                              No. 94-4045


Lonnie Kent Wildrick,                *
                                     *
      Appellant,                     *
                                     *   Appeal from the United States
        v.                           *   District Court for the
                                     *   Southern District of Iowa.

North River Insurance Company,       *
                                     *
      Appellee.                      *



                   Submitted:    October 19, 1995

                     Filed:     February 6, 1996


Before MORRIS SHEPPARD ARNOLD, F. GIBSON, and ROSS, Circuit Judges.


MORRIS SHEPPARD ARNOLD, Circuit Judge.

     Lonnie Kent Wildrick sued North River Insurance Company in
Iowa state court in 1992, claiming that North River breached its
contract by withdrawing its defense of Phillips, P.C., a
professional corporation earlier sued by Mr. Wildrick for
negligence in the performance of accounting services. Mr. Wildrick
asserted that claim as both a third-party beneficiary of Phillips's
professional liability insurance policy and as Phillips's assignee
for claims against North River relative to Phillips's defense in
the professional negligence action (which resulted in a state court
judgment   against    Phillips    for   approximately    $427,500).
Mr. Wildrick also asserted claims for breach of fiduciary duty,
breach of an implied covenant of good faith and fair dealing, and
bad faith. North River removed the case to federal district court.
     On motion by North River, the district court dismissed the
third-party beneficiary claim in late 1992 for failure to state a
claim.   On motion by North River, the district court granted
summary judgment to North River in late 1994 on the remaining
claims, holding, as a matter of law, that Phillips had failed to
cooperate in the professional negligence case.      Mr. Wildrick
                                                      1
appeals. We affirm the rulings of the district court.

                                I.
     Robert Phillips was the principal in a professional
corporation that performed accounting services between 1983
and 1986 for an Iowa company owned by Lonnie Kent Wildrick
(for simplicity's sake, we call the professional corporation
"Phillips" in this opinion; we refer to Robert Phillips himself as
"Robert Phillips" or "Mr. Phillips"). In late 1986, in preparation
for the sale of his company, Mr. Wildrick requested an independent
audit of the company's finances. As a result of the independent
audit, Mr. Wildrick learned that financial statements prepared by
Phillips for the company overstated the company's accounts
receivable by at least $100,000.


     In late 1988, Mr. Wildrick sued Phillips in Iowa state court,
alleging conversion, breach of contract, and professional
negligence in accounting services -- all three counts based on
payments alleged to have been improperly made to Phillips, to
Robert Phillips, or to another entity in which Phillips's
principal, Robert Phillips, was also the principal. The allegedly
improper payments were exactly the same in each count.
(Mr. Wildrick also sued Robert Phillips, individually, but
Mr. Phillips's subsequent petition for bankruptcy stayed any action
against him personally.) Phillips notified the company that had


    1
     The Honorable Harold D. Vietor, United States District Judge
for the Southern District of Iowa.


                               -2-
issued Phillips's professional liability insurance policy,
North River Insurance Company. The insurance company advised
Phillips, in response, that North River would provide "a complete
defense to all allegations" of the complaint. North River called
to Phillips's attention, however, that North River was reserving
its rights to limit the defense provided to only those claims
covered by the policy.


     The professional liability insurance policy issued by
North River covered claims made against Phillips between late 1988
and late 1989 and contained three provisions relevant to this case.
First, the policy excluded from coverage any claims "arising out of
any dishonest, fraudulent, criminal or malicious act or omission"
of Phillips and any claims "arising out of [Phillips's] gaining in
fact any personal profit or advantage to which [Phillips] was not
legally entitled." Second, the policy stated that in "any legal
proceedings" against Phillips involving a claim arguably covered by
the policy, Phillips was required to "cooperate with [North River]
and upon [North River's] request [to] attend hearings and trials
and [to] assist in effecting settlements, securing and giving
evidence, ... and in the conduct of suits"; Phillips was also
required "not [to] ... admit any liability." Finally, the policy
provided that North River was not liable for claims against
Phillips arguably covered by the policy unless Phillips "shall have
fully complied with all the terms" of the policy.


     North River hired a lawyer to defend Phillips in the state
court action. From late 1988 until early 1991, according to an
affidavit, a deposition, and subsequent trial testimony from that
lawyer in a related action, Robert Phillips "represented ... that
[Mr. Wildrick's lawsuit] came as a complete shock to him and that
the allegations ... that he converted funds to his own use were
completely untrue." During that period, according to the lawyer,
Mr. Phillips "vehemently and vigorously denied to [the lawyer] that


                               -3-
he, or to his knowledge anyone at Phillips, P.C., had ever
converted or misappropriated funds entrusted to him." In addition,
Mr. Phillips "represented to [the lawyer] that there were
appropriate explanations for all of the funds paid to him, his
professional corporation, and [the other entity in which
Mr. Phillips was the principal]."


