“Four Corners” Rule only applies when insurer denies and does not file DJ or defends under reservation of rights.

In an opinion authored by Judge Diane Sykes, joined by Judge Bauer and Judge Flaum, the Seventh Circuit, applying Illinois law, held that Landmark American Insurance Company (“Landmark”) can introduce extrinsic evidence outside of the underlying complaints to dispute a broker’s status as an insured.  In making this ruling, the Seventh Circuit reversed a trial court ruling which held that Landmark had a duty to defend the broker, Peter Hilger, under a professional liability policy issued to Hilger’s cco-defendants, O’M and Associates LLC (“OMA”)

The case involved the scope of Landmark’s duty to defend Hilger, the President of Allied Solutions, LLC, in two cases brought in Michigan and Tennessee.  The suits alleged that Hilger, OMA, and others overstated the value of life insurance policies to convince credit unions to treat them as collateral.  The plaintiffs in the underlying cases sought more than $1M in damages for fraud, breach of contract, and negligent misrepresentation.

The professional liability policy issued by Landmark to OMA provided coverage to independent contractors.  OMA sought coverage under the policy as the named insured and Hilger sought a defense from Landmark asserting that the suits pertained to professional services he rendered as an independent contractor to OMA.  Landmark denied coverage to both OMA and Hilger and filed a declaratory judgment suit against both in Illinois federal court.

The trial judge held that Landmark could not introduce evidence outside the “four corners” of the underlying complaints to demonstrate that Hilger didn’t qualify as an insured under OMA’s policy.  The court found that the underlying complaints “paint[ed] an ambiguous picture” of the relationship between Hilger and OMA, and that some of the facts tended to support the claim of independent contractor status.  Thus, the court found that given that ambiguities must be construed in favor of coverage, he found that Landmark had a duty to defend. The trial judge refused Landmark’s request that it be allowed to conduct discovery on the independent contractor question because he was not allowed to consider evidence outside the complaint in the absence of a “strong reason to believe” that Hilger didn’t qualify as an independent contractor under the OMA policy.

The Seventh Circuit reversed the trial court and found that, under Illinois law, the “four corners” approach only applies when an insurer denies coverage and does not seek a declaratory judgment or when the insurer defends the insured under a reservation of rights.

The appellate court held that when an insurer files a declaratory judgment action disputing its duty to defend it can offer extrinsic evidence to the extent that it will not decide an “ultimate issue” in the underlying litigation.  Because the underlying claims do not depend on a finding that Hilger was an independent contractor, Illinois law permits the introduction of extrinsic evidence on the issue.  Landmark Am. Ins. Co. v. Peter Hilger, No. 15-2566 (7th Cir. Sept. 22, 2016).