Duty to Defend

Tests for Determining Duty to Defend: The Four Corners or Eight Corners Rule

Adapted from Zalma on Insurance Claims Part 105 Second Edition: A Comprehensive Review of the law and Practicalities of Property, Casualty and Liability Insurance Claims now available at https://www.amazon.com/dp/168874343X.

Four or Eight Corners Rule

Some states apply a rule of interpretation of the duty to defend a liability claim by limiting their review to the facts alleged in the lawsuit and the wording of the insurance policy. They refuse to consider any evidence extrinsic to the allegations of the suit.

If any of the allegations are potentially covered by the policy, the duty to defend is established. If none of the allegations in the complaint is potentially covered by the policy, the insurer can generally refuse to defend.

“Four corners” refers to the parameters of the policy; there is a variant test known as the “eight corners rule.” There is little difference between the two; they both take into consideration the four corners of the suit and the four corners of the policy.

Courts operating under the four corners or eight corners rule will not consider extrinsic facts or the potential for a suit drafted out of spite. The prudent insurer will, before making a decision, determine what rule or test is applied in the jurisdiction where the loss occurred.

The rationale behind the two rules is to require insurers to defend their insureds against all covered claims regardless of merit. Allowing an insurer to admit extrinsic evidence that contradicts a plaintiff’s allegations to establish the applicability of a policy exclusion would circumvent the very reason for the rules.

Many jurisdictions have ruled that any doubt regarding the obligation to defend is to be resolved in favor of the insured [Miller v. Elite Ins. Co., 100 Cal. App. 3d 739 (1980)].

The obligation to defend is measured by the terms of the policy and the allegations of the complaint against the insured and where the complaint reveals potential liability within the policy, the duty to defend arises. (Karpe v. Great American Indem. Co. (1961) 190 Cal. App. 2d 226, 233-234 [11 Cal. Rptr. 908].) If there is a doubt as to whether the insurer must defend, the doubt should be resolved in the insured’s favor. (Ritchie v. Anchor Casualty Co. (1955) 135 Cal. App. 2d 245, 251 [286 P.2d 1000].)

In Lenick Construction, Inc. v. Selective Way Insurance Company, 737 Fed. Appx. 92 (3d Cir. 2018) Lenick Construction, Inc. appealed a summary judgment in favor of Selective Way Insurance Company on Lenick’s declaratory judgment action for insurance coverage. The District Court held that Selective had no duty to defend or indemnify Lenick in state-court litigation that arose out of problems experienced by a condominium development in South Philadelphia, Pennsylvania applying the law of the state.

The dispute underlying this coverage action began between The Villas at Packer Park Condominium Association and various entities collectively referred to as Westrum. Westrum was hired as the general contractor for the 92-unit development, and it subcontracted with Lenick to perform rough and finish carpentry and to install panelling, windows, and doors provided by the developer. Upon completion of the project, it was discovered that some units experienced water infiltration, leaks, and cracked drywall.

The Villas sued Westrum in the Philadelphia County Court of Common Pleas, alleging contract and warranty claims. Westrum impleaded Lenick (and others), asserting claims for breach of contract and indemnification.

Soon after it had been joined as a defendant, Lenick notified its insurer (Selective) of the claims, stating that the commercial general liability (CGL) policy in effect when the defects were discovered entitled Lenick to defense and indemnification. Selective initially denied Lenick’s request, but eventually agreed to defend Lenick, subject to a reservation of rights.

In response to Selective’s reservation of rights letter, Lenick filed an action in the Court of Common Pleas seeking a declaration that Selective was obliged to defend and indemnify Lenick. After Selective removed the action to federal court, the parties filed cross-motions for summary judgment regarding Selective’s duty to defend, and Selective also filed a motion for summary judgment on its duty to indemnify.

For its part, Lenick sought reimbursement for fees that it incurred in the time period between its demand for a defense and Selective’s agreement to provide one. The District Court concluded that the allegations against Lenick were not covered under its CGL policy, so Selective had no duty either to defend or indemnify Lenick.

