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Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 

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In the

United States Court of Appeals

For the Seventh Circuit ____________________

No. 15-2566

LANDMARK AMERICAN INSURANCE COMPANY,

Plaintiff-Appellant,

v.

PETER HILGER,

Defendant-Appellee.

____________________

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 13 C 02552 — Edmond E. Chang, Judge.

____________________

ARGUED FEBRUARY 10, 2016 — DECIDED SEPTEMBER 22, 2016

____________________

Before BAUER, FLAUM, and SYKES, Circuit Judges.

SYKES, Circuit Judge. Peter Hilger faces two separate lawsuits alleging that he and several codefendants persuaded

credit unions in Michigan and Tennessee to fund loans by 

overstating the value of the life-insurance policies that 

would serve as collateral. Hilger tendered his defense to 

Landmark American Insurance Company under a professional liability policy held by one of his codefendants, 

O’M and Associates LLC (“O’MA”). Although Hilger is not a 

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named insured under O’MA’s policy, the policy defines

“covered persons and entities” to include O’MA’s independent contractors; Hilger sought coverage as such. 

Landmark responded by filing this action for a declaratory judgment that it has no duty to defend Hilger. The insurance company argued that Hilger did not perform the 

professional services at issue in the Michigan and Tennessee 

suits as an O’MA independent contractor and is therefore 

not covered under O’MA’s policy. The district court, sitting 

in diversity and applying Illinois law, disagreed and entered 

judgment on the pleadings for Hilger. Landmark now

appeals, arguing that it is entitled to take discovery and offer

evidence regarding the true nature of Hilger’s relationship to

O’MA.

We agree with Landmark that judgment on the pleadings 

was inappropriate. Under Illinois law an insurer that seeks a 

declaration of its duty to defend may offer evidence outside 

the underlying complaint for purposes of establishing that 

no duty exists. While the insurer may not use a declaratoryjudgment action to litigate liability in the underlying lawsuit, that limitation is inapplicable to this case. Accordingly, 

we reverse the judgment and remand for further proceedings.

I. Background

Peter Hilger is the president of Allied Solutions, LLC, a 

company that provides customized products to financial 

institutions. In 2013 he was named as one of several codefendants in two separate lawsuits brought by credit unions 

in Michigan and Tennessee. Hilger’s codefendants include

Michael O’Malley, who sells life insurance through O’MA, 

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No. 15-2566 3

and Daniel Phillips, who brokers the sale of life-insurance

policies to third parties through Berkshire Group, LLC, and 

Capital Lending Strategies, LLC. The credit unions allege

that Hilger, O’Malley, and Phillips persuaded them to fund 

loans used to pay life-insurance premiums by overstating

the value of the policies that would serve as collateral for the 

loans.

Hilger and his codefendants face a host of claims in these

lawsuits. The Michigan complaint alleges fraud, innocent 

and negligent misrepresentation, breach of contract, and 

conspiracy against all of the defendants in their individual 

capacities. It also advances theories of joint-venture liability 

against Allied, Capital Lending Strategies, and O’Malley; 

individual liability against Hilger and Phillips for the acts of 

Allied and Capital Lending Strategies; and respondeat 

superior liability against Allied and Capital Lending Strategies for the conduct of Hilger and Phillips. The Tennessee 

complaint alleges negligence, negligent misrepresentation, 

and unjust enrichment against Hilger, O’Malley, Phillips, 

and their respective companies. Together, the credit unions 

claim losses in excess of $1 million.

Both O’MA and Hilger tendered their defense to Landmark under O’MA’s Insurance Agents and Brokers Liability 

Policy. The policy obligates Landmark to pay damages 

arising out of any negligent act, error, or omission committed in O’MA’s rendering of professional services as an 

insurance agent and broker, including facilitation of insurance-premium finance loans. Section I.E of the policy defines 

“Covered Persons and Entities” to include “[a]ny present or 

former principal, partner, officer, director, employee or 

independent contractor of the Named Insured, but only as 

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respects professional services rendered on behalf of the 

Named Insured.” O’MA sought coverage as the policy’s 

named insured, while Hilger claimed that the Michigan and 

Tennessee lawsuits pertained to professional services that he 

rendered as an O’MA independent contractor. Landmark

denied both tenders and filed this action for a declaratory 

judgment that it has no duty to defend either O’MA or 

Hilger. O’MA and Hilger counterclaimed, seeking a declaration that Landmark does owe them a duty to defend. They

then moved for judgment on the pleadings, see FED. R. CIV.

P. 12(c), which the district court granted. Only the judgment 

in favor of Hilger is at issue on appeal.

