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Where the pleadings do not allege a covered occurrence but the insurer has actual knowledge of facts demonstrating that the lawsuit does involve such an occurrence, the insurer cannot use a third party's pleadings as a shield to avoid its contractual duty to defend its insured.
Plaintiff sought recovery for the wrongful death of her husband, who died while operating a vehicle owned by third-party plaintiff. Third-party plaintiff was an officer of a property owners’ association and had given the decedent permission to use the vehicle while landscaping. The property association had purchased a liability insurance policy from third-party defendant. The complaint alleged that the third-party defendant had a duty to defendant on the insurance contract. The lower appellate court granted the motion of the third-party defendant to dismiss the third-party complaint. The third-party plaintiff appealed.
Under the circumstances, did the third-party defendant had a duty to defend defendant on the insurance contract?
The court reversed the lower appellate court's order. The court held that an insurer was required to provide a defense when it had actual knowledge of the facts establishing a reasonable possibility of coverage. The complaint on its face did not state a covered claim, but the underlying facts made known to the insurer by its insured unquestionably involved a covered event. Had the complaint correctly identified third-party plaintiff as an officer and/or shareholder of the insured, he would have unquestionably been covered for this lawsuit. Relieving third-party defendant of its duty to defend was particularly imprudent where the inaccuracies in plaintiff's pleadings were likely to become apparent when the true facts were developed on the record.