The rules appear to be fairly simple, but there seems to always be a steady stream of new case law coming along with regard to the circumstances under which an insurer has a duty to defend its insured. At the outset, the general rule is that, when the insurance policy includes a duty to defend and a claim arises under which there is a "potential" for coverage, the insurer has a duty to either provide the insured with a complete defense or reimburse the insured’s defense costs.
Whether there is a duty to defend is thus generally determined by reference to the four-corners of the complaint.1 Superfluous allegations, which have nothing to do with whether liability may be established, should be ignored because they do not serve to eliminate the "potential for coverage."2 There is increasing authority, however, for the proposition that, if the insurer has notice of extrinsic facts that would establish that coverage should be afforded in a given case, the insurer cannot refuse the insured’s defense simply because the complaint does not disclose those facts.3 If the underlying complaint was filed in federal court, moreover, the federal court’s notice-pleading rules apply and a potential for coverage may be found even if the four corners of the complaint do not specifically disclose the elements of an insured cause of action.4
One might conclude from these authorities that a duty to defend is likely to be found in most cases in which the insured seeks a defense from its insurer, regardless of the merits of the demand. But it is also true, just as the courts have begun to look beyond the "four corners" of a complaint to determine whether there is potential coverage, a number of cases reflect what appears to be a growing skepticism among the courts with respect to claims brought solely to trigger coverage, regardless of the absurdity of the possibility.5
Still, if there is a potential for coverage on any one count in the complaint, the duty to defend extends to all of the claims in the complaint.6 So, in cases involving the duty to defend, the insurer often plays a very active role in the disposition of claims against its insured, even though it might not be eventually required to indemnify the insured on those claims.
If the insurer refuses to defend its insured, of course, the insured is entitled to take whatever action it deems necessary to resolve the underlying claim. Thus, when an insurer refuses to defend a claim which is then settled by the insured, the only issue to be resolved (to determine the insurer’s liability) is whether the complaint could have been reasonably construed to potentially trigger coverage afforded by the policy. As the Court held in U.S. Gypsum Co. v. Admiral Ins. Co., 268 Ill. App. 3d 598, 626, 643 N.E.2d 1226 (1st Dist. 1994):
Requiring that insureds reprove the entire case which was to be offered against them could have a chilling effect on settlements as such a regime would markedly reduce the advantages to the insured of settling: faced with the choice of defending the tort action vigorously or settling it without hope of insurance reimbursement, the insured would tend to choose the former.
It is for these reasons that insurers often seek to defend cases brought against their insureds under a reservation of rights, confirming that they will provide a defense but reserving the right to deny coverage if it turns out that the facts do not support a conclusion that the claim should be indemnified. In these cases (which seem to more and more frequently represent the rule rather than the exception), the insured should seek its own counsel. The insurer is not entitled to both take a contrary position to the interests of its insured and control the insured’s defense at the same.
One reason for this is that the attorney working for the insurer has an inherent conflict of interest when the case is proceeding under a reservation of rights. In cases involving liability coverage, the one ethical issue which seems to permeate almost every relationship between insurer and insured is the potential conflict of interest which the attorney trying to represent both interests must experience. The issues arise under Rule 1.7 of the Illinois Rules of Professional Conduct, which provides in part that:
A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer’s responsibilities to another client or to a third person, or by the lawyer’s own interest, unless: (1) The lawyer reasonably believes the representation will not be adversely effected; and (2) The client consents after disclosure. (Rule 1.7b).
When a lawyer would otherwise be representing the interests of both insurer and insured, in cases in which the insurer has reserved its rights because of a possible policy exclusion, there is a potential conflict between the clients such that the attorney often cannot represent both. In such cases, the insurer’s choice of counsel is irrelevant and the insurer can satisfy its obligations to the insured only by reimbursing the insured the reasonable costs of counsel chosen by the insured:
• American Country Ins. Co. v. Williams, 339 Ill. App.3d 835, 274 Ill. Dec. 857, 791 N.E.2d 1268 (1st Dist. 2003) ("The test of whether a conflict of interest exists, allowing the insured to assume control of the defense, is if, in comparing the allegations of the complaint to the terms of the policy, the insurer’s interests would be furthered by providing a less than vigorous defense to the allegations. The insurer facing a conflict of interest with its insured in the conduct of the insured’s defense is not obligated or even permitted to participate in the defense.").
• Murphy v. Urso, 88 Ill. 2d 444, 454-55, 430 N.E.2d 1079 (1981) ("Travelers had an even more fundamental problem [than a conflict between its two insureds] - the conflict between its own interests and [those of the insured].... Where there is a conflict...the insurer is not "obligated or permitted to participate in the defense.... The particulars of the conflict of interest do not matter, only that there is a conflict at all. The insured has the right to be defended by counsel of his own choosing. A ruling that required an insured to be defended by what amounted to his enemy in the litigation would be foolish");
• Mobil Oil Corp. v. Maryland Casualty Co., 288 Ill. App. 3d 743, 756-57, 681 N.E.2d 522 (1st Dist. 1997) ("A conflict of interest exists in the interests of the insurer would be furthered by providing a less than vigorous defense to the allegations against the insured..... The conflict of interest faced by Maryland’s attorney demonstrably established the need for an independent counsel to represent Mobil’s interests. Because it had a contractual obligation to provide Mobil with a viable defense, Maryland must pay attorneys fees incurred by Mobil in the Cibulskis lawsuit.")
