In previous issues of the Litigation & Counseling Alert and the Business & Legal Quarterly, we have examined the liability insurer’s duty to defend. The general rule is that the duty to defend is broader than the duty to indemnify. This concept is best explained by the following scenario. You are sued by an individual who claims that she was injured. Her complaint contains two counts. In the first count, she maintains that your negligence caused her injury. In the second count, she asserts, alternatively, that you intentionally caused her injury. If the case goes to trial and it is ultimately determined that you negligently, but not intentionally, caused the injury, your insurance company would indemnify you for whatever damages you owe (up to your policy’s limit of liability and less your deductible). But if it is instead determined that you intentionally caused the injury, your insurance company would not indemnify you for the damages because injuries expected or intended from the standpoint of the insured (you) are excluded.

At the beginning of a case like this, however, no one knows whether you will be liable on a covered ground (negligence) or an excluded ground (you expected or intended the injury), or not liable at all. What impact does that situation have on your insurance company’s obligation to defend you? The answer depends on the outcome of the “eight corners” test, which requires the insurance company to compare the “four corners” of the complaint to the “four corners” of the insurance policy. The law in most states, including Illinois, says that the insurance company must defend you if the complaint alleges even a single fact that, if proven, would result in liability that is covered and not excluded.

In some cases, however, the complaint does not allege a “potentially covered” fact. Does that let your insurance company off the hook? Not necessarily, as it turns out.

Case Law Supporting the “Ninth Corner”

Illinois courts have held that an insurance company is not permitted to ignore what I think of as the “ninth corner”: true but unpleaded facts that, had they been mentioned in the complaint, would trigger the duty to defend. (Insurers, however, cannot use the “ninth corner” to defeat coverage.) This doctrine has turned up in a number of situations.

In American Economy Insurance Co. v. DePaul University, an Illinois Appellate Court decision handed down in May of this year, an office worker claimed that she was injured by exposure to high levels of ultraviolet radiation from fluorescent lighting. She sued the architectural firm and the owner of the building, but not the electrical contractor that selected and installed the fixtures. Both the architect and the owner were additional insureds on the electrical contractor’s insurance policy, and that is the policy under which the defendants sought their defense. The electrical contractor’s insurer denied coverage on the ground that the office worker did not name the electrical contractor in her complaint. The court ruled that, but for the electrical contractor’s work, the architect and owner would not be potentially liable to the office worker. That was a true but unpleaded fact, and the architect and owner were entitled to a defense.

In La Rotunda v. Royal Globe Insurance, decided in 1980 by the Illinois Appellate Court, the plaintiff in the underlying lawsuit alleged that smoke emanating from land adjacent to the road caused an automobile accident. There was a junkyard and refuse dump on part of that land. The defendant’s insurance company argued that the smoke emanated from the junkyard, which triggered the “business exclusion” in the policy. The La Rotunda court determined that there was a duty to defend because the insurer’s own investigation disclosed a “ninth corner”: the true but unpleaded fact that not all of the land in question was used as a junkyard or refuse dump. Therefore, the smoke might have come from the vacant part of the land, making the “business exclusion” potentially inapplicable.

In Associated Indemnity Co. v. Insurance Co. of North America, an Illinois Appellate Court decision from 1979, the insurer knew that unpleaded facts related to it by the insured were true. For starters, the insurer had a file containing documents produced in the underlying litigation that verified the truth of the insured’s facts. The insurer also knew that the facts were true because it was defending another party in the underlying action. As a result, the court held that the insurer owed the insured a duty to defend even though the underlying complaint did not allege facts potentially within coverage.

The lessons from these cases are clear. If you have been sued and your insurance company declines to defend on the grounds that the complaint only alleges facts that are excluded, and does not allege any facts that are potentially covered, don’t assume that the “eight corners” test has been met and your fate is sealed. It is critical that you consult with your lawyer and consider whether there is actually a “ninth corner”: a true but unpleaded fact that the insurance company is not entitled to ignore.