Landmark American Insurance Co v. Peter Hilger

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 15-2566
LANDMARK AMERICAN INSURANCE COMPANY,
Plaintiff-Appellant,
v.
PETER HILGER,
Defendant-Appellee.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 13 C 02552 — Edmond E. Chang, Judge.
____________________
ARGUED FEBRUARY 10, 2016 — DECIDED SEPTEMBER 22, 2016
____________________
Before BAUER, FLAUM, and SYKES, Circuit Judges.
SYKES, Circuit Judge. Peter Hilger faces two separate law-
suits alleging that he and several codefendants persuaded
credit unions in Michigan and Tennessee to fund loans by
overstating the value of the life-insurance policies that
would serve as collateral. Hilger tendered his defense to
Landmark American Insurance Company under a profes-
sional liability policy held by one of his codefendants,
O’M and Associates LLC (“O’MA”). Although Hilger is not a
2 No. 15-2566
named insured under O’MA’s policy, the policy defines
“covered persons and entities” to include O’MA’s independ-
ent contractors; Hilger sought coverage as such.
Landmark responded by filing this action for a declarato-
ry judgment that it has no duty to defend Hilger. The insur-
ance company argued that Hilger did not perform the
professional services at issue in the Michigan and Tennessee
suits as an O’MA independent contractor and is therefore
not covered under O’MA’s policy. The district court, sitting
in diversity and applying Illinois law, disagreed and entered
judgment on the pleadings for Hilger. Landmark now
appeals, arguing that it is entitled to take discovery and offer
evidence regarding the true nature of Hilger’s relationship to
O’MA.
We agree with Landmark that judgment on the pleadings
was inappropriate. Under Illinois law an insurer that seeks a
declaration of its duty to defend may offer evidence outside
the underlying complaint for purposes of establishing that
no duty exists. While the insurer may not use a declaratory-
judgment action to litigate liability in the underlying law-
suit, that limitation is inapplicable to this case. Accordingly,
we reverse the judgment and remand for further proceed-
ings.
I. Background
Peter Hilger is the president of Allied Solutions, LLC, a
company that provides customized products to financial
institutions. In 2013 he was named as one of several code-
fendants in two separate lawsuits brought by credit unions
in Michigan and Tennessee. Hilger’s codefendants include
Michael O’Malley, who sells life insurance through O’MA,
No. 15-2566 3
and Daniel Phillips, who brokers the sale of life-insurance
policies to third parties through Berkshire Group, LLC, and
Capital Lending Strategies, LLC. The credit unions allege
that Hilger, O’Malley, and Phillips persuaded them to fund
loans used to pay life-insurance premiums by overstating
the value of the policies that would serve as collateral for the
loans.
Hilger and his codefendants face a host of claims in these
lawsuits. The Michigan complaint alleges fraud, innocent
and negligent misrepresentation, breach of contract, and
conspiracy against all of the defendants in their individual
capacities. It also advances theories of joint-venture liability
against Allied, Capital Lending Strategies, and O’Malley;
individual liability against Hilger and Phillips for the acts of
Allied and Capital Lending Strategies; and respondeat
superior liability against Allied and Capital Lending Strate-
gies for the conduct of Hilger and Phillips. The Tennessee
complaint alleges negligence, negligent misrepresentation,
and unjust enrichment against Hilger, O’Malley, Phillips,
and their respective companies. Together, the credit unions
claim losses in excess of $1 million.
Both O’MA and Hilger tendered their defense to Land-
mark under O’MA’s Insurance Agents and Brokers Liability
Policy. The policy obligates Landmark to pay damages
arising out of any negligent act, error, or omission commit-
ted in O’MA’s rendering of professional services as an
insurance agent and broker, including facilitation of insur-
ance-premium finance loans. Section I.E of the policy defines
“Covered Persons and Entities” to include “[a]ny present or
former principal, partner, officer, director, employee or
independent contractor of the Named Insured, but only as
4 No. 15-2566
respects professional services rendered on behalf of the
Named Insured.” O’MA sought coverage as the policy’s
named insured, while Hilger claimed that the Michigan and
Tennessee lawsuits pertained to professional services that he
rendered as an O’MA independent contractor. Landmark
denied both tenders and filed this action for a declaratory
judgment that it has no duty to defend either O’MA or
Hilger. O’MA and Hilger counterclaimed, seeking a declara-
tion that Landmark does owe them a duty to defend. They
then moved for judgment on the pleadings, see FED. R. CIV.
P. 12(c), which the district court granted. Only the judgment
in favor of Hilger is at issue on appeal.