     Specifically, according to the lawyer, Robert Phillips
asserted that "he was to receive a yearly salary of $30,000 for his
accounting work" (as business manager) for Mr. Wildrick's company
and that some of the payments reflected reimbursement to
Mr. Phillips of advances that he made to Mr. Wildrick's company to
pay bills. Mr. Phillips also contended, with respect to the other
entity in which he was also the principal, first, that Mr. Wildrick
had asked Mr. Phillips to deposit a $25,000 check to the credit of
that entity in order to "prevent others in the business and
Mr. Wildrick's wife from knowing how profitable [Mr. Wildrick's
company] was" and, second, that "checks and cash had been paid back
to Mr. Wildrick." In early January, 1991, in preparation for a
settlement conference, the lawyer hired by North River advised the
state court, with respect to Phillips's defense, that "Mr. Phillips
generally denies that he improperly made any payments from
[Mr. Wildrick's company] to either himself, his firm or [the other
entity in which Mr. Phillips was a principal].         ...   It is
[Phillips's] position that all such payments were proper."


     Just two days later, however, a second lawyer, hired by
Robert Phillips himself, advised the state court and the lawyer
hired by North River that Mr. Phillips had been "in contact with
... the office of the United States Attorney ... to present his
admission of misappropriation of funds entrusted to him."       (It
later became known that Mr. Phillips first went to law enforcement
authorities in mid-December, 1990, approximately three weeks before




                               -4-
the second lawyer's letter.) The second lawyer stated that the
lawyer hired by North River "had no knowledge" of that contact.


     Four days after the second lawyer's letter to the state court,
a front-page article appeared in the local newspaper stating that
Robert Phillips had "told federal investigators [that] he stole
more than $1 million from some of his clients." The settlement
conference in the state court action took place on that same day.
At that conference, Mr. Wildrick evidently advised the state court
that he intended to drop the claims for breach of contract and for
conversion, and that a professional negligence claim would be the
only issue for trial. Mr. Wildrick did amend his complaint to that
effect at a pretrial conference in early February, 1991, four days
before the state trial.


     Only hours after the pretrial conference, North River informed
Phillips that North River was withdrawing its defense of Phillips.
North River gave as its reason Robert Phillips's failure to
cooperate, as required by the terms of Phillips's professional
liability insurance policy. North River specifically stated that
Mr. Phillips had "consistently misrepresented ... that [he was]
innocent of any wrongdoing," that Mr. Phillips had "not disclosed
to North River evidence which would have established [his]
wrongdoing," that he had "affirmatively misled [North River's]
investigation of this claim," that he had "made a ... highly
publicized confession to exactly that wrongdoing in the eleventh
hour before trial," and that he had "stated [his] intention to
assert [his] Fifth Amendment privilege if ... called as a witness
at the impending trial." North River concluded by asserting that
by "virtue of [Mr. Phillips's] past and continuing misconduct
toward North River, [he had] directly and adversely prejudiced its
ability to prepare and prosecute a successful defense or settlement
of the [state court] action," that he had "effectively made
impossible any defense to liability in the [state court] action,"


                               -5-
and that he had "dramatically increased the likelihood        that
[Mr. Wildrick would] obtain a larger recovery at trial."


     Although North River advised both Phillips and the lawyer
hired by North River to defend Phillips that it would pay no more
expenses associated with the professional negligence action (and
did not), the lawyer appeared at trial nonetheless.             He
cross-examined witnesses offered by Mr. Wildrick but offered no
witnesses or evidence himself. That trial, which was held to the
court rather than to a jury, resulted in a state court judgment of
approximately $427,500 against Phillips. North River refused to
pay the judgment. Phillips subsequently assigned to Mr. Wildrick
any claims that Phillips had against North River relative to
Phillips's defense in the professional negligence action.


     Mr. Wildrick sued North River in 1992, alleging breach of
contract and other claims related to North River's withdrawal of
its defense of Phillips in the state court action. Under Iowa law,
when a judgment creditor (or assignee) of an insured sues for
breach of contract associated with an insurance company's alleged
failure to defend on account of its insured's failure to cooperate,
the insurance company has "the burden of going forward with the
evidence on the issue of [the insured's] noncooperation." American
Guarantee and Liability Insurance Co. v. Chandler Manufacturing
Co., 467 N.W.2d 226, 229 (Iowa 1991). The judgment creditor (or
assignee), however, retains the overall burden of proof with
respect to the insured's compliance with the terms of the policy.
Id. at 228.   That burden of proof requires a showing either of
substantial compliance with the cooperation clause of the insurance
policy, or that the failure to comply was waived or was not
prejudicial to the insurance company. Id.