In granting Hilger’s motion, the judge observed that the 

complaints in the underlying lawsuits “paint an ambiguous 

picture” of Hilger’s relationship with O’MA: while certain 

allegations suggest that Hilger acted at all times as an agent 

of Allied, other allegations are consistent with the assertion 

that Hilger acted as an independent contractor for O’MA.1 In 

light of the requirement under Illinois law that this type of 

ambiguity be resolved in favor of the insured, see, e.g., 

Gen. Agents Ins. Co. of Am., Inc. v. Midwest Sporting Goods Co., 

828 N.E.2d 1092, 1098 (Ill. 2005), the judge concluded that 

Landmark is required to defend Hilger. On Landmark’s 

motion for reconsideration, see FED. R. CIV. P. 54(b), the judge 

rejected the argument that discovery was required to determine the true nature of Hilger’s relationship with O’MA. 

 1 Specifically, the judge noted that both the Michigan and Tennessee

complaints expressly attribute all alleged acts and omissions to Hilger in 

his capacity as an agent of Allied. On the other side of the equation, the 

judge cited assertions in both complaints that Hilger either collaborated 

with or acted through O’MA.

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No. 15-2566 5

Relying on our decision in Old Republic Insurance Co. v. 

Chuhak & Tecson, P.C., 84 F.3d 998 (1996), the judge held that 

any consideration of evidence outside the underlying complaints was inappropriate absent a “strong reason to believe” that Hilger was not in fact an insured under O’MA’s 

policy. The judge denied reconsideration. Landmark now 

appeals.

II. Discussion

We review a judgment on the pleadings de novo, using 

the same standard that applies to a Rule 12(b)(6) motion to 

dismiss for failure to state a claim. Buchanan-Moore v. County

of Milwaukee, 570 F.3d 824, 827 (7th Cir. 2009). “Thus, we 

view the facts in the complaint in the light most favorable to 

the nonmoving party and will grant the motion ‘only if it 

appears beyond doubt that [Landmark] cannot prove any 

facts that would support [its] claim for relief.’” Id. (quoting 

N. Ind. Gun & Outdoor Shows, Inc. v. City of South Bend, 

163 F.3d 449, 452 (7th Cir. 1998)). Neither party has raised

the issue of which state’s substantive law governs this 

diversity action, so we apply the law of Illinois, the forum 

state. Santa’s Best Craft, LLC v. St. Paul Fire & Marine Ins. Co., 

611 F.3d 339, 345 (7th Cir. 2010). 

The oft-repeated refrain of Illinois insurance law is that

an insurer’s duty to defend is “much broader” than its duty 

to indemnify. Crum & Forster Managers Corp. v. Resolution Tr.

Corp., 620 N.E.2d 1073, 1079 (Ill. 1993). “If the facts alleged in 

the underlying complaint fall within, or potentially within, 

the policy’s coverage provisions, then the insurer has a duty 

to defend the insured in the underlying action.” Id.; see also

Amerisure Mut. Ins. Co. v. Microplastics, Inc., 622 F.3d 806, 

810–11 (7th Cir. 2010). As a practical matter, this means that 

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an insurance company taking the position that it has no duty 

to defend usually cannot “simply refuse to defend the 

insured.” Emp’rs Ins. of Wausau v. Ehlco Liquidating Tr., 

708 N.E.2d 1122, 1134 (Ill. 1999). As long as the underlying 

complaint even “potentially alleg[es] coverage,” the insurer 

must either defend the suit under a reservation of rights or 

seek a declaratory judgment that there is no coverage. Id.; see 

also Edward T. Joyce & Assocs., P.C. v. Prof’ls Direct Ins. Co., 

816 F.3d 928, 932 (7th Cir. 2016). “If the insurer fails to take 

either of these steps and is later found to have wrongfully 

denied coverage, the insurer is estopped from raising policy 

defenses to coverage.” Ehlco Liquidating Tr., 708 N.E.2d at 

1135.

Hilger thinks that the broad scope of an insurer’s duty to 

defend means that in all duty-to-defend disputes, the court 

is limited to a review of the allegations in the underlying 

complaint. That’s true when an insurer tries to deny coverage without seeking a declaratory judgment or defending

under a reservation of rights. In that situation the relevant 

question is whether the insurer justifiably refused to defend 

the action based solely on the allegations in the complaint, so

the court’s inquiry is necessarily limited to those allegations. 

See MFA Mut. Ins. Co. v. Crowther, Inc., 458 N.E.2d 71, 73 (Ill. 

App. Ct. 1983) (“An insurer may not justifiably refuse to 

defend an action against its insured unless it is clear from 

the face of the complaint that the allegations fail to state facts 

which bring the claim within, or potentially within, the 

policy’s coverage.”).

