Four Corners Rule Deprives Contractor of Defense
In states that apply the four-corners or eight-corners rule the determination of the duty to defend is limited to the allegations of the suit rather than the actual facts that brought about the suit. As a result an artful pleader can either cause coverage to be applied or refused. Other states allow the court to consider extrinsic evidence when determining the duty to defend.
In Lenick Construction, Inc. v. Selective Way Insurance Company, No. 16-1891, United States Court Of Appeals For The Third Circuit (June 6, 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 paneling, 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.
In February 2013, 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.
If the complaint filed against the insured avers facts which would support a recovery that is covered by the policy, it is the duty of the insurer to defend until such time as the claim is confined to a recovery that the policy does not cover.
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 and 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.
© 2018 – 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 firstname.lastname@example.org.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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