an insurer’s guide to vacating default judgments

Introduction

It is an insurance company’s worst nightmare. One of

your adjusters opens his/her daily mail to find a default order

was entered against the insured 45 days ago in a matter that

inadvertently slipped through the cracks. Or, one of your

defense counsel calls, explains that he lost track of a file, and

that a default was entered against the insured more than two

months ago. Your first thought – “how did this happen” – is

quickly replaced by – “what do I do now?”

Fortunately, there is something you can do, and there is a

good chance that you may be able to vacate the default if you

and defense counsel take the right steps. This article is

designed to provide a roadmap for what to do in the event of a

30-day old default judgment against the insured, and high-

lights some of the considerations that surface when defense

counsel moves to vacate such a judgment.

Discussion

I. The Basics

In Illinois, a default judgment that is more than 30 days

old is substantially more difficult to vacate than such a judg-

ment that is not 30 days old. Accordingly, an insurance com-

pany should be aware that there may be significant problems

for a defense attorney who attempts to vacate a judgment that

is more than 30 days old. Illinois civil procedure rules pro-

vide the legal mechanism by which defense counsel may seek

to vacate a default judgment that is more than 30 days old. 1

The law requires an attorney to file a petition under

Section 1401. The litigation of a Section 1401 petition is an

equitable proceeding, and the trial court should exercise its

discretion to vacate the default judgment when warranted by

the particular circumstances of a case.2 In short, the court

should vacate the default judgment so long as defense counsel

can identify a good reason for doing so and when fairness

requires it. However, the preparation of a Section 1401 peti-

tion requires a swift and thorough response by the insurance

adjuster and defense counsel upon learning about the default

judgment.

II. The Ingredients for a Section 1401 Petition.

There are three key points that defense counsel must

demonstrate to secure Section 1401 relief: (1) the existence of

a legitimate defense; (2) due diligence in presenting that

defense; and (3) diligence in presenting the Section 1401 peti-

tion.3 These points are discussed in more detail in the subsec-

tions to follow.

LEGAL ISSUES INSURANCE INSIGHT22 NOVEMBER 2006

An Insurer’s Guide to Vacating Default Judgments

by Kathleen McDonough and Chad Layton

1 The statute provides: “[r]elief from final orders and judgments, after 30 days from the entry thereof, may be had upon petition asprovided in this Section. Writs of error coram nobis and coram vobis, bills of review and bills in the nature of bills of review areabolished. All relief heretofore obtainable and the grounds for such relief heretofore available, whether by any of the foregoingremedies or otherwise, shall be available in every case, by proceedings hereunder, regardless of the nature of the order or judgmentfrom which relief is sought or of the proceedings in which it was entered. Except as provided in Section 6 of the Illinois ParentageAct of 1984, there shall be no distinction between actions and other proceedings, statutory or otherwise, as to availability of relief,grounds for relief or the relief obtainable.” 735 ILCS 5/2-1401(a). 2 People v. Dunson, 316 Ill. App. 3d 760, 763, 737 N.E.2d 699, 701 (2d Dist. 2000).3 Morris v. Elmhurst Motors, Inc., 268 Ill. App. 3d 890, 892, 645 N.E.2d 476, 478 (1st Dist. 1994); Bonanza Int’l v. Mar-Fil, Inc.,128 Ill. App. 2d 714, 719-20, 471 N.E.2d 221, 225 (2d Dist. 1984).

In one Illinois decision, the plaintiffs filed suitto recover for injuries and property damage froman automobile accident.4 After plaintiffs filedtheir complaint, counsel for plaintiffs and defen-dant discussed the defendant’s appearance. Fourmonths after the complaint had been filed, plain-tiffs’ counsel obtained an order of default againstdefendant for failing to appear or answer withinthe proper time.

After learning about the default judgment 31days later, defense counsel filed a Section 1401petition. The trial court granted defense counsel’smotion to vacate because he was able to prove allof the required elements. In reaching its decision,the court considered factors such as plaintiff’sfailure to notify defendant of the entry of thedefault judgment in a timely manner, despite thefact that defendant had not appeared; that thecourt was not advised of the discussions betweenthe parties’ respective attorneys; and that the courtwas not apprised of defense counsel’s involve-ment in the case. This decision highlights thepoint that the court must consider all of the cir-cumstances of a case when evaluating a Section1401 petition.

This decision also speaks to the importance ofproperly documenting the file to reflect any andall discussions with plaintiff’s counsel, especiallyfor those cases in which suit has been filed. Ifplaintiff’s counsel has filed suit and agreed tohold off on requiring an appearance to exploresettlement, it is advisable to confirm that agree-ment in a letter to plaintiff’s counsel. Better still,either the insurance adjuster or defense counselshould request that plaintiff’s counsel sign and

return a copy of the letter to acknowledge theagreement. This way, plaintiff’s counsel cannotlater claim that there was a misunderstanding orthat he never received the letter.

A. The Meritorious Defense Requirement.

Defense counsel must identify a legitimateor “meritorious” defense to the underlyinglitigation. While the purpose of Section1401 is to “ensure justice,” a court willnot likely vacate a default judgment ifthere is not a legitimate defense.Accordingly, it is up to the insuranceadjuster and defense counsel to workclosely with the insured to establish alegitimate defense, be it to liability, proxi-mate cause, damages, or some other aspectof the case.