But Landmark did seek a declaratory judgment, so that 

limitation doesn’t apply here. “[W]hen an insurer has elected 

to either defend under a reservation of rights or file a declarCase: 15-2566 Document: 37 Filed: 09/22/2016 Pages: 9
No. 15-2566 7

atory judgment action, ... the insurer may present evidence 

beyond the underlying complaint, so long as it does not tend 

to determine an ultimate issue in the underlying proceeding.” Fid. & Cas. Co. of N.Y. v. Envirodyne Eng’rs, Inc., 

461 N.E.2d 471, 474–75 (Ill. App. Ct. 1983) (citation omitted), 

cited with approval in Pekin Ins. Co. v. Wilson, 930 N.E.2d 1011, 

1020 (Ill. 2010). An “ultimate issue” is one that would collaterally estop the plaintiff in the underlying lawsuit from 

raising a theory of recovery or be crucial to the insured’s 

liability. Id. at 475.

The extra latitude afforded to insurers in this situation 

makes sense given the Illinois Supreme Court’s longstanding directive in duty-to-defend disputes between an 

insurer and its insured:

When the underlying complaint against the insured allege[s] facts within or potentially within the scope of policy coverage, the insurer taking the position that the complaint is not covered by its policy must defend the suit under a 

reservation of rights or seek a declaratory 

judgment that there is no coverage. 

Midwest Sporting Goods Co., 828 N.E.2d at 1098. If the inquiry

in the ensuing declaratory-judgment action were limited to 

the four corners of the underlying complaint and asked only 

whether the complaint’s allegations fall potentially within 

the policy’s coverage, the proceedings would be “little more 

than a useless exercise possessing no attendant benefit.” 

Envirodyne Eng’rs, 461 N.E.2d at 474. 

In granting Hilger’s motion for judgment on the pleadings, the judge assumed that all duty-to-defend issues “are 

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analyzed by comparing the four corners of the underlying 

complaint to the insurance policy.” As we’ve explained, that

proposition is inapposite in the context of a declaratoryjudgment action. Because Landmark seeks a declaration of 

its duty to defend Hilger, it may offer evidence outside the 

Michigan and Tennessee complaints that Hilger did not 

render the professional services in question as an O’MA

independent contractor provided that doing so will not decide 

an “ultimate issue” in the underlying actions. There’s no 

indication that it would. The claims against Hilger in the 

Michigan and Tennessee suits consist primarily of misrepresentation and breach-of-contract claims, none of which 

“hinge[] upon” Hilger’s status as an independent contractor.2 Id. at 476.

We note that the judge also relied heavily on our decision 

in Old Republic Insurance Co. v. Chuhak & Tecson, P.C., for the 

proposition that a court may only look beyond the underlying complaint in a declaratory-judgment action if the insurer 

provides a “strong reason to believe” that it has no duty to 

defend. But Old Republic predates Pekin Insurance Co. v. 

Wilson, 930 N.E.2d 1011 (Ill. 2010), in which the Illinois 

Supreme Court clarified the law on this point. See Gen. Ins. 

 

2 Hilger argues that the question whether he participated in a joint 

venture with O’MA constitutes an “ultimate issue” in the Michigan and 

Tennessee suits. See Clarendon Am. Ins. Co. v. B.G.K. Sec. Servs., Inc., 

900 N.E.2d 385, 393 (Ill. App. Ct. 2008) (holding that the putative insured’s participation in a joint venture was an ultimate issue because the 

existence of a joint venture would give rise to joint and several liability 

for the conduct of codefendants under Illinois law). But Landmark hasn’t 

asked the court to decide whether Hilger participated in a joint venture, 

only whether he rendered the services in question in the Michigan and 

Tennessee suits as an independent contractor for O’MA. 

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No. 15-2566 9

Co. of Am. v. Clark Mall Corp., 644 F.3d 375, 378 (7th Cir. 

2011). To reiterate, an insurer seeking a declaratory judgment on its duty to defend is entitled to introduce evidence 

outside the underlying complaint so long as it does not 

implicate an “ultimate issue” in the underlying action. To 

the extent that Old Republic suggests that additional limitations apply, it is inconsistent with Illinois insurance law. Cf.

Envirodyne Eng’rs, 461 N.E.2d at 474 (“The only time such 

evidence should not be permitted is when it tends to undermine an issue crucial to the determination of the underlying lawsuit ... .”).

Illinois law permits Landmark to offer evidence outside 

the Michigan and Tennessee complaints that Hilger isn’t 

covered as an independent contractor under O’MA’s policy. 

We therefore REVERSE the judgment in favor of Hilger and 

REMAND for further proceedings.

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