Extrinsic Facts Outside of Complaint Not Permissible in Determining Duty to Defend

The Illinois Appellate Court for the Second District, in an opinion written by Justice Hutchinson with Justices Birkett and Schostok concurring, applying Illinois law, affirmed the opinion of the trial court and held Pekin Insurance Company (“Pekin”) did not have a duty to defend McKeown Classic Homes, Inc. (“McKeown”), a construction company, in a lawsuit involving a conversion claim. The appellate court found Pekin’s duty to defend was not triggered by the clear and unambiguous allegations of McKeown’s intentional conduct. Moreover, the appellate court found that facts not pled in the underlying complaint that are first brought to the attention of the insurer by the insured in a declaratory judgment action may not be used by the insured to determine the scope of coverage.

The underlying claimants brought suit against McKeown concerning construction work done on their property, including a claim for conversion, which alleged that McKeown, “without authority and knowledge of the [claimants], took hundreds of planks of knotty pine wood, a Dutch door, a hand sink, four windows and glass door knowingly belonging to the [claimants].” McKeown tendered the defense of the lawsuit to Pekin, its commercial general liability insurer. Pekin denied the defense because the claims in the underlying complaint were predicated on intentional conduct and its coverage extended only to property damage caused by an “occurrence” or accident.

Pekin brought a declaratory judgment action to determine the scope of its coverage obligations. McKeown argued that the underlying complaint did not clearly delineate whether McKeown negligently or intentionally converted property. McKeown asserted in a counterclaim against Pekin that the materials at issue were mistakenly removed by as subcontractor involved in the demolition of the prior home located at the property, and therefore, Pekin has a duty to defend because the loss was caused by a mistake. The trial court found that the underlying complaint alleged intentional conduct and held Pekin has no duty to defend.

The appellate court agreed with the trial court and found there was no reasonable interpretation of claimants’ allegations other than one of intentional conversion against McKeown. McKeown’s explanation that the allegedly converted items were mistakenly removed by a subcontractor was not known to Pekin until McKeown included the explanation in its counterclaim in the coverage case. Where an insurer is unaware of purportedly true, but unpled facts, those facts may not be considered in determining the insurers duty to defend.  “McKeown’s explanatory allegations may not be considered in determining Pekin’s duty to defend.”

The appellate court found the underlying complaint was clearly predicated on an intentional act, not an incident or occurrence: “Reading the complaint as a whole, the facts alleged do not lead to a reasonable interpretation that McKeown’s alleged conversion was a mistake.” Thus, Pekin has no duty to defend. Pekin Insurance Co. v. McKeown Classic Homes, Inc., IL App 2d 190631 (July 29, 2020).