Illinois is a “four corners” state that holds that interpretation of an insurance policy to determine a duty to defend relies totally upon the wording of the lawsuit and the policy. No facts extrinsic to the pleadings or the policy wording are allowed to impinge upon the court's analysis of the duty to defend. This rule, followed in several but by no means a majority of states, often results in rulings that put defendants and their insurers at the mercy of the plaintiff pleading a lawsuit against the defendant.

For example, if a party plaintiff wishes to punish the defendant, it can instruct its lawyers to plead the lawsuit in terms of intentional tort—assault, battery, trespass, etc.— rather than negligence. Thus, reviewing the four corners of the lawsuit and the four corners of the policy, the insured can never receive defense from its insurer whose policy would necessarily not include coverage for intentional acts.

Similarly, a prudent plaintiffs' lawyer whose client was injured by an intentional tort like battery will plead a suit against the aggressor in terms of negligence so that the aggressor's insurer will defend and eventually indemnify the aggressor.

In Landmark American Insurance Company v. O'Malley, 2014 WL 2978213 (N.D.Ill.), an Illinois appellate court was faced with the attempt of an insurer to read the allegations of a lawsuit to deprive insurance agents and brokers of their right to defense of the lawsuits. To do so, Landmark American Insurance Co. sued Michael O'Malley, O'M and Associates LLC d/b/a O'Malley and Associates (O'MA), and Peter Hilger, seeking a declaration that Landmark has no duty to defend these three defendants in two underlying lawsuits, one in Michigan and one in Tennessee, and the defendants responded with an opposite motion.

Landmark issued an insurance agents and brokers' professional liability policy to O'MA. The Landmark policy covers O'MA as the “named insured” and included Exclusion D, which excludes coverage for any claims “based upon or arising out of … [a]ny business enterprise not named in the Declarations which is owned, controlled, operated or managed by any Insured.”

Both underlying lawsuits arose from misrepresentations that defendants allegedly made to credit unions in Michigan and Tennessee. In both states, the defendants allegedly persuaded credit unions to fund several secured loans by overstating the value of life insurance policies that would serve as collateral for the loans. Because of their losses, the credit unions filed lawsuits against O'Malley, O'MA, and Hilger.

Under Illinois law, the interpretation of an insurance policy is a question of law. In determining whether a duty to defend exists, the underlying complaints and insurance policy must be construed liberally, resolving all doubts in the insured's favor. Discovery is not needed to resolve this dispute at the duty-to-defend stage because application of the four corners rule compels the court to make a decision with regard to the duty to defend on the words of the lawsuits and nothing else. Discovery of extrinsic facts would not effect the decision of the court on duty to defend.

Therefore, if the allegations in the underlying complaints fall potentially within the policy's coverage, Landmark's duty to defend is triggered. The underlying complaints are broad enough to support Hilger's claim that he is entitled to a defense because he was acting as an independent contractor for O'MA and is therefore a “covered person” under the Landmark policy.

Just as with Landmark's duty to defend Hilger, further discovery on whether the defendants formed a joint venture is also inappropriate at this duty-to-defend stage. Landmark has the burden of proving that Exclusion D applies and it cannot do so from the wording of the suit.

Defendants' motions for judgment on the pleadings were granted. Judgment was entered against Landmark and for defendants on Counts I, III, V, VII, and IX of Landmark's complaint, Count I of Hilger's counterclaims and Counts I and II of O'Malley and O'MA's counterclaims.

Having granted the defendants' motions for judgment on the pleadings, the only count still pending is Count II of Hilger's counterclaims: a breach-of-contract claim against Landmark seeking damages for expenses Hilger incurred as a result of Landmark's refusal to defend Hilger in the underlying lawsuits.

Because Landmark has a duty to defend Hilger, it will now also have to reimburse Hilger for any defense expenses Hilger has incurred so far.

The defendant that buys insurance in a state like Illinois with a four corners rule, if any potential for coverage is revealed by the pleading, will be entitled to a defense. That right will continue until sufficient evidence is produced to establish that there is no potential for coverage to exist under any reading of the suit or presented at trial if the insurer properly and effectively reserves its rights. Of course, if the rights are reserved, the defendant is then entitled to obtain, at the expense of the insurer, independent counsel. Independent counsel will not only exercise his or her skill to properly defend the insured, but also prevent any evidence being presented at trial that would eliminate the right to a defense and/or indemnity.

The four corners rule should be losing traction in those states where has been adopted by the courts and legislatures. It gives too much power to the plaintiffs' lawyers, drawing the complaints to compel insurers to become involved in lawsuits they should never be involved in or to refuse coverage to people to whom coverage would be available but for the creative pleading of the plaintiffs' lawyers. The duty to defend and indemnify should be based on the true facts and the policy wording, not some creative recitation from the imagination of a plaintiffs' lawyer.

For example, in Trade Center Properties, L.L.C. v. Hartford Fire Insurance Company, 345 F.3d 154 (2d Cir. 09/26/2003), interpretation of a contract of insurance was based upon extrinsic facts. Similarly, in George F. Hillenbrand, Inc. v. Insurance Co. f North America, 102 Cal.App.4th 584, 125 Cal. Rptr.2d 575 (Cal. App. Dist.3 9/27/2002), explained (citing to the California Supreme Court decision Montrose Chemical Corp. v. Superior Court, 6 Cal. 4th 287, 304, 24 Cal. Rptr. 2d 467) that California has moved away from the four corners rule to include extrinsic evidence in the evaluation of the duty. It is important, when evaluating a duty to defend to determine the method used by your state's courts.

Special Reports /

'Four corners' legal interpretation puts defendants and their insurers in a corner

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