• Nandorf, Inc. v. CNA Ins. Co., 134 Ill. App. 3d 134, 136-37, 479 N.E.2d 988 (1st Dist. 1985) ("Generally, the insurer’s duty to defend includes the right to assume control of the litigation.... When conflicts arise, the Illinois Supreme Court has recognized a limited exception to the general rule.... In a conflict situation where the insured rejects the insurer’s offer to defend under a reservation of rights, the insurer’s obligation to defend is satisfied by reimbursing the insured for the costs of independent counsel.... Because CNA’s reservation of rights placed the insurer and insured at cross-purposes ... an actual conflict of interest existed... which rendered it improper for CNA to retain control of the litigation.")
• Villicana v. Evanston Ins. Co., 28 Cal. App. 4th 631 (Cal. App. 1994) ("An insurer has an obligation to provide an insured with independent counsel when the outcome of a coverage issue can be affected by the manner in which the underlying action is defended.").
1 See, e.g. American Country Ins. Co. v. Williams, 339 Ill. App.3d 835, 274 Ill. Dec. 857, 791 N.E.2d 1268 (1st Dist. 2003) ("The general rule in Illinois is that an insurer is obligated to defend an action against an insured when the complaint contains allegations which bring the claim actually or potentially within the policy."). But whether there is a potential for coverage may also turn on what must be proven "in order to recover in the underlying litigation." Travelers Ins. Cos. v. P.C. Quote, Inc., 211 Ill. App. 3d 719, 729-30 (1st Dist. 1991).
2 In this regard, the insured’s counsel should be careful to scrutinize any complaint. Often claims of "spurious," "willful" or "intentional" conduct show up in the complaint, particularly when the other side wants to make sure their client’s anger has been memorialized. But the inclusion of such allegations does not necessarily mean that coverage would not be available. Indeed, there are many bases for coverage that apply regardless of whether the conduct involved was intentional. See, e.g. Dixon Distributing Co., v. Hanover Ins. Co., 244 Ill. App. 3d 837; 612 N.E.2d 846 (5th Dist. 1993) (Intentional acts may be insured against under Illinois law. "Indeed, the courts have allowed insurance to indemnify many categories of willful misconduct.").
3 See La Rotunda v. Royal Globe Ins. Co., 87 Ill. App. 3d 446, 408 N.E.2d 928, (1st Dist. 1980) ("The results of Royal Globe’s own investigation may also be considered as unpleaded facts known to the insurer which indicate that the claim was potentially within the policy’s coverage."); Maneikis v. St. Paul Ins. Co., 655 F.2d 818, 823-24 (7th Cir. 1981) ("St. Paul’s letter refusing coverage explicitly admits that counsel for St. Paul had reviewed both the complaint and a portion of the pretrial memorandum filed by Maneikis.").
4 See Maneikis v. St. Paul Ins. Co., 1980 U.S. Dist. LEXIS 12925 (N.D. Ill. 1980) ("Given the practice of fact pleading in Illinois, it would not be unfair to hold an insurer liable only to the extent the question of coverage could be answered affirmatively from the face of the pleading. In a notice-pleading jurisdiction, however, such a rule would be inappropriate. The result would be that plaintiffs would be compelled to engage in fact pleading, contrary to the mandate of Fed.R.Civ.P. 8 for short, concise pleadings."); Kufalk v. Hart, 636 F. Supp. 309 (N.D. Ill. 1986) ("Federal court ‘notice pleading’ does not require the detailed averments of the Illinois courts and a complaint’s lack of specificity as to extent of injury should not remove a duty to defend where one might otherwise exist."); Carboline Co. v. Home Indem. Co., 522 F.2d 363 (7th Cir. 1975) ("Especially since the advent of notice pleading, it has been universally recognized that an insurer has a duty to defend under a defense clause if there is doubt whether the claim comes within the coverage of the policy….").
5 See SCR Medical Transp. Services, Inc. v. Browne, 335 Ill. App.3d 585, 269 Ill. Dec. 767, 781 N.E.2d 564, 567-68 (1st Dist. 2002) ("Count IX was rushed into the breach when it became obvious the first eight counts of Browne’s complaint would not support a duty to defend. The trial court had made it clear it was finding for the insurance company...."); Pope ex rel. Pope v. Economy Fire & Cas. Co., 335 Ill. App.3d 41, 48-49, 268 Ill. Dec. 847, 779 N.E.2d 461 (1st Dist. 2002) ("[C]ourts should not torture the language of a policy to find coverage where it is clear that none exists.").
6 See Bedoya v. Illinois Founders Ins. Co., 293 Ill. App. 3d 668, 688 N.E.2d 757 (1st Dist. 1997), appeal denied, 177 Ill. 2d 567, 698 N.E.2d 542(1998) ("The fact that a general liability policy was also issued in addition to the dram shop policy in Illinois Founders does not change the well settled rule that an insurer must defend all counts of a multi-count lawsuit even if only one of the counts falls within the coverage of the insurance policy."); Continental Cas. Co. v. Randhava, 1999 Ill. App. LEXIS 978 (1st Dist. 1999), appeal denied, 185 Ill. 2d 620, 720 N.E.2d 1090 (1999) ("[I]f any of the counts in the underlying complaint fell within the coverage provisions, the insurance company had a duty to defend the insured against all the counts in the complaint.").
Ted A. Donner is an attorney with Donner & Company Law Offices LLC in Wheaton, Illinois and the Editor-in-Chief of the DCBA Brief. His practice is con-centrated in legal services for business entities, with emphasis on matters involving trade issues, employment, insurance coverage and real estate. Mr. Donner is the author of two treatises for Thomson-West and an Adjunct Professor with Loyola University Chicago School of Law. He is scheduled to appear as a lecturer at two separate seminars for NBI this June: Bad Faith Insurance Claims in Illinois (June 12-13) and Insurance Coverage Litigation (June 18-19).