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Landmark American Insurance Co. v. Hilger

United States Court of Appeals, Seventh Circuit

September 22, 2016

Landmark American Insurance Company, Plaintiff-Appellant,
Peter Hilger, Defendant-Appellee.

          Argued February 10, 2016

         Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 13 C 02552 - Edmond E. Chang, Judge.

          Before Bauer, Flaum, and Sykes, Circuit Judges.

          Sykes, Circuit Judge.

         Peter 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.

         Landmark 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.

         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 lawsuit, that limitation is inapplicable to this case. Accordingly, we reverse the judgment and remand for further proceedings.

         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, 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 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.

         Both 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.

         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 (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.

         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 (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 ...

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