The determination of whether an insurer has a duty to defend is the most important of all coverage issues, which 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 whether 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.

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

Exceptions

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 of the document” rule for determining whether 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 whether a defense is owed, are considering other information. As a result, a “four corners” determination may not be as narrow as advertised.

Beyond the four corners

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 — you can now add a possible dust up over whether additional information should 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 the exception 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.

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 “four corners” state, in Peerless Ins. Co. v. Viegas [667 A.2d 785 (R.I. 1995)], the Supreme Court of Rhode Island inferred an intent to cause harm and injury in cases involving the sexual molestation of a minor. Thus, notwithstanding that the duty to defend is determined by the “pleadings test,” (the “four corners”) the Rhode Island high court held that, if the policy contains an intentional act exclusion, an insurer is not obligated to defend an insured who sexually abuses a minor, even if the allegations in the complaint 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 Virginia acknowledged that, in several prior decisions, it applied the rule that only the allegations in the complaint and the terms of the policy can be considered in deciding whether there is a duty to defend. However, the court departed from the “four corners” rule on the basis that none of the prior decisions involved the situation before it — applicability of an exception to the “expected or intended” 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)], the court acknowledged that Oregon is a “four corners” state. However, the court concluded that, “When the question is whether the insured is being held liable for conduct that falls within the scope of the policy, it makes sense to look exclusively to the complaint. However, the “same cannot be said with respect to whether a party seeking coverage is an 'insured.'” Thus, the court allowed a party to use extrinsic evidence to establish its status as 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 an additional uncertainty for parties disputing whether a defense is owed.

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

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Duty to defend: &lsquo;Four corners&rsquo; or &lsquo;four corners, but&hellip;&rsquo;?

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