A meritorious defense is one which, ifbelieved by the jury, would defeat or limit theplaintiff’s claim.5 It is important to note, however,that defense counsel only needs to establish that apossible defense exists, and need not actuallyprove that the defense will prevail at trial. 6

Examples of meritorious defenses can include adefense against liability in a negligence case,7 ora defense concerning the element of damages.8

For example, in one case involving an automobileaccident, the legitimate defense was that there wasno damage to the rear of the plaintiff’s vehicle.9

In order to establish the defense, the insurance

adjuster and defense counsel should work closely

with the insured or any relevant witness to prepare

an affidavit that supports the defense.10 Defense

counsel’s ability to establish a legitimate defense

is not as easy as you might think, however, and itis particularly important to provide proper supportfor the defense.11

There is an important lesson to be learnedhere. While defense counsel does not have toprove the defense, he or she must – at the veryleast – be able to provide a sound, evidentiarybasis for that defense. This key point speaks,again, to the importance of documenting the file,and documenting any and all conversations withthe insured and any relevant witnesses.

B. Defense Counsel Must Establish That

He or She Diligently Presented the

Defenses.

Defense counsel must also be able toestablish that the prior failure to defend thecase resulted from an “excusable mistake”and that the insurance adjuster and defensecounsel both acted reasonably under thegiven circumstances.12 A court must con-sider all the relevant circumstances, andwill consider the conduct of the insuredand defense counsel.13 The standard statesthat the insured cannot act with indiffer-ence for or willful disregard of the legalprocess.14 Additionally, when an insuredhas, in good faith, relied on the insurancecompany and insurance adjuster, the courtmay conclude that the due diligencerequirement has been satisfied.15

The cardinal rule, however, is that neithera defendant nor his attorney can use theirown lack of diligence or complacence toset aside a default.16 For example, a court


5 Pirman v. A & M Cartage, Inc., 285 Ill. App. 3d 993, 1001, 674 N.E.2d 874, 880 (1st Dist. 1996); Halle v. Robertson, 219 Ill. App. 3d 564, 568, 579 N.E.2d 1243,1246 (2d Dist. 1991).6 City of Chicago Hts. v. Furrer, 99 Ill. App. 3d 414, 420, 425 N.E.2d 1125, 1129 (1st Dist. 1981). See also Pirman, 285 Ill. App. 3d at 1001, 674 N.E.2d at 880(whether the petitioner’s defense will “ultimately prevail at trial is not at issue in the section 2-1401 proceedings.”) (citations and quotations omitted).7 Genesis & Sons, Ltd. v. Theodosopoulos, 223 Ill. App. 3d 276, 282, 585 N.E.2d 188, 194 (2d Dist. 1991) 8 Halle, 219 Ill. App. 3d at 568-69, 579 N.E.2d at 1246.9 Genesis, 223 Ill. App. 3d at 282, 585 N.E.2d at 194.10 Id. 11 Gonzalez v. Profile Sanding Equip., Inc., 222 Ill. App. 3d 680, 776 N.E.2d 667 (1st Dist. 2002 ); Johnson v. Wal-Mart Stores, Inc., 324 Ill. App. 3d 543, 755 N.E.2d507 (5th Dist. 2001).12 Smith v. Cole, 256 Ill. App. 3d 806, 812, 632 N.E.2d 31, 36 (1st Dist. 1993).13 Id.; Halle, supra.14 Id. at 812, 632 N.E.2d at 36. 15 Pirman v. A & M Cartage, Inc., 285 Ill. App. 3d 993, 1004, 674 N.E.2d 874, 881 (1st Dist. 1996). 16 Smith v. Airoom, 114 Ill. 2d 209, 223, 499 N.E.2d 1381, 1387 (1986) (court concluded that the defendant failed to act with diligence because it did nothing followingthe service of the complaint).

may find a lack of diligence if the insuredfails to respond when served with the com-plaint.17 The inadvertence of defense coun-sel may also translate into a finding thatthe insured himself failed to act with dili-gence.18

C. Defense Counsel Must Diligently Present

The Section 1401 Petition.

The law also provides that the defenseattorney must act diligently in presentingthe petition to vacate the default. A courtwill consider defense counsel to be diligentif he or she acts within seven days or eventwenty-seven days19 of learning about thedefault judgment.20 An insured, insuranceadjuster, or defense counsel who waits fortwo years, however, is not diligent.21

Typically, courts will focus on defensecounsel’s response time when assessingthis factor. The Section 1401 petitionshould therefore be filed as soon as possi-ble, taking into consideration any timenecessary to ensure that the petition isproperly and thoroughly prepared.Defense counsel will not likely make upfor a lack of diligence or a meritoriousdefense by filing an inadequate petitionthat is simply thrown together on an emer-gency basis, with no meaningful substance.Accordingly, once the insurance adjusterlearns about the default judgment, he orshe should ensure that the insured is coop-erating and that defense counsel is swiftlyresponding.