In granting Hilger’s motion, the judge observed that the
complaints in the underlying lawsuits “paint an ambiguous
picture” of Hilger’s relationship with O’MA: while certain
allegations suggest that Hilger acted at all times as an agent
of Allied, other allegations are consistent with the assertion
that Hilger acted as an independent contractor for O’MA.1 In
light of the requirement under Illinois law that this type of
ambiguity be resolved in favor of the insured, see, e.g.,
Gen. Agents Ins. Co. of Am., Inc. v. Midwest Sporting Goods Co.,
828 N.E.2d 1092, 1098 (Ill. 2005), the judge concluded that
Landmark is required to defend Hilger. On Landmark’s
motion for reconsideration, see FED. R. CIV. P. 54(b), the judge
rejected the argument that discovery was required to deter-
mine the true nature of Hilger’s relationship with O’MA.
1 Specifically, the judge noted that both the Michigan and Tennessee
complaints expressly attribute all alleged acts and omissions to Hilger in
his capacity as an agent of Allied. On the other side of the equation, the
judge cited assertions in both complaints that Hilger either collaborated
with or acted through O’MA.
No. 15-2566 5
Relying on our decision in Old Republic Insurance Co. v.
Chuhak & Tecson, P.C., 84 F.3d 998 (1996), the judge held that
any consideration of evidence outside the underlying com-
plaints was inappropriate absent a “strong reason to be-
lieve” that Hilger was not in fact an insured under O’MA’s
policy. The judge denied reconsideration. Landmark now
appeals.
II. Discussion
We review a judgment on the pleadings de novo, using
the same standard that applies to a Rule 12(b)(6) motion to
dismiss for failure to state a claim. Buchanan-Moore v. County
of Milwaukee, 570 F.3d 824, 827 (7th Cir. 2009). “Thus, we
view the facts in the complaint in the light most favorable to
the nonmoving party and will grant the motion ‘only if it
appears beyond doubt that [Landmark] cannot prove any
facts that would support [its] claim for relief.’” Id. (quoting
N. Ind. Gun & Outdoor Shows, Inc. v. City of South Bend,
163 F.3d 449, 452 (7th Cir. 1998)). Neither party has raised
the issue of which state’s substantive law governs this
diversity action, so we apply the law of Illinois, the forum
state. Santa’s Best Craft, LLC v. St. Paul Fire & Marine Ins. Co.,
611 F.3d 339, 345 (7th Cir. 2010).
The oft-repeated refrain of Illinois insurance law is that
an insurer’s duty to defend is “much broader” than its duty
to indemnify. Crum & Forster Managers Corp. v. Resolution Tr.
Corp., 620 N.E.2d 1073, 1079 (Ill. 1993). “If the facts alleged in
the underlying complaint fall within, or potentially within,
the policy’s coverage provisions, then the insurer has a duty
to defend the insured in the underlying action.” Id.; see also
Amerisure Mut. Ins. Co. v. Microplastics, Inc., 622 F.3d 806,
810–11 (7th Cir. 2010). As a practical matter, this means that
6 No. 15-2566
an insurance company taking the position that it has no duty
to defend usually cannot “simply refuse to defend the
insured.” Emp’rs Ins. of Wausau v. Ehlco Liquidating Tr.,
708 N.E.2d 1122, 1134 (Ill. 1999). As long as the underlying
complaint even “potentially alleg[es] coverage,” the insurer
must either defend the suit under a reservation of rights or
seek a declaratory judgment that there is no coverage. Id.; see
also Edward T. Joyce & Assocs., P.C. v. Prof’ls Direct Ins. Co.,
816 F.3d 928, 932 (7th Cir. 2016). “If the insurer fails to take
either of these steps and is later found to have wrongfully
denied coverage, the insurer is estopped from raising policy
defenses to coverage.” Ehlco Liquidating Tr., 708 N.E.2d at
1135.
Hilger thinks that the broad scope of an insurer’s duty to
defend means that in all duty-to-defend disputes, the court
is limited to a review of the allegations in the underlying
complaint. That’s true when an insurer tries to deny cover-
age without seeking a declaratory judgment or defending
under a reservation of rights. In that situation the relevant
question is whether the insurer justifiably refused to defend
the action based solely on the allegations in the complaint, so
the court’s inquiry is necessarily limited to those allegations.
See MFA Mut. Ins. Co. v. Crowther, Inc., 458 N.E.2d 71, 73 (Ill.
App. Ct. 1983) (“An insurer may not justifiably refuse to
defend an action against its insured unless it is clear from
the face of the complaint that the allegations fail to state facts
which bring the claim within, or potentially within, the
policy’s coverage.”).
