No Defense Duty For Allegations That Merely “Relate” To Potential Coverage

May 5, 2017 / Uncategorized

An insurer’s duty to defend typically turns on the allegations of the underlying complaint against the insured. Sometimes those allegations contain statements that arguably could give rise to a defense obligation, but the statements are not the basis for the underlying claimant’s cause of action. The question then arises as to what relevance should be given the statements. The United States Court of Appeals for the Seventh Circuit recently evaluated these types of statements in a complaint against a real estate broker for intentional infliction of emotional distress and related claims, to determine whether they triggered the obligation of a professional liability insurer to defend the broker. The Court said no, even though the allegations related to those made in an earlier complaint against the broker, which the insurer did defend. Madison Mutual Ins. Co. v. Diamond State Ins. Co., 851 F.3d 749 (7th Cir. 2017).


In 1999, the insured, Geraldine Davidson, served as broker for the sale of a 42-acre parcel of land in southern Illinois to Dr. William and Wendy Dribben. The acreage sold the Dribbens contained a dam for a lake that was part of a four-parcel development. Davidson was owner of a second parcel in the development.

In 2006, the Dribbens sued Davidson claiming that she fraudulently concealed that no permit authorizing the dam had ever been obtained from the Illinois Department of Natural Resources. The Dribbens apparently were potentially responsible for the permit as owners of the property on which the dam was located.

Diamond State, Davidson’s professional liability carrier, provided a defense for Davidson for the 2006 lawsuit under a claims-made policy. The claims asserted by the Dribbens were eventually resolved in Davidson’s favor.

In 2011, the Dribbens brought a second suit against Davidson and her husband. This lawsuit contained a potpourri of allegations against the Davidsons, including that they violated restrictive covenants, polluted the lake, interfered with the Dribbens’ easement rights, spread rumors that Dr. Dribben was a serial killer, and did other nasty things. Recovery was sought based on intentional infliction of emotional distress, trespass, and additional theories.

Davidson tendered to her homeowners’ carrier, Madison Mutual, which agreed to defend. Later, Davidson also tendered the 2011 lawsuit to Diamond State, which declined to defend on the ground that, in its view, no professional services were at issue in the lawsuit.

In 2014, Madison Mutual filed the instant declaratory action claiming that Diamond State had breached its duty to defend the 2011 action. It argued that at least some of the 2011 allegations supported a potential claim against Davidson as a real estate broker for failure to disclose the lack of a dam permit, and that those allegations related back to the 2006 lawsuit.

The district court entered summary judgment in favor of Diamond State, finding that it had no duty to defend the 2011 suit. Madison Mutual took this appeal.


In an opinion by Judge Ilana Diamond Rovner, the Seventh Circuit affirmed. The Court characterized the issue as whether the allegations in the 2011 litigation potentially implicated Davidson’s conduct as a broker. In doing so, the Court noted the provision in the Diamond State policy, which, although issued on a claims-made basis, provided that any claim subsequently made against the insured arising out of an earlier wrongful act of which Diamond State had notice, would be deemed to have been made at the time Diamond State received the earlier notice.

The Seventh Circuit then observed that various allegations in the 2011 lawsuit concerned the dam and Davidson’s status as a real estate broker. These included references to the dam permitting issue and an allegation that, as a real estate broker who convinced the Dribbens to purchase into the development, Davidson had a duty not to engage in the kind of nasty activities alleged in the complaint.

The Court found, however, that none of the 2011 allegations, expressly or impliedly, claimed that Davidson wronged the Dribbens in her capacity as a realtor by not disclosing that the dam was un-permitted. Rather, the reference to Davidson’s status as a realtor appeared aimed at suggesting that she should have understood how her actions as a neighbor in the development would interfere with the quiet enjoyment of the property by the Dribbens.

Madison Mutual nonetheless argued that because certain of the factual allegations could support a claim related to Davidson’s failure to disclose the dam permitting situation, the Court should construe the 2011 lawsuit as potentially asserting a claim against Davidson for professional liability. The Court rejected the argument based in part on Health Care Indus. Liability Ins. Program v. Momence Meadows Nursing Ctr., Inc., 566 F.3d 689 (7th Cir. 2009).

In that case, an insured nursing home sought coverage under a CGL policy for claims based on retaliation against former employees for exposing fraudulent Medicare and Medicaid charges. Although the underlying complaint described physical harms to the nursing home residents, the court found that the relevant allegations provided mere explanatory background that did not point to a theory of recovery based on bodily injury.

Similarly here, said the Seventh Circuit, the allegations concerning the dam did not point to any theory of recovery against Davidson for breach of her professional obligations as a realtor. This was so despite the fact that the prayer for relief in the 2011 complaint contained a boiler plate request for further relief that “the Court feels is necessary, proper or just.” Such a request did not operate as an independent theory of recovery.

The Court therefore affirmed the summary judgment in favor of Diamond State.

Learning Points:

(1)  Factual allegations in an underlying complaint that provide mere explanatory background and do not point to a theory of recovery against an insured for which coverage is provided, do not trigger the insurer’s duty to defend.

(2)  Boilerplate requests in a prayer for relief that the court grant such further relief as may be necessary or proper, are not construed as an independent theory of recovery.

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