An insurer’s duty to defend and indemnify is determined solely in a four-corners state like Pennsylvania from the language of the complaint against the insured.

In this case, Lenick’s CGL policy insured it against bodily injury and property damage caused by an “occurrence,” which an endorsement to the policy defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Lenick contends that the pleadings established occurrences under Pennsylvania law in three ways:

  1. the damage occurred to areas of the property on which Lenick did not work,
  2. the damage was caused by work performed by other subcontractors, and
  3. the damage was caused by defects in the materials that Lenick used rather than by its own faulty workmanship.

Selective counters that Lenick’s liability arises from its own faulty workmanship, which is not covered as an occurrence under the policy.

Lenick points only to extrinsic evidence to support this argument. Because the pleadings do not contain allegations sufficient to support a claim that the windows, doors, and/or panels used by Lenick “actively malfunctioned, directly and proximately causing” the property damage to the project, this argument fails.

Coverage would have been found if the plaintiff alleged that the windows, doors and/or panels actively malfunctioned. It did not. Lenick received no coverage for defense or indemnity. Many states allow extrinsic evidence to allow a court to fairly determine the duty to defend. Pennsylvania does not and contractors like Lenick will lose coverage it should be entitled to until the law is changed.

The California Court of Appeal, in George F. Hillenbrand, Inc. v. Insurance Co. of North America, 102 Cal.App.4th 584, 125 Cal. Rptr.2d 575 (Cal. App. Dist.3 09/27/2002), explained (citing to the California Supreme Court) that California has moved away from the four corners rule to include extrinsic evidence in the evaluation of the duty.

In order to prevail on the issue of the duty to defend, the insured must prove the existence of a potential for coverage, while the insurer must establish the absence of any such potential. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot. Facts merely tending to show that the claim is not covered, or may not be covered, but are insufficient to eliminate the possibility that resultant damages (or the nature of the action) will fall within the scope of coverage, therefore add no weight to the scales. [Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295-296 (Montrose Chemical).]

Potentiality

The insurer is not required to indemnify the insured if the potentiality of an accidental cause never materializes, if the jury finds that the insured intentionally caused the plaintiff’s injury, or if the insured is convicted of the crime of battery. However, even though a policy excludes liability arising from violations of law, there is the potentiality that the jury would find there was no violation of law and that the policy provided coverage. However, if the claims of negligence against the insured were potentially covered under the policy the insurer will have a duty to defend.

Determining whether insurance coverage exists requires analysis of the claims asserted in the state court action. [Va. Elec. & Power Co. v. Northbrook Prop. & Cas. Ins. Co., 475 S.E.2d 264, 265-66 (Va. 1996); Bohreer v. Erie Ins. Grp., 475 F. Supp. 2d 578, 584 (E.D. Va. 2007)] Noting that Virginia recognizes the “potentiality rule,” wherein an insurer’s duty to defend is triggered if there is any possibility that a judgment against the insured will be covered under the insurance policy. The “eight corners rule,” compares the four corners of the insurance policy with the four corners of the underlying complaint to determine whether coverage exists. [Erie Ins. Exch. v. State Farm Mut. Auto. Ins. Co., 60 Va. Cir. 418 (Va. Cir. Ct. Dec. 16, 2002); AES Corp. v. Steadfast Ins. Co., 725 S.E.2d 532, 535 (Va. 2012]

