The Duty To Defend: The Four(ish) Corners Rule
November 2009
Courts typically determine an insurer's duty
to defend its insured under a liability policy in one of two ways.
by R. Steven
Rawls and Rebecca C. Appelbaum
Butler Pappas
Weihmuller Katz Craig, LLP
In some jurisdictions, an insurer's duty to defend depends solely on a comparison
of the allegations of the complaint to the policy language.
See, e.g., Lamar
Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 13 (Tex. 2007).
An insurer has a duty to defend if the face of the complaint alleges something
covered and does not allege an exclusion to coverage. Extrinsic facts not alleged
in the complaint do not affect the insurer's duty to defend in these jurisdictions.
See Kvaerner Metals
Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888,
896–7 (Pa. 2006). Courts refer to this approach as the four-corners, or sometimes
the eight-corners, rule.1
GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church,
197 S.W.3d 305, 307 (Tex. 2006).
Other jurisdictions do not rely solely on a comparison of the allegations
of the complaint to the policy language. These jurisdictions also require that,
where the complaint does not trigger the duty to defend, an insurer must conduct
a reasonable investigation of the surrounding facts to determine whether it
has an obligation to defend. If the insurer determines that facts exist that
would trigger the duty to defend despite the absence of such allegations in
the complaint, the insurer has a duty to defend.
See e.g., Mortgage
Exp., Inc. v. Tudor Ins. Co., 771 N.W.2d 137, 147 (Neb. 2009) ("In determining
its duty to defend, an insurer must not only look to the petition or complaint
filed against its insured, but must also investigate and ascertain the relevant
facts from all available sources.").
However, even in a four-corners jurisdiction, the actual facts (as opposed
to the alleged facts) may still play an important role in determining an insurer's
defense obligation, particularly when the insurer knows about such facts.
The Four-Corners Rule
Under the four-corners rule, an insurer has a duty to defend its insured
complaint states a claim that is potentially covered by the policy.
National Union Fire Ins. Co. v. Lenox Liquors, Inc.,
358 So. 2d 533 (Fla. 1978). The court may not read facts into the pleadings,
look outside the pleadings, or imagine factual scenarios that might trigger
coverage. National Union Fire Ins. Co. of Pittsburgh,
Pa. v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997).
The insurer's duty to indemnify, however, is governed by the actual facts establishing
the insured's liability in the underlying litigation.
Trinity Universal Ins.
Co. v. Cowan, 945 S.W.2d 819, 821 (Tex. 1997).
Ambiguous Complaints Are Generally Construed in Favor of a Defense
In four-corners jurisdictions, "the allegations of the complaint are controlling
and, if ambiguous, must be construed most favorably to the insured to establish
the duty to defend." Baron Oil Co. v. Nationwide Mut.
Fire Ins. Co., 470 So. 2d 810 (Fla. App. 1985);
accord Merchs. Fast Motor Lines, Inc., supra,
at 141 (resolving all doubts regarding the duty to defend in favor of the insured).
Thus, if the complaint is ambiguous, the insurer generally has an obligation
to defend and may be able to institute a declaratory judgment action to determine
the actual facts. See
Baron Oil, supra.
However, in some states:
if it is not clear from the face of the complaint that the policy provides
coverage, but coverage could exist, the insurer must investigate and give
the insured the benefit of the doubt that the insurer has a duty to defend.
Campbell v. Ticor Title Ins. Co., 209 P.3d
859, 861 (Wash. 2009).
The Devil You Know: Unpled Facts
Two kinds of facts may impact an insurer's obligation to defend in four-corners
jurisdictions: (1) unpleaded but known facts that would negate coverage and
(2) unpleaded but known facts that would trigger the insurer's duty to defend.
[I]f the allegations in the complaint conflict with facts known to or readily
ascertainable by the insurer, or if the allegations are ambiguous or inadequate,
facts outside the complaint may be considered.
Woo v. Fireman's Fund Ins. Co., 164 P.3d 454,
459 (Wash. 2007). The insurer may not rely on facts extrinsic to the complaint
to deny the duty to defend, and may do so only to trigger the duty.
Facts That Negate Coverage
Despite Woo's pronouncement that facts extrinsic
to the complaint in a four-corners jurisdiction can never permit an insurer
to deny the duty to defend, courts widely accept some situations as exceptions
to the four-corners rule. One such exception is "the creation of the basic insurer-insured
relationship" in the complaint. In Nateman v. Hartford
Cas. Ins. Co., 544 So. 2d 1026, 1027 (Fla. Dist. Ct. App. 1989), the
underlying defamation complaint against Dr. Nateman alleged that he was acting
in his capacity as an employee of the hospital when he made allegedly libelous
statements. Dr. Nateman sought a defense from Hartford, the hospital's insurer,
as an additional insured because the Hartford policy made employees additional
insureds.
