Not So Fast: Eight Corners Rule Is Not The Final Word

January 5, 2017Articles Law360

In January of 2015, the Illinois Appellate Court ruled that several primary insurers had a duty to defend their insured in lawsuits alleging bodily injuries caused by exposure to welding fumes during unknown time periods. Illinois Tool Works Inc. v. Travelers. Cas. and Sur. Co., 2015 IL App (1st) 132350 (ITW). Based on those facts alone, the ruling was neither surprising nor significant. After all, the duty to defend is broadly construed and, given the lack of specificity concerning when the alleged bodily injuries occurred, there was the potential they had occurred during the relevant policy periods.

What is significant is that the court found there was a duty to defend even though it was undisputed — based on facts extrinsic to the underlying complaints — that the insured did not enter the welding industry until years after the insurers’ policies had expired. Thus, the underlying lawsuits did not and could not have involved bodily injury that occurred during the policy period (a necessary requirement in order to establish indemnity coverage) under any circumstances. The insurers argued that, in the absence of any possible duty to indemnify, the court should have found there was no duty to defend. Yet the court found there was a such duty and, in so doing, strictly adhered to the “eight corners” rule which looks solely to the allegations of the underlying complaint and the insurance policy without reference to matters extrinsic to the complaint. Id. at ¶ 27.

At first glance, the Illinois Appellate Court’s strict adherence to the eight corners rule might appear to be a victory for Illinois policyholders because the rule limits the determination of the duty to defend to the allegations of the complaint which, more often than not, are drafted to be vague and unspecific in order to trigger insurance coverage. See Jeff Sistrunk, Ill. Court’s Duty-To-Defend Ruling Boosts Policyholders, Law360 (Jan. 23, 2015, 2:09 p.m.)

But what if the allegations of the complaint fail to establish that a duty to defend is owed, yet the policyholder is aware of factual matter beyond the four corners of the complaint that would establish a duty to defend? See, e.g., Pekin Insurance Co. v. CSR Roofing Contractors Inc., 2015 IL App (1st) 142473, at ¶ 48. Should the insurer in such a case be allowed to rely on the eight corners rule in order to deny that it has a duty to defend until such time as there are facts sufficiently pled to establish the duty? Or what if the complaint alleges facts that obligate the insurer to defend a party under an omnibus provision when, in fact, that party is a stranger to the policy and not entitled to a defense? If the policy is written on a loss-sensitive basis (i.e., subject to retrospective premiums), stringent application of the eight corners rule could result in the policyholder being billed for losses sustained by a stranger to the policy.

The better, more well-reasoned rule is that insurers and policyholders should be permitted to look beyond the eight corners in coverage litigation to determine whether a duty to defend is owed, so long as doing so will not decide an issue that is critical to the underlying lawsuit, i.e., an “ultimate fact” that could have collateral estoppel implications on the underlying claims. Parties should also be permitted to use extrinsic evidence to determine the insured status of a party. Although policyholders may view this approach as less favorable than a strict eight corners rule, it is a neutral approach because both policyholders and insurers can use it to determine insured status and/or whether a duty to defend is owed, particularly in instances where the allegations of the complaint are not sufficiently clear. Pekin Insurance Co. v. Wilson, 237 Ill. 2d 446, 465 (2010) (“[I]f an insurance company has a right to present evidence beyond the complaint in the underlying lawsuit to show that it has no duty to defend, the insured has the same right to present evidence to show that there is a duty to defend”).

From the perspective of the insurer, this approach is desirable because it avoids windfall defenses to policyholders in instances where there is no possibility of indemnity coverage and/or parties that have no contractual relationship with the insurer. From the policyholder’s perspective, it avoids situations where the insurer relies on the eight corners rule to avoid the duty to defend where extrinsic facts demonstrate otherwise.

Illinois cases decided before ITW adhered to this approach. See Wilson, 237 Ill. 2d at 459 (“[W]e disagree … that this court … intended to limit the source of an insurer’s duty to defend ‘solely’ to the content of the underlying complaint”); Pekin Insurance Co. v. Equilon Enter. LLC, 2012 IL App (1st) 111529, at ¶ 29 (“In Wilson, our supreme court rejected the assertion … that the trial court must look solely to the underlying complaint and the applicable policy provisions to determine whether there is a duty to defend”); Am. Economy Insurance Co. v. Holabird and Root, 382 Ill. App. 3d 1017, 1032 (2008) (“the trial court ‘need not wear judicial blinders’ and may look beyond the complaint at other evidence appropriate to a motion for summary judgment”); Fremont Comp. Insurance Co. v. ACE-Chicago Great Dane Corp., 304 Ill. App. 3d 734, 744 (1999) (ruling that the trial court properly considered deposition testimony in ruling that an insurer did not owe a duty to defend because the conduct at issue took place after the insurer’s policy expired); Fid. & Cas. Co. v. Envirodyne Eng. Inc., 122 Ill. App. 3d 301, 305 (1983) (“To require the trial court to look solely to the complaint … to determine coverage would make the declaratory proceeding little more than a useless exercise possessing no attendant benefit and would greatly diminish a declaratory action’s purposes of settling and fixing the rights of the parties”).

What remained unclear in the immediate aftermath of ITW was whether future Illinois courts would follow a strict application of the eight corners rule. Fortunately for insurers and policyholders, Illinois decisions post-ITW have continued to follow the approach that factual matters beyond the eight corners may be considered in coverage litigation when determining the duty to defend unless doing so would decide a critical issue in the underlying case such that collateral estoppel concerns are implicated. See Country Mut. Insurance Co. v. Dahms, 2016 IL App (1st) 141392, at ¶ 77 (“the only time such evidence should not be permitted is when it tends to determine an issue crucial to the underlying lawsuit”) (emphasis in original) (citing Bartkowiak v. Underwriters at Lloyd’s London, 2015 IL App (1st) 133549, at ¶ 21 (“[P]rovided the trial court is not, in effect, adjudicating a critical issue in the underlying case, there is no reason why the trial court should not consider relevant, objective undisputed facts in deciding the duty to defend, even if those facts fall outside the pleadings of the underlying lawsuit. In fact, the only time such evidence should not be permitted is when it tends to determine an issue crucial to the underlying lawsuit”) (emphasis in original)); Pekin Insurance Co. v. Martin Cement Co., 2015 IL App (3d) 140290, at ¶ 15 (rejecting contention that “it is never appropriate to consider outside” information); Farmers Auto Insurance Assoc. v. Neumann, 2015 IL App (3d) 140026, at ¶ 12 (“A court is not required to put on blinders and may look beyond the complaint at other evidence appropriate on a motion for summary judgment”); Markel Am. Insurance Co. v. Vantage Yacht Club LLC, 158 F. Supp. 3d 699, 707 (N.D. Ill. 2016) (Illinois law) (same); CSR Roofing Contractors Inc., 2015 IL App (1st) 14373, at ¶ 48 (“rejecting … the proposition that the duty to defend must be based solely on the allegations of the underlying complaint”).

In sum, a recent line of Illinois decisions has reaffirmed the rule in Illinois that assessment of the duty to defend may include factual information beyond the “eight corners” of a complaint and a policy, particularly when the issue is raised on summary judgment. It remains that the only instances in which such information should not be included in the analysis are when such considerations might decide a critical issue, i.e., have collateral estoppel implications, with respect to the underlying claims brought against the insured.

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