Illinois is a "four corners" state in which determining 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 states, often results in rulings that put defendants and their insurers at the mercy of the plaintiff pleading a lawsuit against the defendant.
A plaintiff can instruct his 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 policy, the insured can never receive defense from its insurer whose policy would not include coverage for intentional acts. Similarly, a plaintiff's lawyer whose client was injured by an intentional tort 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 Co. v. O'Malley, 2014 WL 2978213 (N.D.Ill.), Landmark sued insurance brokers Michael O'Malley, O'M and Associates LLC and Peter Hilger, seeking a declaration that Landmark has no duty to defend them 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'M and Associates covering O'M 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 the 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. Because of their losses, the credit unions sued O'Malley, O'M and Associates, and Hilger.
In Illinois, insurance policy interpretation is a question of law. In determining whether a duty to defend exists, the underlying complaints and policy must be construed liberally, resolving all doubts in the insured's favor.
Discovery is not needed at the duty-to-defend stage because application of the four-corners rule compels the court to make a decision on only the lawsuit, and not extrinsic facts.
If the allegations in the complaints fall within the policy's coverage, Landmark's duty to defend is triggered.
The 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'M and is a "covered person" under the Landmark policy.
The 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'M and Associate's counterclaims. Still pending is Count II of Hilger's breach-of-contract claim against Landmark seeking damages for expenses Hilger incurred from Landmark's refusal to defend Hilger in the underlying lawsuits.
Because Landmark has a duty to defend Hilger, it now also will have to reimburse Hilger for his defense expenses.
Unfair?
The four corners rule gives too much power to the plaintiffs' lawyers, drawing the complaints to compel insurers to become part of lawsuits that they should never be involved in, or to refuse coverage to those 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 plaintiff's lawyer.
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