Knoch, Kiley and Cummings, Circuit Judges. Knoch, Circuit Judge (dissenting).
This is a diversity action seeking relief under the Federal Declaratory Judgment Act (28 USC § 2201). Plaintiff State Farm Mutual Automobile Insurance Company ("State Farm") is an Illinois corporation with its principal office and place of business in Bloomington, Illinois. The defendants are Richard Walker and his former wife, Dorothy Walker, who are Indiana citizens.
Richard Walker held an automobile insurance policy issued by State Farm. In the policy the insurer agreed to defend any suit against Richard Walker seeking damages for bodily injury or property damage caused by accident arising from the use of the insured's car. The policy also contained the following clause:
"The insured shall cooperate with the Company and upon its request, attend hearings and trials, assist in effecting settlements, securing and giving evidence, obtaining the attendance of witnesses and in the conduct of any legal proceedings in connection with the subject matter of this insurance."
At 6:00 P.M. on July 3, 1964, Mr. and Mrs. Walker were traveling along Indiana State Highway 67 near Martinsville, Indiana, when an accident occurred while Mr. Walker was driving. Five days after the accident, Walker gave a statement to State Farm that the accident was caused in an effort to avoid an oncoming car on his side of the highway. Walker also advised State Farm that Mrs. Walker had not complained about his driving. The following day, Mrs. Walker allegedly gave a statement to State Farm confirming her former husband's version of the accident.
On October 13, 1964, Mrs. Walker sued Mr. Walker for $50,000 for damages she suffered in the accident. In the state court complaint, she alleged that Mr. Walker was traveling at 65 miles an hour on a rain-slick roadway, and that over her repeated admonitions to slow down, he attempted to pass a car ahead of his Oldsmobile, causing him to lose control of his car so that it ran into a ditch. Pursuant to the insurance policy, State Farm employed attorneys to defend the action against Mr. Walker.
On October 16, 1965, Richard Walker's deposition was to be taken by counsel for his former wife in her damage suit. Beforehand, in a conversation with his attorney, Walker denied the veracity of his July 8 statement and said that he had lost control of his car in an effort to pass a Cadillac ahead of him. He then testified in the deposition taken in his former wife's lawsuit that she had admonished him about the manner and speed of his driving and that the accident occurred in his effort to pass a Cadillac ahead of his car. Nothing was said about another automobile proceeding from the opposite direction of his lane. Mrs. Walker's deposition of the same date confirmed her former husband's second version of the accident.
Just after the completion of the depositions of Mr. and Mrs. Walker, his attorney took his statement ex parte and under oath. In that statement, Walker admitted that his preceding deposition was contrary to the statement he had given to State Farm on July 8, 1964. He said that he had not mentioned the Cadillac in the earlier statement because he was leery of losing his insurance, had been convicted of speeding, and had previously had a drunken driving charge against him. As to his earlier statement, he said:
"I never lied for any reason other than to try to save my damned insurance or what have you."
On October 29, 1965, State Farm notified Richard Walker that it was disclaiming liability under the policy and was withdrawing from his defense in Dorothy Walker's suit on the ground that he had breached the cooperation clause contained in the insurance policy. On November 3, 1965, counsel withdrew their appearance for Richard Walker in that lawsuit, which was scheduled for a November 8, 1965, trial. The case was subsequently to be re-set for trial, but no trial date has yet been fixed.
The District Court found that Walker had breached the cooperation provision of the insurance policy by giving a false version of the accident to State Farm "during its investigation",*fn1 and that his breach misled State Farm "to its disadvantage in the handling of Dorothy Walker's claim in an essential matter". The District Court also found that State Farm had not waived Walker's breach of the cooperation provision of the policy by continuing to defend him after it was aware of the breach. The court thereupon granted State Farm's motion for summary judgment, relieving the insurer of its obligations under the policy for claims arising out of the July 3 automobile accident.
On appeal, Mr. and Mrs. Walker contend that summary judgment was improper on the ground that there are genuine issues as to material facts. See Rule 56(c) of the Federal Rules of Civil Procedure. We of course stand ready to approve summary judgments when the terms of Rule 56 are satisfied (see Markwell v. General Tire and Rubber Co., 367 F.2d 748 (7th Cir. 1966)), but here certain material facts remain controverted, so that summary judgment was improper.
This being a diversity action, Indiana law is decisive. In that state, it has been held that a breach of the cooperation clause occurs when, as here, an insured furnishes false information of a material nature to the insurer. Motorists Mutual Insurance Company v. Johnson, 139 Ind. App. 622, 218 N.E. 2d 712, 716 (Ind. App. 1966). However, under Indiana law, the insurer is required to establish prejudice resulting from the insured's breach of the cooperation clause in order to be relieved of its contractual obligations. Idem at p. 715.*fn2 But it has been said that an insurer is not prejudiced unless the breach will produce a judgment less favorable to it in the tort suit. See Note, "Liability Insurance Policy Defenses and the Duty to Defend", 68 Harv. L.Rev. 1436, 1441 (1955). At this time, any answers to the question whether State Farm has been prejudiced ...