Seventh Circuit Recognizes Illinois Law to Allow Extrinsic Evidence in Evaluating an Insurer’s Duty to Defend

The Seventh Circuit recently handed down a decision encouraging Illinois courts to consider evidence beyond the complaint and the insurance policy when evaluating an insurer’s duty to defend. In Landmark American Insurance Co. v. Hilger, 838 F.3d 821 (7th Cir. 2016), the Seventh Circuit reviewed a district court’s judgment on the pleadings favor of a purported insured in a declaratory judgment suit filed by Landmark American Insurance Company. At issue was whether Peter Hilger was covered as an insured in connection with lawsuits filed in Michigan and Tennessee alleging that he and other codefendants persuaded the plaintiffs, credit unions, to fund loans by overstating the value of the life-insurance policies that would serve as collateral.

The coverage issue was whether Hilger was insured under the Landmark policy issued to a codefendant, O’M and Associates, LLC (O’MA). The policy covered O’MA’s independent contractors as long as they were rendering professional service on behalf of O’MA. The district court reviewed the underlying complaints and concluded they painted an ambiguous picture since Hilger at times appeared to act as an agent of another entity while at other times appeared to act as an independent contractor of O’MA. Due to the ambiguity, the district court determined that Hilger was afforded coverage under the Landmark policy. Importantly, the judge refused Landmark’s request to conduct discovery to determine the true nature of Hilger’s relationship with O’MA.

On appeal, the Seventh Circuit recognized the fundamental rule that the duty to defend is broader than the duty to indemnify and insurers may present evidence beyond the underlying complaint so long as the ultimate issue in the underlying lawsuit is not implicated. Accordingly, the Seventh Circuit rejected the district court’s decision, which was based on a strict four-corners analysis. Since the court reasoned allowing discovery to go forward on whether Hilger was an independent contractor would not decide an “ultimate issue” of the underlying actions, the lower court’s decision was reversed.

This decision reminds insurers of yet another benefit under Illinois of initiating declaratory judgment actions when the insurer has doubts about coverage—the ability to introduce extrinsic evidence, which the Seventh Circuit otherwise has deemed inadmissible where the insurer simply denies coverage and is later required to defend against a breach of contract action.