     The district court granted summary judgment to North River,
holding, first, that because Robert Phillips "repeatedly lied to


                               -6-
and concealed facts from his defense counsel" in the state court
action, Phillips failed to cooperate with North River, as a matter
of law, and, second, that North River was actually prejudiced by
that failure to cooperate. On appeal, Mr. Wildrick argues that
Mr. Phillips's conduct did not amount to a failure to cooperate, as
a matter of law; that because North River knew or should have known
of Mr. Phillips's deception, North River waived the use of any
failure to cooperate as a defense to payment under the professional
liability insurance policy; and, further, that a genuine issue of
material fact exists with respect to whether North River was
actually prejudiced by Mr. Phillips's conduct. (Because of our
disposition of these arguments, we need not recount or address the
other issues that Mr. Wildrick raises.)


                               II.
     We consider first the question of whether Robert Phillips
failed to cooperate, as a matter of law.       "The purpose of a
cooperation clause is to protect insurers and prevent collusion
between insureds and injured parties."     American Guarantee and
Liability Insurance Co. v. Chandler Manufacturing Co., 467 N.W.2d
226, 229 (Iowa 1991). "The kind of cooperation required ... is
honest cooperation. Honest cooperation involves telling the truth.
It cannot be based on persistent falsehood going to the very
essence of the problem." Western Mutual Insurance Co. v. Baldwin,
137 N.W.2d 918, 924 (Iowa 1965) (en banc).


     It is undisputed that, less than four months after the state
court judgment was rendered, Robert Phillips pleaded guilty in
federal court to two counts of mail fraud and, in doing so,
stipulated that he had embezzled approximately $294,700 from
Mr. Wildrick's company between 1983 and 1985.            Basically,
North River contends that by asserting, during the period preceding
the state trial on the professional negligence claim, that
legitimate reasons existed for every payment to Phillips, to


                               -7-
himself, or to the other entity in which he was also the principal,
Mr. Phillips "actively misled" the lawyer hired by North River in
a way that went to the "very essence of the problem," Western
Mutual, 137 N.W.2d at 924, presented in the professional negligence
action -- in other words, in a way that was not only substantial
but also material.     In response, Mr. Wildrick argues that a
"refusal to divulge all known facts is not sufficient, in and of
itself, to establish a failure to cooperat[e]," as a matter of law.
Mr. Wildrick also appears to argue that because the counts for
conversion and breach of contract were dropped from the state court
action, leaving only an issue of professional negligence for trial,
Mr. Phillips's guilty plea to charges amounting to embezzlement is
irrelevant. We reject both of these arguments.


     Mr. Wildrick cites as authority for his first argument a case
that did not involve a cooperation clause of the scope present in
Mr. Wildrick's case.     See Glade v. General Mutual Insurance
Association, 246 N.W. 794, 795-96 (Iowa 1933), overruled in part on
different issue, Western Mutual, 137 N.W.2d at 925-26. That case,
moreover, turned not on whether the insured failed to cooperate, as
a matter of law, but on the questions of waiver by, and prejudice
to, the insurance company.    See id. at 796-98.     In that case,
furthermore, the court concluded that the insured had admitted to
the insurance company that he was at fault in the vehicle accident
in question and had not "declined to state the facts" to the
insurance company; it was only at the trial for damages from the
vehicle accident that the insured "declined to divulge the details
of the accident."    Id. at 796.    Indeed, the court stated, the
insured in that case "paid the judgment rendered against him" in
the trial for damages and "acted in perfect good faith and under
the belief that [the plaintiff in the trial for damages] had a
valid cause of action against him for damages." Id. The facts in
Mr. Wildrick's case are in no way comparable, or analogous, to
those in Glade.


                               -8-
     Nor do we find the three other cases cited by Mr. Wildrick to
be of any avail to him. In American Guarantee, 467 N.W.2d at 230,
the insurance company failed to use "reasonable diligence" to
gather the facts from its insured -- the insurance company only
wrote letters to its insured and did not personally contact him,
take a statement or deposition from him, or attempt to make him
testify. In Mr. Wildrick's case, however, it is clear from Robert
Phillips's own deposition and subsequent trial testimony in a
related action that the lawyer hired by North River to defend
Phillips met numerous times with Mr. Phillips and that
Mr. Phillips's criminal lawyer asserted shortly before the state
trial on the professional negligence claim that Mr. Phillips would
invoke his fifth amendment privilege against self-incrimination if
called to testify at that trial. In Mr. Wildrick's case, we see no
issue present of North River's failure to use reasonable diligence
to obtain Mr. Phillips's cooperation.


