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Illinois Federal District Court Relies on Extrinsic Evidence to Rule that Insurer Has No Duty to Defend

Insurance Coverage Case Advisory, Issue 24
November 16, 2012

In Nautilus Ins. Co. v. Ricciardi Dev., LLC., No. 11-C-6126, 2012 WL 5471091 (N.D. Ill. Nov. 9, 2012), an Illinois federal district court granted summary judgment to an insurer who filed a declaratory judgment action, holding that the insurer had no duty to defend or indemnify its policyholder in a negligence suit under a commercial general liability policy because extrinsic evidence, which the court determined that it could consider under Illinois law, demonstrated that the policy’s completed work exclusion applied.

Plaintiffs in the underlying tort action alleged that the policyholder was liable for the negligent construction or renovation of a porch guard rail, which collapsed and caused injuries to the plaintiffs.  Id. at *1-2.  The policyholder allegedly renovated the porch and guardrail before the property was sold “[p]rior to May 24, 2009.”  Id.  The policyholder demanded a defense and indemnification pursuant to the CGL policy issued by Nautilus Insurance Company.  That policy excluded coverage for bodily injury claims arising out of work completed prior to September 11, 2008.   Id. at *3.   The insurer then filed the declaratory judgment action seeking a ruling that it had no duty to defend or indemnify the policyholder based on the completed work exclusion.

The federal district court explained that, under Illinois law, courts generally may not look beyond the allegations in the underlying complaint in order to determine whether an insurer has a duty to defend.  Id. at *4.  Illinois law recognizes an exception to this rule where an insurer files a declaratory judgment action regarding its duty to defend.  In such cases, an insurer may submit evidence to challenge the existence of a duty to defend, except when the evidence “tends to determine an issue crucial to the determination of the underlying lawsuit.”  Id. at *5 (quoting Fid. & Cas. Co. of N.Y. v. Envirodyne Eng’rs, Inc., 461 N.E.2d 471, 473 (Ill. App. Ct. 1983)).  On this basis, the court found that it could consider the undisputed evidence showing that the porch and guardrail work had been completed prior to September 11, 2008, because this evidence was not contested in or significant to the underlying suit.  Id.  Relying on the completed work exclusion, the court ruled that the insurer had neither a duty to defend nor indemnify the policyholder. 

The Ricciardi decision supports the proposition that, under Illinois law, a court may look beyond the allegations of the underlying complaint in a declaratory judgment proceeding where an insurer has filed a declaratory judgment action and has offered extrinsic evidence that is not central to the determination of an issue in the underlying case.  An insurer may wish to consider this case in determining whether it is appropriate to file a declaratory judgment action regarding the duty to defend based upon evidence outside the four corners of the underlying complaint.