February 10, 2016
from the United States District Court for the Northern
District of Illinois, Eastern Division. No. 13 C 02552 -
Edmond E. Chang, Judge.
Bauer, Flaum, and Sykes, Circuit Judges.
Hilger faces two separate lawsuits 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 professional liability policy held by one of
his codefendants, O'M and Associates LLC
("O'MA"). Although Hilger is not a named
insured under O'MA's policy, the policy defines
"covered persons and entities" to include
O'MA's independent contractors; Hilger sought
coverage as such.
responded by filing this action for a declaratory judgment
that it has no duty to defend Hilger. The insurance 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.
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 lawsuit, that limitation is inapplicable to this
case. Accordingly, we reverse the judgment and remand for
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, 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
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 Strategies 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.
O'MA and Hilger tendered their defense to Landmark 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 committed in
O'MA's rendering of professional services as an
insurance agent and broker, including facilitation of
insurance-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 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 declaration 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.
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. 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 (111. 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
determine the true nature of Hilger's relationship with
O'MA. 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 complaints was inappropriate absent a
"strong reason to believe" that Hilger was not in
fact an insured under O'MA's policy. The judge denied
reconsideration. Landmark now appeals.
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).
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 (111.
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 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 (111. 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 ...