     In Farm and City Insurance Co. v. Hassel, 197 N.W.2d 360, 363
(Iowa 1972) (en banc), overruled in part on different issue, Ideal
Mutual Insurance Co. v. Winker, 319 N.W.2d 289, 296 (Iowa 1982),
the court specifically referred to other cases in which the
circumstances established, as a matter of law, a failure to
cooperate.   In one of those cases, the insured "advanced four
separate versions" of the events in question (and thus "misled" the
insurance company) and refused to explain to the insurance company
why he decided to plead guilty to charges associated with a vehicle
accident. Id. In another of those cases, the insured "made false
statements" as to whether he was drinking before the vehicle
accident and as to "other facts pertinent to the inquiry" (and thus
"obviously misled" the insurance company).        Id.    The cases
described by that court as establishing, as a matter of law, a
failure to cooperate involved facts that are much closer to the
facts in Mr. Wildrick's case than to the facts involved in Farm and
City itself (an insured who admitted all along that he had been


                               -9-
drinking but denied that he had been intoxicated, and who pleaded
guilty to a misdemeanor in order to avoid felony charges, id. at
361-62; the court held that the insured's conduct was not a failure
to cooperate, id. at 362-63).


     In Western Mutual, 137 N.W.2d at 924, the insured "lied
repeatedly to escape responsibility for his own acts," which
amounted to "a clear, intentional and serious breach" of the duty
to cooperate with the insurance company (insured first lied to
insurance company about starting fire, then admitted to injured
party that he started fire but did not tell insurance company until
three and a half months later -- after settlement negotiations --
that he had confessed to injured party and had reached agreement
with injured party to restrict his own exposure to damages, id. at
920-25). The court in that case specifically held that "[s]ecrecy
for that long is not in accord with good faith." Id. at 926. In
Mr. Wildrick's case, Robert Phillips lied to the lawyer hired by
North River for over two years.


     Finally, we address Mr. Wildrick's contention that because the
state court action was tried only on a theory of Phillips's
professional negligence, Robert Phillips's guilty plea and
stipulation that he had embezzled approximately $294,700 from
Mr. Wildrick's company are somehow irrelevant. That argument is
completely without merit. The state court's damages award quite
clearly included amounts that Mr. Phillips converted and amounts
consequent to that conversion, and thus Mr. Phillips's deliberately
wrongful acts, however Mr. Wildrick may have sought to characterize
them, were central to the trial and to the judgment in the state
court action. Therefore, if Mr. Phillips misled the lawyer hired
by North River with respect to the question of whether he converted
funds, he necessarily did so with respect to the issues relevant in
the state trial.




                               -10-
     The district court was thus quite correct in holding, as a
matter of law, that Robert Phillips failed to cooperate with the
insurance company.    Unless North River waived the use of any
failure to cooperate as a defense to payment under the professional
liability insurance policy, that failure gives rise to a rebuttable
presumption of prejudice suffered by North River.        See, e.g.,
Met-Coil Systems Corp. v. Columbia Casualty Co., 524 N.W.2d 650,
654 (Iowa 1994), and American Guarantee, 467 N.W.2d at 228. We
turn, then, to the question of waiver.


                                III.
     Mr. Wildrick argues that North River waived the use of any
failure to cooperate as a defense to payment under the professional
liability insurance policy by acknowledging, early on, that
Phillips was likely to be found liable for professional negligence.
Mr. Wildrick also argues that because North River knew or should
have known, at least six months before the state trial in the
professional negligence action, of serious and questionable gaps
and irregularities in Phillips's records, yet waited to withdraw
its defense of Phillips until four days before that trial,
North River waived its right to use any failure to cooperate as a
defense to payment under the professional liability insurance
policy. Those arguments actually address the question of prejudice
more than waiver; we nonetheless consider the issue of waiver by
itself at this point.


     North River offered an affidavit, a deposition, and subsequent
trial testimony in a related action by the lawyer whom it hired to
defend Phillips in the professional negligence action. North River
also offered letters from itself to Robert Phillips. All of that
evidence shows that immediately after North River learned of the
professional negligence action in late 1988, North River asserted
its intention to reserve its rights to limit the defense provided
to only those claims covered by the policy. North River reaffirmed


                               -11-
that reservation of rights three months later and, again, four and
a half months before the state trial.


