7th Circuit Finds that Extrinsic Evidence is Admissible in a Declaratory Judgment Action to Determine the Carrier’s Duty to Defend

In Landmark American Insurance Co. v. Hilger, 838 F.3d 821 (7^th Cir. 2016) the U.S. Circuit Court of Appeals for the 7^th Circuit found that the insurance company was allowed to offer evidence outside the underlying court complaints and that the defendant did not render the professional services in question as an independent contractor. In this case the insured was sued by two credit unions in two different states (Michigan and Tennessee) for allegedly joining with a life insurance agent and a life insurance broker to persuade the credit unions to fund loans based upon life insurance policies with an overstated value that was used as collateral. When the insured and the insurance agent were sued, they tendered their defense to Landmark American under the agent’s and the broker’s liability policy. The policy provided coverage for claims arising out of any negligent act, error, or omission committed in the agent’s rendering of professional services as an agent or broker. However, the tenders were denied.

The District Court granted the insured’s motion for judgment on the pleadings with the observation that the underlying lawsuits were ambiguous regarding the insured’s relationship with the agent insomuch as some allegations suggested that he acted as an agent, while others suggested he acted as an independent contractor for the defendant agent. Under Illinois law, any ambiguity in the pleadings was required to be resolved in favor of the insured and a duty to defend. The insurance company moved for reconsideration, arguing that discovery was required to determine the true nature of the relationship.

On appeal, the 7^th Circuit concluded that Illinois law permitted the insurer to offer evidence outside the underlying complaints, and that the insured was not covered as an independent contractor under the agent’s and broker’s liability policy. The Court found that insurance companies that elected to either defend under a reservation of rights or file a declaratory judgment action were allowed to present evidence beyond the underlying complaint so long as it did not tend to determine the ultimate issue in the underlying proceeding. Thus, the insurance company, which had sought a declaratory judgment, was allowed to offer evidence outside the underlying court complaints.