But Landmark did seek a declaratory judgment, so that
limitation doesn’t apply here. “[W]hen an insurer has elected
to either defend under a reservation of rights or file a declar-
No. 15-2566 7
atory judgment action, … the insurer may present evidence
beyond the underlying complaint, so long as it does not tend
to determine an ultimate issue in the underlying proceed-
ing.” Fid. & Cas. Co. of N.Y. v. Envirodyne Eng’rs, Inc.,
461 N.E.2d 471, 474–75 (Ill. App. Ct. 1983) (citation omitted),
cited with approval in Pekin Ins. Co. v. Wilson, 930 N.E.2d 1011,
1020 (Ill. 2010). An “ultimate issue” is one that would collat-
erally estop the plaintiff in the underlying lawsuit from
raising a theory of recovery or be crucial to the insured’s
liability. Id. at 475.
The extra latitude afforded to insurers in this situation
makes sense given the Illinois Supreme Court’s long-
standing directive in duty-to-defend disputes between an
insurer and its insured:
When the underlying complaint against the in-
sured allege[s] facts within or potentially with-
in the scope of policy coverage, the insurer tak-
ing the position that the complaint is not cov-
ered by its policy must defend the suit under a
reservation of rights or seek a declaratory
judgment that there is no coverage.
Midwest Sporting Goods Co., 828 N.E.2d at 1098. If the inquiry
in the ensuing declaratory-judgment action were limited to
the four corners of the underlying complaint and asked only
whether the complaint’s allegations fall potentially within
the policy’s coverage, the proceedings would be “little more
than a useless exercise possessing no attendant benefit.”
Envirodyne Eng’rs, 461 N.E.2d at 474.
In granting Hilger’s motion for judgment on the plead-
ings, the judge assumed that all duty-to-defend issues “are
8 No. 15-2566
analyzed by comparing the four corners of the underlying
complaint to the insurance policy.” As we’ve explained, that
proposition is inapposite in the context of a declaratory-
judgment action. Because Landmark seeks a declaration of
its duty to defend Hilger, it may offer evidence outside the
Michigan and Tennessee complaints that Hilger did not
render the professional services in question as an O’MA
independent contractor provided that doing so will not decide
an “ultimate issue” in the underlying actions. There’s no
indication that it would. The claims against Hilger in the
Michigan and Tennessee suits consist primarily of misrepre-
sentation and breach-of-contract claims, none of which
“hinge[] upon” Hilger’s status as an independent contrac-
tor. 2 Id. at 476.
We note that the judge also relied heavily on our decision
in Old Republic Insurance Co. v. Chuhak & Tecson, P.C., for the
proposition that a court may only look beyond the underly-
ing complaint in a declaratory-judgment action if the insurer
provides a “strong reason to believe” that it has no duty to
defend. But Old Republic predates Pekin Insurance Co. v.
Wilson, 930 N.E.2d 1011 (Ill. 2010), in which the Illinois
Supreme Court clarified the law on this point. See Gen. Ins.
2 Hilger argues that the question whether he participated in a joint
venture with O’MA constitutes an “ultimate issue” in the Michigan and
Tennessee suits. See Clarendon Am. Ins. Co. v. B.G.K. Sec. Servs., Inc.,
900 N.E.2d 385, 393 (Ill. App. Ct. 2008) (holding that the putative in-
sured’s participation in a joint venture was an ultimate issue because the
existence of a joint venture would give rise to joint and several liability
for the conduct of codefendants under Illinois law). But Landmark hasn’t
asked the court to decide whether Hilger participated in a joint venture,
only whether he rendered the services in question in the Michigan and
Tennessee suits as an independent contractor for O’MA.
No. 15-2566 9
Co. of Am. v. Clark Mall Corp., 644 F.3d 375, 378 (7th Cir.
2011). To reiterate, an insurer seeking a declaratory judg-
ment on its duty to defend is entitled to introduce evidence
outside the underlying complaint so long as it does not
implicate an “ultimate issue” in the underlying action. To
the extent that Old Republic suggests that additional limita-
tions apply, it is inconsistent with Illinois insurance law. Cf.
Envirodyne Eng’rs, 461 N.E.2d at 474 (“The only time such
evidence should not be permitted is when it tends to un-
dermine an issue crucial to the determination of the underly-
ing lawsuit … .”).
Illinois law permits Landmark to offer evidence outside
the Michigan and Tennessee complaints that Hilger isn’t
covered as an independent contractor under O’MA’s policy.
We therefore REVERSE the judgment in favor of Hilger and
REMAND for further proceedings.