A duty to defend in such circumstances was found in CNA Casualty of Calif. v. Seaboard Surety Co., 176 Cal. App. 3d 598, 222 Cal. Rptr. 276 (1986), and its progeny. Likewise, the insurer may produce undisputed extrinsic evidence that eliminates the possibility of coverage. Montrose Chemical Corp. v. Superior Court, 6 Cal. 4th 287, 304, 24 Cal. Rptr. 2d 467, 861 P.2d 1153 (1993), and Armstrong World Industries Inc. v. Aetna Casualty & Surety Co., 45 Cal. App. 4th 1, 52 Cal. Rptr. 2d 690 (Cal. App. Dist.1 04/30/1996). In probably the most egregious application of the potentiality concept, the California Supreme Court found in Clemmer v. Hartford, 151 Cal. Rptr. 285, 151 Cal. Rptr. 285 (Cal. 12/19/1978) a duty to defend a wrongful death action even though the insured had been tried for first degree murder and convicted of second degree murder. The case arose after the insured, Dr. Lovelace, placed a pistol in a shoe box, took it to his car, and drove across the street (from his apartment) to the gas station. He then left the car and, carrying the gun, approached Dr. Clemmer. He greeted Dr. Clemmer, then shot him twice. These shots were followed by two more shots. Finally, Dr. Lovelace knelt close to the victim and at close range shot him in the head. The gun was placed on the ground. Dr. Lovelace remarked that he knew what he was doing and that Dr. Clemmer was destroying him professionally. The Supreme Court reasoned that there was a potentiality that the jury would find there was no intent on the part of Dr. Lovelace to kill, and concluded:

It is clear, however, that this argument not only ignores the specific language of the instruction — which speaks in terms of intent to “shoot and harm,” not in terms of intent to kill — but refuses to recognize the clear line of authority in this state to the effect that even an act which is “intentional” or “willful” within the meaning of traditional tort principles will not exonerate the insurer from liability under Insurance Code section 533 unless it is done with a “preconceived design to inflict injury.”

If the person insured fails to give notice of a loss but, rather, pays to defend himself, the insurer is not required to pay any fees incurred before the tender of the defense to the insurer. Insua v. Scottsdale Insurance Company, 104 Cal. App. 4th 737, 129 Cal. Rptr. 2d 138 (Cal. App. Dist.2 12/20/2002). The wise insured will immediately report all liability claims to the insurer to avoid a denial of defense costs paid before the tender. The wise insurer will assert its rights under the “no voluntary payments” clause of the policy immediately to avoid claims of waiver.

In Shell Oil Co. v. National Union Fire Ins. Co. (1996) 44 Cal.App.4th 1633 (Shell Oil), the trial court awarded the insured their defense costs for a four-month period prior to tender. The insureds argued they were “‘compelled’ . . . to respond to legal process and to protect their legal interests,” before contacting the carrier. (Id. at p. 1648.) The court of appeal affirmed. Shell Oil is not a prejudice case at all; rather, it is an affirmation that certain claimed “voluntary” payments may in fact be involuntary. The court of appeal essentially concluded substantial evidence supported the finding of involuntariness during the four-month period before the insured found its policy and tendered the defense. See also Fiorito v. Superior Court (1990) 226 Cal.App.3d 433, 438.[2]

Some intentional conduct is inexcusable. Getting drunk and molesting a minor is an inexcusable act and, for insurance purposes, should never be the type of fortuitous conduct that can be insurable. In State Farm Fire And Casualty Company v. Tully, 322 Conn. 566 147 A.3d 1079 (2016) the Supreme Court of Connecticut was asked to find that a voluntarily intoxicated person could not form the intent to harm the minors he molested and negate intent thereby requiring the insurer to defend the insured person against civil claims arising from sexual misconduct with a minor.

State Farm Fire and Casualty Company sought a declaratory judgment that it owed no duty to defend the named defendant, Mark Tully, under a homeowners insurance policy, in a separate civil action filed on behalf of the defendant Child Doe. Tully’s actions fell outside the scope of the policy and, thus, the plaintiff had no duty to defend him under the presumption of intent established in United Services Automobile Assn. V. Marburg, 46 Conn.App. 99, 104–105, 698 A.2d 914 (1997). . .

On July 2, 2012, Doe and two other girls were in the shower area of Winding Trails Park in Farmington. At that time, Doe was fourteen years old and the two other girls were, respectively, thirteen and eight years old. Tully, who was fifty-six years old and “under the influence of intoxicating liquor,” approached the three girls and offered to buy them ice cream. After the girls refused, Tully grabbed Doe’s breast, nearly removing her bathing suit top. Tully then fondled the buttocks of the eight year old girl in Doe’s view…

The obligation of the insurer to defend does not depend on whether the injured party will successfully maintain a cause of action against the insured but on whether he has, in his complaint, stated facts which bring the injury within the coverage. If the latter situation prevails, the policy requires the insurer to defend, irrespective of the insured’s ultimate liability. The insurer’s duty to defend is measured by the allegations of the complaint. On the other hand, if the complaint alleges a liability which the policy does not cover, the insurer is not required to defend. . .

