[It was exciting to see that the Third Circuit cited Insurance Key Issues in a recent duty to defend case. Key Issues has not been getting attention from the courts. This was only the second citing. But that doesn’t bother me. The book is not scholarly. And I wear that fact with a badge of honor. Key Issues is designed to be practical. It provides answers – not legal theory. If you – or courts -- want scholarly, there are plenty of excellent treatises out there.]

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I have always considered Pennsylvania to be a strict “four corners” state for purposes of determining an insurer’s duty to defend. [An exception being that a court may be willing to ignore a “negligence” allegation if the complaint belies that a defendant-insured’s actions could have been negligent.]

In Lupu v. Loan City, LLC, No. 17-1944 (3d Cir. Sept. 10, 2018) (published), the strictness of Pennsylvania’s “four corners” test was, well, put to the test. The facts at issue are crazy complex. It would take forever to summarize them – and for no reason. Thus, I limit the discussion to the court’s legal analysis, which addressed a title insurance policy.

The Third Circuit acknowledged that Pennsylvania has long employed the “four corners” test for purposes of determining an insurer’s duty to defend. The court also had no hesitation pointing out shortcomings of the four corners rule: “[T]he inflexible application the ‘four corners’ rule allows an insurer to plead Sergeant Schultz’s ‘know nothing’ defense, and thereby successfully ignor[e] true but unpleaded facts within its knowledge that require it, under the insurance policy, to conduct the putative insureds defense.” Further, the court conceded that “harsh consequences [] can be wrought by the ‘four corners’ rule, and no doubt a wooden application leaves would-be insureds in the lurch if a covered claim is not identifiable in the complaint. But Pennsylvania courts tolerate this measure of concern in exchange for a clear rule’s benefit.” The court acknowledged that, under the four corners rule, the party seeking insurance is left at the mercy of the manner in which the underlying plaintiff pleads its case.

Against this backdrop of the four corners shortcomings, the Lupu court pointed out that a majority of courts have departed from the rule -- and require the insurer to consider extrinsic evidence when determining if an insurer is obligated to defend. In support, the court pointed to the dissenting opinion, in the Wisconsin Supreme Court’s 2016 decision in Water Well Sols. Serv. Grp. v. Consol. Ins. Co., which noted that 31 states allow for the consideration of extrinsic evidence.

The question before the Lupu court was this. In its 2006 decision, in Kvaerner Metals v. Commercial Union, the Pennsylvania Supreme Court declined to adopt an exception to the four corners rule. Does the strict four corners rule apply when the outside facts are introduced by the plaintiff and not the insured. [Again, how this issue arose is quite complex.] The court concluded – despite one “misfit” case from 1992 – that four corners was king, stating: “Pennsylvania courts have identified no exception to the time-honored rule . . . in Kvaerner. Legal commentators concur. For instance, one source counts Pennsylvania among the states in which ‘the answer is simple—No. Courts are not permitted to consider extrinsic evidence[.]’ Randy Maniloff & Jeffrey Stempel, General Liability Insurance Coverage: Key Issues In Every State 69-74, 89 (1st ed. 2011).”

It was neat to see that the Lupu court cited to Insurance Key Issues in reaching this decision. Although it would have been even better if the court had sprung for a copy of the 4th edition. In any event, I have always considered Pennsylvania to be a strict “four corners” state. And I still do. Having said that, I’d like to see a Pennsylvania appellate court address whether an insurer can look to extrinsic facts, to deny a duty to defend, when such facts are “coverage only,” i.e., not at issue in the underlying action.