Expanding the Duty to Defend Through Judicial Misapplication of the Four-Corners Rule

By David J. Buishas

A liability insurer’s duty to defend is generally determined by comparing the allegations asserted in the underlying complaint against the terms of the relevant policy.  This duty to defend standard is often referred to as the “four-corners rule” (or, in some jurisdictions, the “eight-corners rule”).  See Ostrager & Newman, Handbook on Insurance Coverage Disputes, § 5:02[b] (17th ed. 2015) (“The rule that the insurer’s duty to defend is determined by the allegations contained within the ‘four corners of the complaint’ is widely followed.”). 

Simply stated, where claims asserted in the underlying complaint, however inartfully drafted, potentially fall within the policy’s coverage, the insurer’s duty to defend is triggered.  Under the four-corners rule, then, it is generally accepted that liability policies impose no duty to defend claims that might have been alleged but were not, or claims that more closely track the true factual circumstances surrounding the claimant’s injuries but which, for whatever reason, have not been asserted. 

However, in an effort to broadly construe the complaint in favor of the insured, several courts in recently published decisions have muddled the four-corners rule by misapplying the standard.  Instead of analyzing whether the complaint’s actual allegations potentially trigger coverage, certain courts have shifted their focus to whether the plaintiff could have potentially alleged claims that would trigger coverage under the policy.  This is an improper application of the rule that results in an exponentially expanded duty to defend.

In each of the decisions referenced below, the court imposed a duty to defend through a strained and implausible reading of the complaint.  By contorting the complaint’s allegations in an effort to find coverage for claims that are hypothetically conceivable, but in reality not alleged, these decisions have injected chaotic uncertainty into the duty to defend analysis, contravening the very purpose of the four-corners rule.

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Example 1:  Ramara, Inc. v. Westfield Ins. Co., 2016 WL 624801 (3d Cir. Feb. 17, 2016) (applying Pennsylvania law)

In Ramara, Inc. v. Westfield Ins. Co., the United States Court of Appeals for the Third Circuit determined that even though a complaint made no allegations against the plaintiff’s employer, the court would use its knowledge of unpled facts to infer wrongdoing by the employer, thereby triggering the employer’s additional insured coverage for a subcontractor.

The Ramara court analyzed an additional insured issue that often presents itself in connection with “bodily injury” or “property damage” claims arising in the construction context.  For example, when a worker becomes injured on a job and files suit, his complaint likely will target multiple different contractors engaged at the site.  He will not, however, sue his own employer because workers’ compensation statutes typically exempt employers from tort liability to their employees.  Thus, the employer is shielded from tort liability even though the employer may warrant some degree of responsibility for the accident and injury.  However, the employer’s insurer may still owe coverage obligations to other contractors who the employer was contractually obligated to name as an additional insured under its own coverage.

Ramara v. Westfield analyzed that very scenario.  There, the coverage dispute arose out of a workplace accident at a Philadelphia parking garage.  The garage owner, Ramara, Inc. (“Ramara”), hired a general contractor, Sentry Builders Corporation (“Sentry”), to perform work at the garage.  Sentry, in turn, engaged a subcontractor, Fortress Steel Services, Inc. (“Fortress”), to supply and install concrete and steel components in the garage.  Pursuant to its contract with Sentry, Fortress procured commercial general liability coverage through Westfield Insurance Company (“Westfield”) naming Sentry and Ramara as additional insureds, but only with respect to liability caused in whole or in part by Fortress’ acts or omissions, or the acts or omissions of those acting on Fortress’ behalf. 

While working at the site, Fortress employee Anthony Axe (“Axe”) became severely injured and brought a personal injury lawsuit against Ramara and Sentry – but not Fortress – alleging that Ramara and Sentry negligently failed to provide a safe work environment by inadequately supervising, inspecting and monitoring the work (the “Axe Lawsuit”).  Aside from identifying Fortress’ role in the project, Axe asserted no allegations or causes of action against his employer, Fortress.

