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Vol. 5, Iss. 12
December 7, 2016

Ramara, Inc. v. Westfield Ins. Co., 814 F.3d 660 (3d Cir. 2016)

Four Corners…Yeah, But, There’s More To The Story


The determination whether an insurer has a duty to defend is the most important of all coverage issues. And this shouldn’t be surprising. The question arises in just about every liability claim -- regardless of policy type. No other issue can make that claim. And the consequences for an insurer that breaches its defense obligation are, at best, significant and, at worst, monumental. The underlying plaintiff also has a lot riding on it. If a defense is owed, an insurer, now incurring costs, may be inclined to settle at some point – even if the case is defensible.

Given the importance of the issue, all of the stakeholders in a liability claim are well-served by the tests, for determining if an insurer has a duty to defend, being well-defined. And that is the case–or so it seems. Almost universally a duty to defend is owed if the allegations in the complaint, and nothing else, provide any potential for coverage or such allegations, in conjunction with extrinsic evidence, provide any potential for coverage. It’s one or the other. What’s more, which one of these tests applies was long-ago decided by just about every state in the country. All this said, how a particular state determines if a duty to defend is owed should be as predictable as General Electric paying a dividend.

However, while courts usually have no problem expressing their state’s duty to defend rule, their steadfast adherence to it can be a different matter. This is most surprising in states that have adopted the “four corners” rule for determining if a duty to defend is owed. What could be simpler than that? While an insurer’s obligation to indemnify its insured may require a four week trial to get all the necessary facts, the information for determining an insurer’s duty to defend should be limited to just two documents – the policy and the complaint. The duty to indemnify may require a roomful of documents to figure out; but those needed for determining a duty to defend should fit in an envelope.

This is the way it’s supposed to work in “four corners” states. But exceptions have crept into the duty to defend calculation. Some courts, despite a high court mandate to look no further than the complaint and policy to determine if a defense is owed, are peaking at, or considering, other things. As a result, a “four corners” determination may not be as narrow as advertised.

Sometimes the consideration of information outside the complaint benefits the insurer and sometimes it benefits the insured. But the result is the same for both. Instead of the parties simply disagreeing whether the complaint, when compared to the policy, creates any potential for coverage–the usual basis of a coverage dispute--now add a possible dust up over whether additional information should also be considered.

This presents an interesting dilemma for the parties in a coverage dispute. Even if a prior court has applied a “four corners” exception, a party may be hesitant, and understandably so, to seek it in its own case. The decision to argue against application of a black letter rule of law – not to mention one that has likely existed for decades -- is not an easy one to make. Nor is it an easy task to accomplish.

This was the situation in Ramara, Inc. v. Westfield Ins. Co. Courts in “four corners” states that peek outside the complaint, or consider other factors, to determine the duty to defend, are not, in and of themselves, that significant. It happens fairly often. However, I chose Ramara for inclusion here because the factual situation at issue arises with some frequency.

Ramara, Inc., a garage owner, engaged Sentry Builders Corporation as a general contractor to perform work at its parking garage. Sentry hired Fortress Steel Services, Inc. to install concrete and steel components. As required by its subcontracting agreement with Sentry, Fortress obtained a general liability policy from Westfield Insurance, naming Ramara as an additional insured.

A Fortress employee, Anthony Axe, was injured on the job. Axe filed suit against Ramara and Sentry. He did not sue Fortress. No surprise here since Fortress, as his employer, was immune from suit under the Pennsylvania Workers’ Compensation Act. Ramara sought a defense from Westfield as an additional insured. Westfield declined. Ramara filed a coverage action in Pennsylvania federal court against Westfield. Ramara was successful and Westfield appealed to the Third Circuit.

Following several pages of eye glazing procedural rigmarole, the appeals court turned its attention to the additional insured issue. Ramara’s potential rights as an additional insured were based on the following endorsement contained in the Westfield policy issued to Fortress:

A. Section II —Who Is An Insured
is amended to include as an additional insured any person or organization for whom you are performing operations when you and such person or organization have agreed in writing in a contract or agreement that such person or organization be added as an additional insured on your policy. Such person or organization is an additional insured only with respect to liability for “bodily injury,” “property damage,” or “personal and advertising injury” caused, in whole or in part, by:

1. Your [Fortress] acts or omissions; or

2. The acts or omissions of those acting on your [Fortress] behalf;

in the performance of your [Fortress] ongoing operations for the additional insured.
*** (emphasis added)

The issue was simple – or at least was simple for the court to describe: “At bottom, this case concerns whether the Axe complaint sufficiently alleges, as required by the Additional Insured Endorsement, that Axe’s injuries potentially were ‘caused, in whole or in part’ by Fortress’s acts or omissions or the acts or omissions of someone acting on Fortress’s behalf. If it does, then Ramara is an additional insured under the Policy with respect to the Axe action and is entitled to a defense in that case. If it does not, then Ramara is not an additional insured with respect to the Axe action and Westfield does not have a duty to defend Ramara.”

Putting aside various arguments about how to interpret “caused, in whole or in part,” and applying the phrase to the allegations at issue, the court turned to Westfield’s argument that the complaint makes no mention of Fortress, except to say that it was Axe’s employer. So, as Westfield saw it, the complaint did not allege any acts or omissions of Fortress. Thus, Ramara was not an additional insured.

But the District Court did not see this as a basis to conclude that Ramara was not an additional insured. “Due to the immunity from tort liability afforded to employers for injury to their employees in circumstances in which compensation is provided by the [Workers’ Compensation] Act, the District Court reasoned that Westfield’s narrow interpretation of the underlying complaint ‘ignore[d] the realities of the worksite’ and "the effect of the Pennsylvania Workers’ Compensation Act.’”

The appeals court turned to Pennsylvania’s duty to defend standard in reviewing the lower court’s decision. It noted that, under Pennsylvania law, the duty to defend is determined based solely on the allegations in the complaint – and the court underlined solely. The challenge for the appeals court was that, if it must look solely at the allegations in the complaint, there were none alleging any acts or omissions of Fortress.

Despite the absence of allegations in the complaint of any acts or omissions of Fortress, the appeals court affirmed the District Court: “[I]t is clear that the District Court properly considered the effect of the Workers’ Compensation Act. The four corners rule—even under Pennsylvania’s strict construction—does not permit an insurer to make its coverage decision with blinders on, disclaiming any knowledge of coverage-triggering facts. Quite the opposite, knowledge that an injured employee has a claim under the Workers’ Compensation Act must be factored into a determination of whether his allegations in an underlying tort complaint potentially trigger an obligation on an insurer to provide coverage for a defendant in the underlying case. If an insurer fails to account for the Act it may construe the factual allegations of an underlying complaint too narrowly, and ‘the insurer who refuses to defend at the outset does so at its own peril.’”

The court also made the point that it was not deviating from Pennsylvania’s “four corners” requirement – something it noted it could not do. Instead, the court characterized its decision as providing an “interpretive constraint” on insurers, when determining whether the allegations of a complaint fall outside of coverage under these circumstances. Specifically, “Westfield was certainly aware of the Workers’ Compensation Act’s limitation on the type of allegations that Axe could bring when it decided to deny coverage to Ramara. Westfield also surely knew that despite the circumstance that the Act does not contain pleading limitations in third party actions, the practical effect of its grant of tort immunity to employers was that Axe’s attorney in drawing the complaint neither would explicitly name Fortress nor feature it prominently in the complaint’s allegations. Within this context and applying Pennsylvania law, Westfield could not have determined reasonably that the allegations of the Axe complaint were patently outside the Policy’s coverage.”


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