Insured’s Professional Services Provided to Third Party Triggers Duty to Defend by Insurer
In Hilco Trading, LLC v. Liberty Surplus Insurance Corporation, Hilco Trading (“Hilco”) purchased a primary professional liability insurance policy from Liberty Surplus Insurance Corporation (“Liberty”), covering claims against Hilco Trading, Hilco Appraisal, Hilco Valuation, and other Hilco entities for errors in rendering professional services. The Liberty policy covered the period from April 23, 2008, to April 23, 2009, and provided a limit of $10 million in excess of a $250,000 deductible. The Liberty policy stated that Liberty had the duty to defend any “claim” against the insured. The policy defined claim as “receipt of a civil action naming the insured seeking damages arising out of a wrongful act by the insured or any entity for whom the insured is legally liable.” The Patriot Group, LLC (“Patriot”) filed a complaint in the Circuit Court of Cook County against Hilco Trading, Hilco, Hilco Financial, Hilco Appraisal, and Hilco Valuation. A bank named Bayerische Hypo-und Vereinsbank AG, New York Branch (“HVB”) also filed a complaint against Hilco Trading, Hilco, Hilco Financial, Hilco Appraisal, and Hilco Valuation.
Patriot alleged that in November 2005, Hilco obtained a $20 million junior secured loan from Patriot. The proceeds from the loan were to be used by Hilco Financial to enter into asset-based loans to third-party borrowers that met the criteria established in the agreement between Patriot and Hilco Financial. Pursuant to the agreement, Hilco Financial was required to provide Patriot with written appraisal reports and audit reports showing that the loans Hilco Financial was making to third-party borrowers were fully secured. Patriot further alleges that Hilco Financial breached its contract in many ways, including failing to make loans that conformed to the criteria of their agreement, failing to make payments of principal, and failing to make payments of interest.
HVB alleged that Hilco Financial defaulted on the loan in question; and after Hilco Financial’s assets were liquidated, HVB was left with a loss of at least $10,004,149.94. HVB alleged that the appraisals performed by Hilco Appraisal and Valuation were grossly inflated. HVB claimed that Hilco Appraisal and Valuation prepared the appraisals for Hilco Financial with the understanding and intent that the appraisals would be provided to HVB and that HVB would rely on the appraisals. HVB claimed that it was induced by Hilco Trading to rely upon the accuracy of the appraisals in entering into the loan agreement and advancing millions of dollars as a result of its reliance.
Hilco filed a complaint for declaratory relief that Liberty was obligated to defend Hilco in the Patriot action and the HVB action. Liberty argued that it did not have a duty to defend Hilco because the terms of the policy stated that it covers professional services only to Hilco Financial, which is not a third party. The plaintiffs pointed out that in the underlying actions, Patriot and HVB alleged that they were provided with the appraisals performed by Hilco Appraisal and Valuation. Thus, the plaintiffs argued that their professional services were provided to a third party. The plaintiffs also argued that Hilco Financial should be considered a third party under the terms of the Liberty policy because it is a separate entity from Hilco Appraisal and Valuation. As such, the plaintiffs argued that Liberty had a duty to defend the plaintiffs in the underlying actions.
The court reviewed whether the insured’s professional services were provided to a third party within the meaning of the insurer’s policy so as to trigger a duty to defend by insurer.
Under Illinois law, the duty to defend standard establishes a low threshold to trigger coverage under insurance policies. If the allegations in the underlying action fall within or even potentially within coverage, then the duty to defend is triggered. Construing the policy liberally and in the light most favorable to Hilco Appraisal and Valuation, the court found that it is certainly arguable that Hilco Appraisal and Valuation provided the appraisal services and the accompanying reports to Patriot and HVB. Thus, Liberty’s duty under the Liberty policy to defend Hilco Appraisal and Valuation in the underlying actions was triggered.
Hilco Trading, LLC v. Liberty Surplus Ins. Corp., 2014 IL App (1st) 123503.