Harmful intent may be inferred at law in circumstances where the alleged behavior in the underlying action is so inherently harmful that the resulting damage is unarguably foreseeable. State Farm argued that Tully’s intent may be presumed in this case as a matter of law under Marburg because the complaint in the underlying civil action alleged sexual misconduct with a minor.

In Marburg, the Appellate Court, in presuming intent to harm as a matter of law when an insured has engaged in sexual misconduct with a minor, did not consider any restrictions on the type or manner of sexual assault of a minor by an adult. This was for good reason. The very nature of the act of sexual abuse of minors, inevitably causes injury extending to emotional harm to minors from sexual abuse in all forms regardless of whether the abuser subjectively meant no harm from his actions, and the abuse was not violent in nature.

Construing the relevant pleadings “broadly,” “realistically” and “reasonably, to contain all that it fairly means,” but not “contorted in such a way so as to strain the bounds of rational comprehension” [Deming v. Nationwide Mutual Ins. Co., 279 Conn. 745, 778, 905 A.2d 623 (2006)] The Supreme Court concluded that the complaint in the underlying civil action alleged that Tully engaged in sexual misconduct with a minor. That complaint, therefore, alleges presumptively intentional conduct on the part of Tully.

Because the complaint in the underlying civil action alleges deliberate sexual misconduct with a minor, the trial court properly allowed the plaintiff to rely on the Marburg presumption of intent in satisfying its initial burden on summary judgment.

As a matter of law, evidence of voluntary intoxication may not be used to negate intent for the purposes of determining whether an insurer owes a duty to defend an insured in cases in which the insured’s intent is presumed because the conduct in question involved sexual misconduct with a minor.

Evidence of voluntary intoxication may never, in any case, serve to negate intent for insurance purposes. The first policy consideration for holding that voluntary intoxication should not operate to negate intent is not to relieve the insured of responsibility, financial and otherwise, for his otherwise intentional actions. Further, permitting voluntary intoxication to negate intent would allow commission of a crime without the requisite responsibility and would create the ability to act unwisely without the requisite financial responsibility.

Tully voluntarily consumed alcohol, went to a local park, attempted to lure children, grabbed one child’s breast, and fondled the buttocks of another. The act of sexual molestation of minors was not unintentional or accidental. The situation at hand is more similar to a scenario in which a driver voluntarily consumes alcohol, gets behind the wheel of a car, sees a pedestrian in the road and then intentionally hits the person with his vehicle. In that situation, the driver’s act of injuring the pedestrian was intentional, despite the driver’s voluntary intoxication, which lowered his inhibition.

Evidence of voluntary intoxication may not negate intent in duty to defend cases in which the insured’s intent is inferred from an underlying complaint that alleges the insured committed sexual misconduct with a minor. Applying this rule to the present case, the trial court properly granted the plaintiff’s motion for summary judgment because the defendants failed, as a matter of law, to rebut the presumption of intent based on Tully’s sexual misconduct with a minor.

The court agreed with the plaintiff and conclude that:

  • the Marburg presumption of intentional conduct based on an insured’s sexual misconduct with a minor remains good law;
  • the trial court properly applied the Marburg presumption in the present case; and
  • evidence of voluntary intoxication may not be used to negate intent in duty to defend cases in which the insured’s intent is inferred from the underlying complaint that alleges that the insured committed sexual misconduct with a minor.

Therefore, State Farm satisfied its burden of demonstrating that no genuine issue of material fact exists insofar as the complaint in the underlying civil action alleges intentional acts and, thus, the plaintiff has no duty to defend Tully. [State Farm Fire and Casualty Company v. Tully, 322 Conn. 566 147 A.3d 1079 (2016)]


© 2019 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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