The court relied on Dr. Nateman's actual status as an independent contractor
in holding that Hartford had no duty to defend merely because the plaintiff
alleged that the defendant was an insured or alleged facts which, if true, would
make the defendant an insured. The Nateman court
explained that:
The insurer is not obligated to provide a defense for a stranger ... it
would be imprudent and illogical to confer such a duty upon an insurer as
to a party who is not an insured ... and the ensuing duty to defend cannot
be left to the imagination of the drafter of a complaint.
Id. (citing Navajo
Freight Lines, Inc. v. Liberty Mut. Ins. Co., 471 P.2d 309, 315–6 (Ariz.
1970)). "[A]s to who is an insured, the
facts as they actually exist must be determinative."
Id. (emphasis in original).
When an insured admits facts to the insurer which negate coverage and a claimant
subsequently files a complaint against the insured that does not allege these
facts, the insurer may have no duty to defend. In Nationwide
Mut. Fire Ins. Co. v. Keen, 658 So. 2d 1101 (Fla. Dist. Ct. App. 1995),
before suit was filed, the insured admitted to the insurer that he operated
a boat with an engine that generated 40 horsepower and thus excluded under the
policy (the policy excluded coverage for boats with certain horsepower engines).
The complaint made no mention of the horsepower of the engine but the fact of
the actual horsepower previously admitted by the insured clearly placed the
boat outside the coverage afforded by the policy. Accordingly, the insurer had
no duty to defend. Accord Burns v. Underwriters Adjusting
Co., 765 P.2d 712 (Mont. 1988) (insurer had no duty to defend insured
against complaint alleging negligence where insured admitted to intentionally
striking claimant in interview with insurer). When:
uncontroverted evidence places the claim outside of coverage, and the claimant
makes no attempt to plead the fact creating coverage or suggest the existence
of evidence establishing coverage, ... the insurer is relieved of defending.
Keen at 1103.
Facts That Trigger the Duty To Defend
While many situations exist in which an insurer might know of actual unpleaded
facts that would, if pleaded, trigger the duty to defend, an issue has arisen
causing trouble for insurers recently where a complaint against a general contractor
is silent about the use of subcontractors against whom a plaintiff either cannot
or does not allege liability. The following cases illustrate this situation.
In Revelation Ind. Inc. v. St. Paul Fire & Marine
Ins., 206 P.3d 919 (Mont. 2009), Revelation entered into a contract with
Phillips Environmental Products, Inc., to design and develop a disposable sanitary
bag for use with Phillips's portable environmental toilets. Revelation subcontracted
with Manchester Packaging to produce the bags in accordance with Phillips's
specifications. The bags provided by Manchester did not contain cornstarch as
required by Phillips and, not knowing of the nonconformity, Revelation provided
the bags to Phillips. Phillips promptly claimed the bags failed to meet its
specifications and terminated its relationship with Revelation.
Revelation attempted to meet with Phillips to salvage the relationship, to
no avail. Eventually Phillips claimed to have suffered significant damages and
Revelation notified St. Paul of the claim by telephone. St. Paul memorialized
the conversation in a letter reciting the facts described above. Phillips subsequently
demanded compensation from Revelation, and Revelation forwarded the demand letter
to St. Paul. The demand letter did not mention Manchester. St. Paul denied Revelation's
request for a defense and indemnity to Phillips's claim. Phillips subsequently
sued Revelation in a complaint, which again failed to mention Manchester, and
St. Paul declined coverage. Revelation defended itself and filed a third-party
complaint against Manchester.
Revelation also sued St. Paul, claiming it breached the insurance contract,
and St. Paul counterclaimed for a declaratory judgment that it was not obligated
to defend Revelation. Ruling on each party's motion for summary judgment, the
lower court concluded that the policy "provided coverage for a defective product
manufactured by a subcontractor" but the complaint, by omitting any reference
to Manchester, did not trigger St. Paul's duty to defend or indemnify Revelation.
The Supreme Court of Montana reviewed Montana caselaw addressing situations
in which courts "looked beyond the allegations [of the complaint] to the facts
known by the insurer or to the actual acts giving rise to the underlying claims"
to determine the insurer had no duty to defend, the Supreme Court of Montana
concluded that:
this same analysis should be utilized when the complaint does not present
a claim which on its face is covered by the policy, but the insurer nonetheless
has information that could give rise to a duty to defend and indemnify.
Revelation at 925‑6.
The Supreme Court of Montana clarified that looking beyond the allegations
of the complaint to the actual facts where the allegations in the complaint:
were either incomplete or inaccurate ... does not require an insurer to
seek out such information—as we have previously held, insurers that look
at facts beyond the allegations in the complaint do so at their own risk
as they will be required to defend and/or indemnify based on the information
discovered.
Id. (citation omitted).