Ramara tendered its defense in the Axe Lawsuit to Westfield, which denied coverage because the complaint did not assert any allegations against Fortress, as would be necessary to trigger a duty to defend.  Ramara then initiated a declaratory judgment action against Westfield.  The United States District Court for the Eastern District of Pennsylvania entered judgment in Ramara’s favor, holding that the Axe Lawsuit triggered Westfield’s duty to defend Ramara as an additional insured.  The district court acknowledged that Pennsylvania’s “four-corners rule” governed its analysis but found it compelling that Axe was foreclosed from naming Fortress in his complaint due to Fortress’ immunity from tort liability under Pennsylvania Workers’ Compensation Act.  The district court determined that Westfield could not ignore its knowledge of Fortress’ involvement in the accident merely because the Workers Compensation Act effectively precluded Axe from asserting a claim against Fortress.

On appeal, the Third Circuit affirmed the district court’s ruling that the Axe Lawsuit triggered Westfield’s duty to defend Ramara as an Additional Insured.  The court noted that the complaint’s sparse reference to Fortress was understandable in light of the Workers’ Compensation Act’s grant of tort immunity to employers.  It reasoned that Westfield’s narrow interpretation of the Axe complaint ignored the realities of the work-site and the effect of Pennsylvania’s Workers’ Compensation Act. 

The court further determined that it was proper for the district court to consider the effect of the Workers’ Compensation Act, even under Pennsylvania’s strict application of the “four-corners rule.”  Specifically the court stated:

The four corners rule, even under Pennsylvania’s strict construction – does not permit an insurer to make its coverage decision with blinders on, disclaiming any knowledge of coverage-triggering facts.  Quite the opposite, knowledge than an insured employee has a claim under the Workers Compensation Act must be factored into a determination of whether his allegations in an underlying tort complaint potentially trigger an obligation on an insurer to provide coverage for a defendant in the underlying case. 

Id. at *14 (emphasis added).

In sum, the Third Circuit ruled that the “four-corners rule” does not permit an insurer to “bury its head in the sand” and ignore outside knowledge of coverage-triggering facts.

Example 2:  MedeAnalytics, Inc. v. Federal Insurance Company, 2016 WL 687976 (N.D. Cal. Feb. 19, 2016)

In MedeAnalytics, Inc. v. Federal Ins. Co., a California federal court imposed a duty to defend upon a commercial liability insurer based upon a complaint’s reference to the insured’s “disparaging comments,” even though the complaint did not plead a covered claim for libel or slander, or sufficiently allege the necessary factual prerequisites for those covered offenses.[1]

The insured, MedeAnalytics, Inc. (“Mede”), provided financial performance analytics software to the health care industry.  In 2014, several competitor companies sued Mede in the U.S. District Court for the Northern District of California (the “Underlying Lawsuit”) alleging that Mede improperly solicited plaintiffs’ employees in an attempt to drive plaintiffs out of business, and in violation of a non-solicitation agreement between the parties.  The Underlying Lawsuit further alleged that, in the course of soliciting plaintiffs’ employees, Mede made “disparaging comments about [plaintiffs] and their directors and officers.”  The Underlying Lawsuit asserted various breach of contract claims, but no dedicated cause of action for disparagement.

Mede tendered the Underlying Lawsuit to its commercial general liability insurer, Federal Insurance Company, which denied coverage.  The Federal Policy provided coverage for “personal injury,” among other risks, which the policy defined to include injury caused by ... electronic, oral, written or other publication of material that libels or slanders a person or organization.

Mede responded by filing a declaratory judgment action against Federal, contending that the complaint’s vague reference to the insured’s “disparaging comments” triggered at least a potential for “personal injury” coverage for libel or slander under the Federal Policy.  Federal countered that the complaint did not assert a cause of action for libel, slander or disparagement and that the complaint, taken as a whole, did not allege facts sufficient to state causes of action for libel or slander.  For instance, Federal contended that the complaint did not even allege the disparaging statements were false, a critical element to any libel or slander claim. 

The parties cross-moved for partial summary judgment as to Federal’s duty to defend.  The Court sided with Mede, holding that the complaint’s allegations regarding Mede’s disparaging remarks triggered at least a potential for “personal injury” coverage under the policy.  Specifically, the court stated:

While the allegations in the underlying complaint did not provide factual support for each element of a libel or slander claim, because the underlying complaint alleged publication to third persons, and the content of the statements were allegedly disparaging, these allegations sufficed to give rise to a potentially covered claim for libel or slander.

