The determination of whether an insurer has a duty to defend isthe most important of all coverage issues, which shouldn't besurprising.

The question arises in just about every liability claim — regardless of policy type. Noother issue can make that claim. And the consequences for aninsurer that breaches its defense obligation are, at best,significant and, at worst, monumental.

The underlying plaintiff also has a lot riding on it. If adefense is owed, an insurer, now incurring costs, may be inclinedto settle at some point — even if the case is defensible.

Given the importance of the issue, all of the stakeholders in aliability claim are well-served by the tests for determiningwhether an insurer has a duty to defend being well-defined. Andthat is the case — or so it seems. Almost universally, a duty todefend is owed if the allegations in the complaint, and nothingelse, provide any potential for coverage, or suchallegations, in conjunction with extrinsic evidence, provide anypotential for coverage. It's one or the other.

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What's more, which one of these tests applies was long agodecided by just about every state in the country. All this said,the way a particular state determines whether a duty to defend isowed should be as predictable as General Electric paying adividend.

Exceptions

However, while courts usually have no problem expressing theirstate's duty to defend rule, their steadfast adherence to it can bea different matter. This is most surprising in states that haveadopted the “four corners of the document” rule for determiningwhether a duty to defend is owed. What could be simpler thanthat?

While an insurer's obligation to indemnify its insured mayrequire a four-week trial to get all the necessary facts, theinformation for determining an insurer's duty to defend should belimited to just two documents: the policy and the complaint. Theduty to indemnify may require a roomful of documents to figure out,but those needed for determining a duty to defend should fit in anenvelope.

This is the way it's supposed to work in “four corners” states. But exceptions havecrept into the duty to defend calculation. Some courts, despite ahigh court mandate to look no further than the complaint and policyto determine whether a defense is owed, are considering otherinformation. As a result, a “four corners” determination may not beas narrow as advertised.

Beyond the four corners

Sometimes the consideration of information outside the complaintbenefits the insurer, and sometimes it benefits the insured. Butthe result is the same for both. Instead of the parties simplydisagreeing whether the complaint, when compared to the policy,creates any potential for coverage — the usual basis of a coveragedispute — you can now add a possible dust up over whetheradditional information should be considered.

Related: The duty to defend: The 3 primary sources ofinsurer litigation

This presents an interesting dilemma for the parties in acoverage dispute. Even if a prior court has applied a “fourcorners” exception, a party may be hesitant, and understandably so,to seek the exception in its own case. The decision to argueagainst application of a black-letter rule of law — not to mentionone that has likely existed for decades — is not an easy one tomake. Nor is it an easy task to accomplish.

Consider some of these examples of states that call themselves“four corners,” but that sometimes use a “four corners, but…”standard to determine whether a defense is owed.

• Rhode Island. Although generally a “fourcorners” state, in Peerless Ins. Co. v. Viegas [667 A.2d785 (R.I. 1995)], the Supreme Court of Rhode Island inferred anintent to cause harm and injury in cases involving the sexualmolestation of a minor. Thus, notwithstanding that the duty todefend is determined by the “pleadings test,” (the “four corners”)the Rhode Island high court held that, if the policy contains anintentional act exclusion, an insurer is not obligated to defend aninsured who sexually abuses a minor, even if the allegations in thecomplaint are described in terms of negligence.
• Virginia. In Copp v. Nationwide Mut. Ins.Co. [692 S.E.2d 220 (Va. 2010)], the Supreme Court of Virginiaacknowledged that, in several prior decisions, it applied the rulethat only the allegations in the complaint and the terms of thepolicy can be considered in deciding whether there is a duty todefend. However, the court departed from the “four corners” rule onthe basis that none of the prior decisions involved the situationbefore it — applicability of an exception to the “expected orintended” exclusion if the insured acted in self-defense.
• Oregon. In Fred Shearer & Sons, Inc.v. Gemini Ins. Co. [240 P.3d 67 (Or. Ct. App. 2010)], thecourt acknowledged that Oregon is a “four corners” state. However, the court concluded that, “When the question is whetherthe insured is being held liable for conduct that falls within thescope of the policy, it makes sense to look exclusively to thecomplaint. However, the “same cannot be said with respect towhether a party seeking coverage is an 'insured.'” Thus, the courtallowed a party to use extrinsic evidence to establish its statusas an insured under a vendor's endorsement.

As these cases, and many others, demonstrate, a “four corners”state is sometimes a “four corners, but…” state. This adds anadditional uncertainty for parties disputing whether a defense isowed.

Randy Maniloff is an attorney at White and Williams, LLP inPhiladelphia, where he represents insurers in coverage disputesunder a host of policies. He is the co-author of General Liability Insurance Coverage – Key Issues in EveryState (3rd edition, National Underwriter) and thepublisher of the newsletter and website www.CoverageOpinions.info.