The court found that St. Paul had knowledge of the true, undisputed facts
giving rise to coverage when the complaint was filed, could not ignore those
facts, and thus, had a duty to defend. The Supreme Court of Montana did not
address whether St. Paul acted in bad faith by disclaiming its defense obligation
and it does not appear the issue was raised in that suit.
In a similar case in Connecticut where the insurer withdrew a defense provided
for many years after the operative pleading was amended, the insured sued alleging
its insurer acted in bad faith in withdrawing its defense. Despite noting that
"the exclusive pleading rule has never been used in Connecticut to defeat an
insurer's duty to defend," the court further explained that "[a]n insurer's
reasonable interpretation of unsettled law does not amount to bad faith."
Fortin v. Hartford Underwriters Ins. Co., 2009
WL 659210, 10 (Conn. Super. 2009) (citation omitted).
However, in a case with facts analogous to Revelation, the Northern District
of Illinois found that the insurer acted in bad faith in refusing to defend
its insured where the insurer had undisputed knowledge "of true but unpled facts"
which triggered the insurer's duty to defend. Edward
Gray Corp. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 1997 WL
102542, 5 (N.D. Ill. 1997) (citation omitted).
In that case, Edward Gray contracted to perform work at an electrical utility
plant in Indiana. Edward Gray subcontracted with Correct Construction Company
to perform piping and plumbing work at the site. Under the subcontract, Correct
was required to provide insurance coverage for its work both during its operations
and after its operations were completed. Edward Gray was named as an additional
insured under the general liability insurance policies issued to Correct by
National Union.
Subsequent to the completion of Correct's work, the utility plant suffered
a collapse of soil above two underground intake and discharge circulating water
pipes. The utility's insurers paid the $47 million in repair costs and subsequently
sued various contractors who performed work at the site, including Edward Gray.
Edward Gray sought a defense from National Union and National Union refused.
Edward Gray defended itself, won summary judgment, and then filed this declaratory
judgment action seeking a determination that National Union breached the insurance
contract and Edward Gray was entitled to attorney's fees and costs.
As an additional insured under Correct's policy, "the underlying complaint
must have alleged that property damage occurred as a result of work which was
performed by or for Correct" to trigger National Union's obligation to defend
Edward Gray. The court found the underlying complaint to be "completely devoid"
of any information relating to Correct and, in fact, "there is no mention of
Correct or any other subcontractors in the complaint."
Id. Accordingly, the complaint did not trigger
National Union's duty to defend Edward Gray.
However, after several exchanges of correspondence in which Edward Gray requested
a defense and National Union declined to provide it, Edward Gray tendered two
binders of information to National Union and met with National Union representatives
to discuss the possibility of a defense. The court reviewed the materials provided
and determined that "it should have become apparent to National" that "a possibility
of coverage existed." Further, National Union's "own notes on this case reflect
the fact that the possibility of coverage existed."
Id. at 6. Thus, because "all questions of
coverage must be resolved in favor of the insured," the court found National
Union's knowledge of the possibility that its duty to defend was triggered "did
in fact trigger National's duty" and its refusal to defend was in error.
Important to the court's determination that National Union's "denial was
vexatious and unreasonable" and therefore in bad faith, were the following facts:
National Union repeatedly denied the insured's requests for a defense instead
of defending under a reservation of rights or seeking a declaratory judgment
and National Union did not seek the opinion of an insurance coverage attorney,
despite Edward Gray's requests, instead responding that it did not need one.
The court found that the record supported "the fact that National did not attempt
to resolve the question of coverage but merely kept denying that coverage existed"
which is not proper practice in Illinois and "such denials were unreasonable
under the circumstances." Id.
Conclusion
Although four-corners jurisdictions do not require an investigation into
the facts to determine an insurer's duty to defend, courts in those jurisdictions
generally liberally construe the allegations of the complaint and resolve any
doubt in favor of a defense for the insured. In this context, extrinsic facts
known by the insurer can create a defense obligation even where the complaint
is silent as to those facts.
As the Supreme Court of Montana explained,
An insurer cannot ignore knowledge of facts that may give rise to coverage
under the policy simply because the complaint—which is, after all, drafted
by a claimant over whose draftsmanship the insured has no control—does not
allege these facts of which the insurer has knowledge. Under such circumstances,
the insurer must defend. It may commence a defense under a reservation of
rights while conducting an investigation, and it may commence a declaratory
action ... It may not, however, ignore information in its possession that
may give rise to coverage simply because the complaint fails to recite it,
and thereupon refuse to defend.
Revelation at 928.
While facts extrinsic to the allegations of the complaint clearly negating
coverage can allow the insurer to deny coverage, particularly where the insured
acknowledges such facts, an insurer's failure to defend based on known unpleaded
facts that potentially trigger coverage under the policy can lead to extracontractual
exposure for the insurer.
Contributing author
Rebecca C. Appelbaum is a senior associate
practicing in the area of third-party coverage at the firm of Butler Pappas Weihmuller Katz Craig, LLP.
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