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Vol. 5, Iss. 8
July27, 2016

Supreme Court Says 31 States Have Exceptions To The “Four Corners” Rule For Duty To Defend


Determining whether an insurer has a duty to defend is by far the most important liability insurance coverage issue. It arises in every type of claim – no matter the facts or the type of policy. And the consequences for an insurer that breaches the duty to defend can be huge (yuge). And once an insurer agrees to defend, it has now opened the door to a financial obligation, which is to say that it may now consider settling the claim, even if defensible, in an effort to prevent what could be greater defense costs.

There are two overarching principles that govern whether an insurer has a duty to defend. The first – duty to defend 101 -- is the almost universal rule, to the general effect that the duty to defend is broader than the duty to indemnify, and an insurer must defend so long as there is a possibility of coverage. This rule does not get a lot of attention because it is so almost-universally accepted.

The more important duty to defend principle is the second: is the determination of the duty to defend tied to the four corners of the complaint or must extrinsic evidence be considered by the insurer (usually only to find a duty to defend and not exclude it)? “Four corners” versus “extrinsic evidence” can have a huge impact on whether an insurer’s defense obligation is triggered.

As an aside, in those states that require an insurer to consider extrinsic evidence, a difficult follow-on issue sometimes emerges – What evidence can, or must, be considered by the insurer? This can be no easy issue.

Just how many states follow four corners and how many extrinsic evidence? This question was discussed in Water Well Solutions Service Group v. Consolidated Insurance Company, No. 2014AP2484 (Wis. June 20, 2016). It’s a lengthy opinion with a lengthy dissent.

For purposes of the discussion here, which is not the Water Well case itself, I note that the court held that “the longstanding four-corners rule in duty to defend cases requires the court to compare the language in the complaint to the terms of the entire insurance policy, without considering extrinsic evidence, even when an insurer unilaterally declines to defend its insured.” To be even clearer, the court stated: “[T]here is no exception to the four-corners rule in duty to defend cases in Wisconsin.”

The court observed that the four corners rule generally favors insureds: “The rule ensures that courts are able to efficiently determine an insurer’s duty to defend, which results in less distraction from the merits of the underlying suit. Also, the four-corners rule supports the policy that an insurer’s duty to defend is broader than its duty to indemnify. That is because it is the nature of the claim alleged against the insured which is controlling even though the suit may be groundless, false or fraudulent.” (citations and internal quotations omitted).

I believe that insureds would have a hard-time accepting this conclusion, especially that last part (and especially when you consider that extrinsic evidence is almost always only allowed to benefit insureds). The New York Court of Appeals certainly saw it that way in Fitzpatrick v. Am. Honda Motor Co., Inc., 575 N.E.2d 90, 92 (N.Y. 1991): “[I]n these circumstances, where the insurer is attempting to shield itself from the responsibility to defend despite its actual knowledge that the lawsuit involves a covered event, wooden application of the ‘four corners of the complaint’ rule would render the duty to defend narrower than the duty to indemnify—clearly an unacceptable result. For that reason, courts and commentators have indicated that the insurer must provide a defense if it has knowledge of facts which potentially bring the claim within the policy’s indemnity coverage.”

But back to the bigger question: Putting aside the specific issues in Water Well (and what type of exception to the four corners rule should be allowed), how many states follow the four corners rule and how many allow considerations of extrinsic evidence?

In Water Well, Justice Bradley, as part of a vigorous dissent, noted that 31 states allow for the consideration of extrinsic evidence for purposes of determining an insurer’s duty to defend. She further concluded that in four states the law is unclear.

My own scorecard on the extrinsic evidence issue closely resembles Justice Bradley’s. I’d put the number at 33 states. But, to be sure, anytime you do a survey like this there are going to be a few states where the law is not crystal clear and different people can reach different conclusions. But the moral of the story is the same – In more than half the states, insurers need to be mindful that their duty to defend determination must go beyond consideration of only the complaint.

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