Illinois Courts Will Consider Claim File Notes

The Illinois Appellate Court recently required an insurer to defend its insured’s subcontractor in light of the insurer’s own claim file note and its insured’s subcontract. In Pekin Insurance Company v. AAA-1 Masonry & Tuckpointing, Inc., 2017 IL App (1st) 160200 at ¶24, the court noted the rule that it may consider evidence of the insurer’s knowledge of facts outside the complaint which may indicate potential coverage for the claim when considered with the complaint’s allegations, as long as consideration of this evidence would not determine liability issues in the underlying case. The court thus held that an insurance coverage determination may include evidence of facts known to the insurer which may bring the claim within coverage, including those in its own claim file.

In AAA-1supra, Alpha 1 Construction Company (“Alpha”) entered into a subcontract for construction services and labor with AAA-1 Masonry & Tuckpointing, Inc. (“AAA”).  The contract required Alpha to name AAA as an additional insured on Alpha’s policy.  Alpha’s employee was injured on the jobsite in an accident involving a scaffold; he then filed suit against AAA.  Based on its contract with Alpha, AAA sought coverage for the suit as an additional insured on Alpha’s policy issued by Pekin Insurance Company (“Pekin”).

Pekin filed suit against AAA seeking a declaration that it had no duty to defend AAA based on the terms of its additional insured endorsement.  That endorsement provided coverage to an additional insured, AAA, only for its vicarious liability due to Alpha’s negligence. Here the claimant had sued AAA for its own negligence, with no allegation that Alpha was also negligent.  Ultimately, AAA’s insurer filed a summary judgment motion.  The motion attached evidence that the claimant’s injury did arise from Alpha’s actions. Specifically, AAA referenced a note from Pekin’s own claim file which stated that Alpha had loaded bricks and an Ibeam onto the scaffold, which shifted while Alpha was raising it, causing the Ibeam to strike the claimant.

The court in AAA noted the rule that a court in a declaratory action is not limited to the allegations of the complaint in determining an insurer’s duty to defend. Rather, a court may consider evidence outside the complaint which may bring the claim within policy coverage as long as the court’s consideration of such evidence would not “determine an issue crucial” to liability in the underlying lawsuit.  2017 IL App (1st) 160200 at ¶ 24.  The true but unpled facts known to Pekin included the subcontract between Alpha and AAA, which provided that Alpha, not AAA, “was solely responsible for performing the work” at the jobsite. In addition, Pekin’s claim note showed its knowledge that Alpha had loaded the bricks and Ibeam onto the scaffold, raised it, and that the scaffold shifted during this transit causing the Ibeam to strike the claimant. Hence, reading the allegations of the complaint in conjunction with the claim note and the subcontract created the potential that AAA could be found liable for the claimant’s injuries based on Alpha’s operation of the scaffold. The court found that consideration of this evidence would not determine a crucial issue in the underlying injury case; rather, the court found that the evidence raised the possibility that Alpha’s liability could be imputed to AAA. An insurer’s duty to defend is triggered by facts that are “potentially within” the policy’s coverage;  there need not be certainty of coverage. Thus, the appellate court ruled that the trial court, in finding that the insurer was obligated to defend, had properly considered true but unpled facts from the insurer’s own file.

Illinois is increasingly moving beyond its prior position as a strictly “four-corners” or an “eight-corners” jurisdiction, in which courts will only consider the allegations of the complaint and the policy language in determining an insurer’s duty to defend.  Rather, in recent years, Illinois courts are allowing consideration of evidence beyond the policy and the complaint where it may potentially bring the claim within coverage, as long as doing so will not determine an issue crucial to liability in the underlying case.  AAA is among a line of cases showing a trend of broadening an insurer’s duty to defend beyond the four corners of the complaint.

AAA demonstrates that an insurer’s claim file notes and the documents it gathers may be used against it in requiring the insurer to defend.   Claims personnel, as well as coverage lawyers, should be aware that claim notes and the documentation gathered by an insurer may be considered in determining the insurer’s defense duties.  These materials should not be overlooked or ignored when a lawsuit is then tendered.  Hence, it may be useful to involve legal counsel in the early investigation  of a claim.

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