     It is true that the letters directed Robert Phillips's
attention particularly to various specific exclusions from coverage
-- claims arising from "dishonest, fraudulent, [or] criminal" acts,
claims arising from "personal profit or advantage" to which the
insured "was not legally entitled," and claims arising from
accounting services provided to any company in which the insured
was a manager or shareholder.       The letters also specifically
stated, however, that North River's agreement to provide a defense
"should not be construed by [Mr. Phillips] as a waiver of any of"
its rights under the policy (emphasis supplied).      One of those
rights was the right to insist that Phillips comply with other
conditions of the policy, including the cooperation clause. Under
these circumstances, we see no waiver by North River of the use of
Mr. Phillips's failure to cooperate as a defense to payment under
the professional liability insurance policy.


                                IV.
     The real focus of Mr. Wildrick's arguments is that, as a
matter of law, North River was not prejudiced by Robert Phillips's
failure to cooperate.     See, e.g., Met-Coil Systems Corp. v.
Columbia Casualty Co., 524 N.W.2d 650, 654, 658 (Iowa 1994), and
Western Mutual Insurance Co. v. Baldwin, 137 N.W.2d 918, 925-26
(Iowa 1965) (en banc) (if lack of insured's cooperation is not
waived as a defense by insurance company, burden is on the insured
-- or insured's judgment creditor or assignee -- to show lack of
prejudice to insurance company).    As noted above, Mr. Wildrick
offers two primary bases for that conclusion on his part. First,
Mr. Wildrick cites the acknowledgment of the lawyer hired by
North River, early in the professional negligence action, that
Phillips was likely to be found liable.      Second, Mr. Wildrick
points to the fact that, until the week before the state trial,


                               -12-
North River was apparently ready to go to trial, despite its
knowledge of, or the obviousness of, serious and questionable gaps
and irregularities in Phillips's records.     In the alternative,
Mr. Wildrick contends that, at the very least, a genuine issue of
material fact exists with respect to whether North River was
prejudiced.


     Specifically, Mr. Wildrick notes that the conversion count was
not dropped until shortly before trial and, therefore, that
North River had the opportunity to, and in fact did, examine
Phillips's records with respect to Mr. Wildrick's company. As of
August, 1990, that examination showed at least $80,000 entirely
unaccounted for. As of that same time, Mr. Wildrick also notes,
the lawyer hired by North River to defend Phillips concluded that
damages of $200,000 to $250,000 were likely to be awarded.
In spite of those facts, Mr. Wildrick argues, North River made no
settlement offer until just before trial, when North River
evidently offered only a negligible amount.           Essentially,
Mr. Wildrick contends, North River suffered no prejudice from
Robert Phillips's denial of the conversion charges, because
North River already knew, and evidently accepted, that it was
likely to be found liable for substantial damages in the
professional negligence action.


     In response, North River alleges a "waste of time, effort and
expense" occasioned by Robert Phillips's two-year denial of
wrongdoing.   Specifically, North River notes that it hired an
accountant to search Phillips's records for legitimate payments
to Mr. Phillips, or to entities that he controlled, from
Mr. Wildrick's company -- legitimate payments that in fact did not
exist.   North River also suggests that it might have attempted
settlement much earlier if it had known the truth about
Mr. Phillips's conduct. We observe, in addition, that North River
would have saved on fees paid to the lawyer hired to defend


                               -13-
Phillips if the truth    about   Mr.    Phillips's   conduct   had   been
revealed earlier.


     This is not a case where the insurance company "was fully
advised as to all of the facts ... and was [therefore] at all times
in a position to negotiate [a] settlement[]."        Farm and City
Insurance Co. v. Hassel, 197 N.W.2d 360, 363 (Iowa 1972) (en banc),
overruled in part on different issue, Ideal Mutual Insurance Co. v.
Winker, 319 N.W.2d 289, 296 (Iowa 1982). Rather, in this case,
North River "acted upon the misrepresentation [and] concealment of
its insured," id., and incurred "extra and unnecessary expense,"
Western Mutual, 137 N.W.2d at 925, in doing so. We need not know,
or be able to determine, the exact amount of that expense in order
to hold that Mr. Wildrick has failed to establish a genuine issue
of material fact on the question of prejudice to North River. Id.
at 926-27. Because that expense was clearly "more than minimal or
inconsequential," North River was prejudiced, as a matter of law.
Id. at 927.


                                 V.
     For the reasons stated, we affirm the judgment of the district
court.


     A true copy.


          Attest:


               CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.




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