(Editor's Note: This article has been contributed by StephenBrown, Carl Pernicone and Samuel Reich, attorneys at WilsonElser. Refer to the respective author bio pages forinformation about their practice areas and expertise.)

A liability policy imposes two separate and distinct duties uponan insurer: a duty to defend and a duty to indemnify. Theduty to defend requires that the insurer providelegal counsel to its insured in the event of a lawsuit, while theduty to indemnify requires the insurer to satisfya judgment entered against its insured. An insurer's duty to defendcan be triggered without activating the insurer's duty to pay for the loss. This is because all jurisdictions find theduty to defend to be greater than the duty to indemnify.

The Majority Rule

Historically, the allegations in the complaint determine whetheran insurer has a duty to defend. The four corner rule requires aninsurer to defend its insured if any of the allegations in thecomplaint, even if untrue, would be covered under the policy. Overtime, the “four corner rule” has been judicially eroded byexpanding the triggering mechanism of an insurer's duty to defend.Instead of strict comparison of the allegations in the complaint tothe subject policy, a majority of jurisdictions require an insurerto provide a defense when it has extrinsic evidence, evidence knownto 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 fromthe face of the complaint but may exist, the insurer mustinvestigate the claim and give the insured the benefit of the doubtin determining whether the insurer has an obligation todefend.
• New York also requires an insurer to defendwhen the insurer has actual knowledge of facts establishingsuch a reasonable possibility of coverage.
• Another example is Nebraska, which requiresan insurer to defend if a reasonable investigation of theactual facts by the insurer would or does disclose facts that wouldobligate the insurer to indemnify.
• Maryland also allows an insured to establishthe potential of coverage under an insurance policy throughthe use of extrinsic evidence.
• Arizona, Arkansas,California, Iowa,Michigan, and Minnesota haveadopted the majority approach of allowing extrinsic evidence,outside of the four corners of the complaint, to be used indetermining if there is a duty to defend.

The majority viewpoint is rooted in a pro-insured principle thatan insurance contract is a contract of adhesion, and the only wayfor the insured to get the benefit of its bargain is to have theinsurer examine all known facts to determine if the duty to defendhas been triggered. To allow the insured to be at the whim of athird party's pleading to determine whether the insured should getwhat it bargained for—a defense—does not give the insured thebenefit of that bargain.

The Minority Rule

In a minority of states, the four corner rule is strictlyenforced; even if the insurer has extrinsic evidence that wouldtrigger coverage:

• A Wisconsin court rejected a request from theplaintiff to consider extrinsic evidence when determining whetherthe duty to defend had been triggered by the complaint.
• The duty to defend in Texas is not affected byfacts learned pre-suit.
• Under Louisiana's “Eight Corners Rule,” thecourt must assess whether there is a duty to defend by applying theallegations of the complaint to the underlying policy withoutresorting to extrinsic evidence.
• Hawaii adheres to the complaint allegationrule; the duty to defend is limited to situations where theunderlying pleadings have alleged a claim for relief, which fallswithin the terms for coverage of the insurance contract.However, the Hawaii Supreme Court has cautioned that courtsshould carefully examine the allegations of a complaint toensure that the plaintiffs are not, through artful pleading,bootstrapping themselves to obtain insurance coverage byasserting claims of negligence based on facts thatreflect intentional rather than negligent conduct.
• Arkansas and Rhode Islandalso do not allow for the consideration of extrinsic evidencein making a determination of whether the insurer's duty todefend 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 isassigned, has opined that the Colorado Supreme Court would carveout two exceptions to the four corner rule:

• In Pompa v. Am. Family Mut. Ins.Co. the Court of Appeals held that it will consider extrinsicevidence that constitutes an indisputable fact that is not anelement of either the cause of action or a defense in theunderlying litigation. Pompa is based on theexpectation that the Colorado Supreme Court would recognize anexception to the complaint rule if a claimant's complaintcontained allegations made in bad faith and framed to trigger aninsurance policy.
• In AIMCO v. NutmegIns. Co. a second exception was identified: consideringextrinsic evidence in the form of an allegation contained inseveral separate but factually related complaints. TheAIMCO court predicted that the Colorado Supreme Courtwould recognize a narrow exception to the four cornersrule requiring an insurer to consider facts of which it isaware in parallel complaints that tend to show a duty todefend as this “would not undercut aninsured's legitimate expectation of a defense.”

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

Hybrid Jurisdictions

Some jurisdictions allow the use of extrinsic evidence only inlimited circumstances:

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

The Verdict

Courts in some jurisdictions are moving away from strictadherence to the four corner rule. There is a trend for courts tofind coverage and impose a duty to defend to protect the insured.Where the four corner rule does not apply, insurers shouldbe diligent in their factual investigation and cautious in theirdenial to defend. To protect itself, an insurer can add clearpolicy language as to whether extrinsic evidence may be consideredin the determination of a duty to defend exists. An insurer canalso defend and initiate a declaratory judgment action to determineits duties under the policy, whereappropriate.