A recent decision of the United State District Court for the Northern District of Illinois affirms the rule in Illinois that the facts of the complaintas opposed to the legal theories it invokes – control whether insurers must defend their policyholders.

Illinois courts have long held that the duty to defend arises when the facts alleged potentially fall within coverage, regardless of the label placed on the claim asserted by the pleader. E.g., Outboard Marine Corp. v. Liberty Mutual Ins. Co., 154 Ill. 2d 90 (1992). As Judge Posner put it in Cincinnati Ins. Co. v. Eastern Atl. Ins. Co.: “So, for example, if the complaint alleges facts that if proved would show that the insured had infringed the plaintiff’s copyright, the policy kicks in even if the complaint charges the insured only with fraud or intentional infliction of emotional distress.” 260 F.3d 742, 745 (7th Cir. 2001) (applying Illinois law).

Recently in Hartford Fire Insurance Co. v. Thermos LLC, No. 14 C 6080 (N.D. Ill), the district court applied this rule to hold that Hartford (the insurance company) was required to defend Thermos (its insured) where the facts alleged in the complaint potentially stated a claim for property damage, which the policy covered, even though the underlying complaint only sought compensation for economic loss, which the policy did not cover.

The plaintiffs alleged that Thermos manufactured and advertised certain bottles as “leak-proof” which induced the plaintiffs to purchase the bottles at a premium price. The plaintiffs further alleged that the bottles had a tendency to leak and pop open, spilling liquid in a diaper bag and soaking the other items in the bag. The plaintiffs claimed if the bottles had not been advertised as “leak-proof,” they would not have purchased the bottles or would not have paid the premium price. The plaintiffs sued Thermos for violations of consumer protection laws, breach of express warranties, and unjust enrichment and sought to recover the purchase price of the “leak-proof” bottles.

Thermos requested a defense under its commercial general liability (“CGL”) policies, which provided that the insurer will pay those sums that the insured becomes legally obligated to pay as damages because of “property damage.” The policies defined property damage as “physical injury to tangible property,” including the loss of use of that property. The insurer denied coverage and claimed that they were not obligated to defend Thermos because any claims that the bottles were defective related to the purchase and alleged economic loss and therefore did not potentially trigger coverage. Thermos then sought declaratory relief in the Northern District of Illinois that the insurer had a duty to defend.

The insurer argued that there was no duty to defend because the underlying complaint did not seek damages for injury to personal property or loss of use of tangible property, but instead only sought the amount the plaintiffs overpaid for the bottles. The insurer relied on the principle that “an allegation of defective or faulty workmanship in the insured’s own products does not, by itself, allege ‘property damage’ under a standard CGL policy,” citing Amerisure Mut. Ins. Co. v. Microplastics, Inc. 622 F.3d 806, 811 (7th Cir. 2010).

Thermos argued that the complaint did in fact include allegations of property damage — i.e., the soaked items in the diaper bag — and that a specific request for “property damage” is not required. The court agreed, concluding that allegations of “leaking bottles, spilled substances, and soaked items in a diaper bag” stated a potential claim for property damage, thereby bringing the claims potentially within coverage, even though the complaint did not actually seek recovery for property damage.

The key point is that the factual allegations of the complaint, rather than the legal label placed on the claim by the pleader, determine whether there is a duty to defend. If the facts alleged potentially state one or more claims that potentially fall within coverage, the insurer must defend.

The opinion reaffirms that a policyholder should not be denied the benefit of a contractual defense merely because a plaintiff in an underlying action has drafted a complaint without considering the defendant’s insurance coverage. Ill. Tool works Inc. v. Travelers Cas. & Sur. Co., 2015 IL App (1st) 132350 (“Questions of coverage should not hinge exclusively on the draftsmanship skills of the plaintiff.”)

At Wentzel Law, we have extensive experience representing clients in insurance coverage disputes. If you need a qualified attorney to analyze your insurance coverage, please call us at (312) 697-0500 to schedule a free consultation.