Id. at *3 (internal quotation marks omitted).

The court granted Mede’s motion for partial summary judgment and held that the complaint’s vague disparagement allegations, though lacking detail, triggered Federal’s duty to defend.

Example 3:  Country Mut. Ins. Co. v. Bible Pork, Inc., 42 N.E.3d 958 (Ill. App. Ct. Nov. 20, 2015)

 In Country Mut. Ins. Co. v. Bible Pork, Inc., the Illinois Appellate Court for the Fifth District concluded that, even though the complaint sought only declaratory relief and pled no monetary losses, the complaint’s prayer for relief which requested “such other relief as deemed appropriate” was sufficient to constitute a claim for monetary “damages” thereby triggering the insurer’s duty to defend.[2]

There, the insured, Bible Pork, sought regulatory approval from the Illinois Department of Agriculture to construct a new hog factory facility in Clay County, Illinois.  During construction, numerous county residents filed suit seeking to enjoin Bible Pork from constructing the hog facility on grounds that that the facility constituted a public and private nuisance (the “Underlying Lawsuit”).  In addition to seeking declaratory relief, the complaint’s prayer for relief also sought “such other relief as deemed appropriate.”  Aside from this “catchall” prayer for relief, however, the Underlying Lawsuit did not allege any monetary damages.

Bible Pork tendered the Underlying Lawsuit to Country Mutual seeking coverage under a primary Agriplus Farm Liability Policy and a Farm Umbrella Liability Policy.  Country Mutual denied coverage for the Underlying Lawsuit under both policies, asserting that the complaints sought only declaratory relief and did not seek coverage for “damages,” as required by the policies.

Bible Pork assumed its own defense in the Underlying Lawsuit and regularly updated Country Mutual concerning the status of the litigation.  Bible Pork advised Country Mutual that plaintiffs’ attorney in the Underlying Lawsuit stated that he intended to seek both monetary damages and injunctive relief, though his complaint did not explicitly seek monetary relief.  Country Mutual maintained its denial of coverage despite receiving this information and thereafter commenced a declaratory judgment action against Bible Pork.  The trial court ruled that Country Mutual breached its defense obligation, and Country Mutual appealed.

Illinois’ Appellate Court affirmed the trial court’s ruling.  The court found that plaintiffs’ demand for “such other relief as deemed appropriate” was broad enough to create a potential that plaintiffs could be awarded monetary relief, in addition to injunctive relief.  Specifically, the court held:

We agree with the trial court’s analysis that plaintiffs’ prayer for “other relief” in the underlying lawsuit establishes it as a suit for “damages” and one “seeking damages” which are to be covered under the language of the policies issued by Country Mutual.

Id. at 964.

The court, therefore, affirmed the trial court’s ruling that plaintiffs’ catchall prayer for relief created the potential for an award of money damages and triggered Country Mutual’s duty to defend the lawsuit.   

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As the above cases demonstrate, several recent courts have gone out of their way to stretch the allegations (or prayer for relief) in an underlying complaint in search of potentially covered claims, even when no such claim was pled or articulated.  These decisions represent a departure from the traditional duty to defend analysis, under which courts are not required (or permitted) to speculate regarding unpled factual scenarios that might trigger coverage. 

The above-referenced cases have unfortunately injected ambiguity into the duty to defend analysis, creating an ill-defined framework that is difficult, if not impossible, to apply or predict.  Insurers should be aware of these decisions when pricing risks and analyzing coverage for claims arising under duty to defend policies. 

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[1] California is among the minority of jurisdictions that do not adhere to the four-corners rule.  Under California law, “the insurer’s obligation to defend is not dependent on the facts contained in the complaint alone; the insurer must furnish a defense when it learns of facts from any source that create the potential of liability under its policy.”  CNA Cas. of California v. Seaboard Sur. Co., 222 Cal. Rptr. 276, 279 (Cal. Ct. App. 1986).

[2] Illinois courts have adopted a modified four-corners rule and may consider extrinsic evidence outside the underlying complaint so long as such evidence does not determine an issue critical to the outcome of the underlying lawsuit.  Pekin Ins. Co. v. Wilson, 930 N.E.3d 1011, 1020 (Ill. 2010).