(Editor's Note: This article has been contributed by Stephen Brown, Carl Pernicone and Samuel Reich, attorneys at Wilson Elser. Refer to the respective author bio pages for information about their practice areas and expertise.)

A liability policy imposes two separate and distinct duties upon an insurer: a duty to defend and a duty to indemnify. The duty to defend requires that the insurer provide legal counsel to its insured in the event of a lawsuit, while the duty to indemnify requires the insurer to satisfy a judgment entered against its insured. An insurer's duty to defend can be triggered without activating the insurer's duty to pay for the loss. This is because all jurisdictions find the duty to defend to be greater than the duty to indemnify.

The Majority Rule

Historically, the allegations in the complaint determine whether an insurer has a duty to defend. The four corner rule requires an insurer to defend its insured if any of the allegations in the complaint, even if untrue, would be covered under the policy. Over time, the “four corner rule” has been judicially eroded by expanding the triggering mechanism of an insurer's duty to defend. Instead of strict comparison of the allegations in the complaint to the subject policy, a majority of jurisdictions require an insurer to provide a defense when it has extrinsic evidence, evidence known to the insurer learned through its investigations of the claim, even though that information is not pled in the complaint.

The following states illustrate this point:

In Washington, if coverage is not clear from the face of the complaint but may exist, the insurer must investigate the claim and give the insured the benefit of the doubt in determining whether the insurer has an obligation to defend.
New York also requires an insurer to defend when the insurer has actual knowledge of facts establishing such a reasonable possibility of coverage.
Another example is Nebraska, which requires an insurer to defend if a reasonable investigation of the actual facts by the insurer would or does disclose facts that would obligate the insurer to indemnify.
Maryland also allows an insured to establish the potential of coverage under an insurance policy through the use of extrinsic evidence.
Arizona, Arkansas, California, Iowa, Michigan, and Minnesota have adopted the majority approach of allowing extrinsic evidence, outside of the four corners of the complaint, to be used in determining if there is a duty to defend.

The majority viewpoint is rooted in a pro-insured principle that an insurance contract is a contract of adhesion, and the only way for the insured to get the benefit of its bargain is to have the insurer examine all known facts to determine if the duty to defend has been triggered. To allow the insured to be at the whim of a third party's pleading to determine whether the insured should get what it bargained for—a defense—does not give the insured the benefit of that bargain.

The Minority Rule

In a minority of states, the four corner rule is strictly enforced; even if the insurer has extrinsic evidence that would trigger coverage:

A Wisconsin court rejected a request from the plaintiff to consider extrinsic evidence when determining whether the duty to defend had been triggered by the complaint.
The duty to defend in Texas is not affected by facts learned pre-suit.
Under Louisiana's “Eight Corners Rule,” the court must assess whether there is a duty to defend by applying the allegations of the complaint to the underlying policy without resorting to extrinsic evidence.
Hawaii adheres to the complaint allegation rule; the duty to defend is limited to situations where the underlying pleadings have alleged a claim for relief, which falls within the terms for coverage of the insurance contract. However, the Hawaii Supreme Court has cautioned that courts should carefully examine the allegations of a complaint to ensure that the plaintiffs are not, through artful pleading, bootstrapping themselves to obtain insurance coverage by asserting claims of negligence based on facts that reflect intentional rather than negligent conduct.
Arkansas and Rhode Island also do not allow for the consideration of extrinsic evidence in making a determination of whether the insurer's duty to defend and indemnify has been triggered.

Colorado also follows the minority approach. However, the United States Court of Appeals for the Tenth Circuit, the appellate court for the federal circuit to which Colorado is assigned, has opined that the Colorado Supreme Court would carve out two exceptions to the four corner rule:

In Pompa v. Am. Family Mut. Ins. Co. the Court of Appeals held that it will consider extrinsic evidence that constitutes an indisputable fact that is not an element of either the cause of action or a defense in the underlying litigation. Pompa is based on the expectation that the Colorado Supreme Court would recognize an exception to the complaint rule if a claimant's complaint contained allegations made in bad faith and framed to trigger an insurance policy.
In AIMCO v. Nutmeg Ins. Co. a second exception was identified: considering extrinsic evidence in the form of an allegation contained in several separate but factually related complaints. The AIMCO court predicted that the Colorado Supreme Court would recognize a narrow exception to the four corners rule requiring an insurer to consider facts of which it is aware in parallel complaints that tend to show a duty to defend as this “would not undercut an insured's legitimate expectation of a defense.”

To date, the Colorado Supreme Court has not adopted these two exceptions.

Hybrid Jurisdictions

Some jurisdictions allow the use of extrinsic evidence only in limited circumstances:

In Connecticut, an insurer can look outside the allegations made in an underlying complaint in order to establish a duty to defend. However, extrinsic evidence may not be considered in determining that the duty to defend does not exist.
Illinois applies strict interpretation of the four corner rule except in declaratory judgment actions. A court in a declaratory judgment proceeding where an insurer's duty to defend is at issue may look beyond the allegations of the underlying complaint to show that there is no duty to defend.
In Utah, whether extrinsic evidence is admissible to determine if an insurer has a duty to defend an insured turns on the parties' contractual terms. If the policy terms make the duty to defend dependent on the allegations against the insured, then extrinsic evidence is irrelevant to a determination of whether a duty to defend exists. If the policy language bases the duty to defend on whether there is an actual covered claim or suit, then extrinsic evidence is admissible.

The Verdict

Courts in some jurisdictions are moving away from strict adherence to the four corner rule. There is a trend for courts to find coverage and impose a duty to defend to protect the insured. Where the four corner rule does not apply, insurers should be diligent in their factual investigation and cautious in their denial to defend. To protect itself, an insurer can add clear policy language as to whether extrinsic evidence may be considered in the determination of a duty to defend exists. An insurer can also defend and initiate a declaratory judgment action to determine its duties under the policy, where appropriate.

Special Reports /

Judicial Interpretations of the Four Corner Rule

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