Extrinsic Evidence Of Defense Duty Submitted Late
A liability insurer's duty to defend typically is resolved by reference to the underlying complaint against the insured: if those allegations implicate or potentially implicate coverage under the policy, then the insurer's duty arises. In 2010, the Illinois Supreme Court deemed the foregoing the "general rule," and indicated the parties may look to facts outside the allegations of the underlying complaint to both trigger and negate the duty to defend. See Pekin Ins. Co. v. Wilson, 237 Ill. 2d 446 (2010). More recently, the Second District Appellate Court considered the timing of extrinsic evidence relied on by the insured, and under the circumstances found that the evidence came too late to provide a basis for a finding that the insurer had a duty to defend. Pekin Ins. Co. v. Precision Dose, Inc., 2012 IL App (2d) 110195, 2012 WL 907074 (2d Dist. Mar. 16, 2012).
In Precision Dose, Xactdose, Inc., was a packager and distributor of single-dose units of liquid medication. In 2006 the minority shareholders brought suit against three of the four directors of the company alleging that the defendants started up a competing company, Precision Dose, which began "assuming operations" of Xactdose. The complaint, as amended, included Xactdose as a defendant and alleged breaches of fiduciary duty and related causes of action.
Pekin's CGL policy issued to Xactdose was in effect during a portion of the period of the defendant directors' alleged breaches, during which time the policy was amended to name Precision Dose as the named insured. No question appeared to exist but that the defendant directors qualified as insureds under the policy.
They tendered defense of the lawsuit to Pekin, Pekin refused the tender, and it then filed this declaratory judgment action seeking a determination that the underlying complaint's allegations did not allege "personal injury" or "advertising injury" under the policy, and that Pekin had no duty to defend. The parties filed cross summary judgment motions, and in support of their motion, the defendant directors relied upon the affidavit of one of them, Koopman, attesting to the fact that Precision Dose used Xactdose's advertising ideas and goodwill, "essentially stepping into Xactdose's shoes."
Pekin moved to strike the affidavit, which motion the trial court allowed. The court then granted Pekin summary judgment and denied the motion of the director defendants. They took this appeal.
In an opinion by Justice Michael J. Burke, the Second District affirmed. The court initially took up the question of Koopman's affidavit. It observed that the facts there set forth would trigger a duty to defend the underlying lawsuit with respect to the "advertising injury" and/or "personal injury" coverages of the policy. Those coverages included protection for misappropriation of advertising ideas, wrongful eviction, and invasion of certain privacy rights.
Nevertheless, the defendant directors here did not disclose the information in the affidavit until the parties filed cross motions for summary judgment in the coverage action. By that time, according to the Second District, "the time for presenting a defense [in the underlying case] had passed."
The Second District acknowledged that, under Wilson and other cases, a coverage court in a summary judgment setting may consider evidence extrinsic to the underlying complaint in deciding the duty to defend. Here, however, the extrinsic information was supplied solely by the defendant directors and not uncovered through Pekin's investigation. And, moreover, the defendant directors delayed the disclosure thereby leaving Pekin without knowledge of the facts at the time it made its coverage decision.
In addition, consideration of the affidavit could not be justified on the ground that it clarified ambiguous pleadings. The defendant directors never explained what part of the underlying complaint needed clarification, and the court found that the affidavit contained no true but unpleaded facts of which Pekin was aware.
Notice and Cooperation
The defendant directors argued that no case law sets a cutoff time for an insured's presentation of facts supporting a duty to defend. In response, the appellate court observed that the withholding of the information until summary judgment could be construed as a violation of the policy's notice-of-occurrence-or-offense condition, and also a violation of the policy's cooperation condition. The court found that these violations presented an alternative basis for striking the Koopman affidavit.
Allegations Not Sufficient
Finally, the defendant directors contended that the allegations of the complaint itself, even in the absence of the affidavit, gave rise to a duty to defend. The Second District disagreed. Although the complaint alleged that Precision Dose "assumed operations" of Xactdose, this allegation appeared to be referring only to Xactdose's factory operations, not its business operations or advertising ideas which might have come within the definition of advertising injury.
Moreover, according to the court, the allegation of Precision Dose "assuming operations" of the factory was not an allegation of wrongful conduct, but only necessary to state the chain of events. None of the damages being sought regarded possession of the factory itself. Consequently, the complaint did not allege damages for any "wrongful eviction" that might be included under the definition of "personal injury."
The court therefore affirmed summary judgment in favor of Pekin and found no duty to defend.
(a) Evidence extrinsic to the underlying complaint in support of the duty to defend must be brought to the insurer's attention within a time frame that allows the insurer to make use of the evidence in a manner meaningful to the insurer's coverage decision.(b) An insured's failure to notify an insurer of extrinsic evidence prior to the briefing on summary judgment in a coverage action may constitute a violation of the notice and cooperation conditions of the policy.