III.The Current Illinois Trend.

The current trend among some Illinois courtshas been to move away from the harsh results ofdefault judgment and to allow a defendant-insuredto have his day in court. In certain circumstances,

some Illinois courts have gone so far as to excusea defendant who failed to act with diligence. Thepurpose of relaxing the due diligence standard isto ensure justice, and prevent enforcement of anunfair default judgment.22

In following this trend, some courts will vacatea default to avoid an unfair circumstance. Anunfair circumstance may involve, for example, apetitioner who did not understand the implicationsof his actions,23 or a judgment that will leave thepetitioner in a state of extreme poverty.24 A court,however, may not find an inequitable circumstanceif a petitioner was simply not diligent25 or if thereis no evidence that the plaintiff acted unfairly.26

While the trend is to move away from theharsh results of the default judgment, neither theinsured nor defense counsel should take such ajudgment lightly. The entry of a default judgmentis a potentially devastating occurrence that maynot be reversed, unless the insured, the insurancecompany and defense counsel cooperate andrespond as quickly as possible.

IV. Checklist For Setting Aside Default

Judgments.

Below is a list of the items that the insuranceadjuster and defense counsel should keep in mindwhen attempting to vacate a default judgment. Aninsurance adjuster should feel comfortable inusing this check list when interviewing counselwho may be involved in preparing the Section1401 petition to ensure that he or she knows theprocess.

• Has the insured appeared or answered? Ifso, did the plaintiff fail to provide propernotice or prove up his case in front of a jury?

• Does the insured have a meritoriousdefense? If so, how will defense counselestablish that defense (i.e., affidavit from

insured or other witness; documents not pre-viously presented to the court)?

• What can the insurance adjuster to do assistdefense counsel in establishing the defense?

• What information in the insurance adjuster’sfile will help establish the elements requiredfor the Section 1401 petition?

• How will defense counsel establish that themeritorious defense was diligently presentedto the court?

• Why did the insured fail to previously pre-sent the meritorious defense to the court?

• Did the plaintiff engage in any fraudulent orimproper conduct in dealing with the insur-ance adjuster or defense counsel?

• Will defense counsel diligently file theSection 1401 petition?

• Are there special circumstances that warrantrelaxation of the due diligence standard?Did someone or something beyond the con-trol of the insured, his attorney or insurerprecipitate the entry of the default? Will thedefendant suffer unduly harsh or unfair con-sequences if the default is not vacated?

Conclusion

Although it is both a serious and challengingdevelopment, a default judgment can be cured.By following the rules and legal requirements,defense counsel may be able to successfullyvacate a default judgment. As with any type oflitigation, however, it is always advisable to seekthe advice and assistance of defense counsel whohas experience in this area so as to avoid furthercomplicating an already difficult circumstance.

Kathleen McDonough and Chad Layton are withSegal McCambridge Singer & Mahoney, Ltd.. ◆


17 Enclosures v. American Pay Telephone Corp., 287 Ill. App. 3d 900, 679 N.E.2d 432 (1st Dist. 1997); Solomon v. Arlington Park/Washington Park Race Track Corp.,78 Ill. App. 3d 389, 396 N.E.2d 1118 (1st Dist. 1979); Hunt v. General Improvements, Inc., 48 Ill. App. 3d 421, 362 N.E.2d 1143 (4th Dist. 1977). 18 Carroll Serv. Co. v. Schneider, 144 Ill. App. 3d 38, 40, 494 N.E.2d 253, 255 (2d Dist. 1986).19 Morris v. Elmhurst Motors, Inc., 268 Ill. App. 3d 890, 892, 645 N.E.2d 476, 478 (1st Dist. 1994).20 Smith v. Cole, 256 Ill. App. 3d 806, 813, 632 N.E.2d 31, 37 (1st Dist. 1993).21 S.C. Vaughan Oil Co. v. Caldwell, Troutt and Alexander, 321 Ill. App. 3d 447, 450, 748 N.E.2d 705, 708 (5th Dist. 2001). 22 Pirman v. A & M Cartage, Inc., 285 Ill. App. 3d 993, 1003, 674 N.E.2d 874, 881 (1st Dist. 1996). See also People v. Dunson, 316 Ill. App. 3d 760, 763, 737 N.E.2d699, 701 (2d Dist. 2000).23 In re County Treasurer, 347 Ill. App. 3d 769, 775, 807 N.E.2d 1042, 1049 (1st Dist. 2004) (petitioner’s lack of fluency in English was an equitable considerationwarranting relaxation of the due diligence standard).24 In re Marriage of Johnson, 339 Ill. App. 3d 237, 243, 790 N.E.2d 91, 95-96 (2d Dist. 2003). 25 Al-Steel Employees Credit Union v. Singh, 345 Ill. App. 3d 1005, 1009, 804 N.E.2d 657, 659 (2d Dist. 2004).26 S.C. Vaughan Oil Co. v. Caldwell, Troutt and Alexander, 321 Ill. App. 3d 447, 449, 748 N.E.2d 705, 707 (5th Dist. 2001).

an insurer’s guide to vacating default judgments

Documents