In Landmark American Insurance Company v. Peter Hilger, the Seventh Circuit, applying Illinois law, recently clarified that an insurer may introduce extrinsic evidence in a declaratory judgment action regarding the insurer’s duty to defend. 2016 U.S. App. LEXIS 17343 (7th Cir. Sept. 22, 2016). Hilger was sued in two separate lawsuits alleging that he and others had mislead credit unions to fund loans by overstating the life-insurance policies that served as collateral. Hilger tendered his defense to Landmark under a professional liability policy held by a co-defendant. Hilger alleged that he qualified as an insured under the policy as, although he was not named in the policy, the policy provided coverage for “independent contractors” of the named insured provided the liability was related to professional services rendered for the named insured.

Landmark denied coverage for Hilger’s claim and filed a declaratory judgment action. The District Court granted Hilger’s motion for judgment on the pleadings reasoning that the underlying complaints left the relationship between Hilger and Landmark’s insured ambiguous, and that ambiguity had to be resolved in Hilger’s favor.

The Seventh Circuit reversed, stating that Landmark was entitled to conduct discovery into the relationship between Hilger and Landmark’s insured, and to use information obtained to demonstrate that Landmark owed no duty to defend. The Court noted that the District Court was correct that a duty-to-defend analysis was confined to the allegations of the underlying complaint where the insurer denies coverage without seeking a declaratory judgment or defending under a reservation of rights. In contrast, where the insurer has filed a declaratory judgment (or if an insurer was proceeding under a reservations of rights), the insurer may present evidence beyond that in the underlying complaint, as long as that evidence does not determine an ultimate issue in the underlying proceeding. In this instance, the Court found that because Landmark had sought a declaratory judgment, it could offer evidence outside the complaints showing that Hilger did not render the professional services as an independent contractor for Landmark’s insured, so long as that evidence would not decide an ‘ultimate issue’ in the underlying action — and the Court found no indication that it would. Thus the Court reversed and remanded, holding Illinois law “permits Landmark to offer evidence outside the. . .complaints that Hilger isn’t covered as an independent contractor under [the Landmark] policy.”