The Insurer's Duty and the Four Corners Rule

An insurer's duty to defend is broader than its duty to indemnify. See Gilmore v. Beach House Inc., 174 P.3d 439, 443 (Kan. Ct. App. 2008); Farmers Union Mutual Insurance Co. v. Rumph, 170 P.3d 934, 937 (Mont. 2007) (“[t]he duty to defend is independent from and broader than the duty to indemnify”); Knight v. Indiana Ins. Co., 871 N.E.2d 357, 362 (Ind.App.Ct. 2005) (stating insurer's duty to defend is broader than its duty to indemnify). The duty to defend “concerns an insurance company's duty to affirmatively defend its insured against pending claims, while the duty to indemnify involves the insurer's duty to satisfy a judgment entered against the insured party.” Carl's Italian Rest. v. Truck Ins. Exch., 183 P.3d 636, 638 (Colo.Ct.App. 2007). If the insurer has no duty to defend, then by definition it has no duty to indemnify. Trainwreck West Inc. v. Burlington Ins. Co., 235 S.W.3d 33 (Mo. Ct. App. 2007).

When Does an Insurer Have a Duty to Defend?

A duty to defend arises if the claim arguably falls within the policy's coverage. Citizens Ins. Co. v. Secura Ins., 755 N.W.2d 563, 566 (Mich. Ct. App. 2008); Trammell Crow Residential Co. v. Virginia Surety, Civil Action No. 3:08-CV-0501-D, 2008 U.S. Dist. Lexis 97341 (N.D.Tex., Dec. 1, 2008). That is, an insurer has a duty to defend absent “an unequivocal demonstration that the claim against the insured does not fall under the policy's coverage.” Farmers Union, 170 P.3d at 937. Further, an insurer has a duty to defend if the allegations of the complaint are not definitive as to coverage. Lavoi Corp. v. National Fire Ins. of Hartford, 666 S.E.2d 387, 395 (Ga. Ct. App. 2008); Hochheim Prairie Casualty Ins. Co. v. Appleby, 255 S.W.3d 146, 149 (Tex. App. 2008) (insurer has a duty to defend if the allegations of the complaint raise a potential for coverage under the insured's policy); State Farm Fire And Casualty Co. v. Superior Court of Los Angeles County, 78 Cal.Rptr.3d 828, 832 (Cal. Ct. App. 2008) (insurer has a duty to defend “even where coverage is in doubt and ultimately does not develop”). All questions must be resolved in favor of the insured. Lavoi, 666 S.E.2d at 395.

In addition, an insurer's duty to defend is not restricted to meritorious suits. Citizens Ins., 755 N.W.2d at 566. Rather, an insurer has a duty to defend against claims which are false, fraudulent or groundless, as long as the claims arguably come within the policy's coverage. Id.; Lavoi, 666 S.E.2d at 395. A duty to defend exists, “despite theories of liability asserted against any insured which are not covered under the policy, if there are any theories of recovery that fall within the policy.” Citizens Ins., 755 N.W.2d at 566.

An insurer may decline to defend the insured if no conceivable theory would bring the claim within the policy's coverage. State Farm, 78 Cal.Rptr.3d at 832; Peterson, 724 N.W.2d at 773 (“[i]f, according to the facts alleged in a pleading and ascertained by an insurer, the insurer has no potential liability to its insured under the insurance agreement, then the insurer may properly refuse to defend its insured”); Penn-Am., 490 S.E.2d at 376 (“only where the complaint sets forth true factual allegations showing no coverage that the suit is one for which liability insurance coverage is not afforded and for which the insurer need not provide a defense). After all, the duty to defend is not unlimited. See State Farm, 78 Cal.Rptr.
3d at 832. An insurer also need not defend if the claims are solely, entirely and unambiguously within a policy exclusion. Carl's Italian, 183 P.3d at 639. The insurer bears the burden of establishing the applicability of a policy exclusion. Hochheim Prairie, 255 S.W.3d at 149; Peterson, 724 N.W.2d at 774 (“the burden to prove that an exclusionary clause applies rests on the insurer”); Carl's Italian, 183 P.3d at 639 (stating that the insurer does not have a duty to defend if the insurer establishes that the claim is entirely within a policy exclusion and not subject to any other reasonable interpretation).

If the insurer decides not to defend because it concludes that the claim is outside the policy or within a policy exclusion, the insurer does so at its own peril. See Knight, 871 N.E.2d at 362. Thus, an insurer must draw a distinction between a groundless suit, on the one hand, and actions, which even if successful, would not fall within the policy's coverage. Great American Ins. Co. v. McKemie, 259 S.E.2d 39, 40 (Ga. 1979). If the insurer determines that no duty to defend exists, the insurer may protect its own interests by filing a declaratory judgment action for a judicial determination of its obligations or may defend its insured under a reservation of rights. See Newnam Manufacturing, Inc. v. Transcontinental Ins. Co., 871 N.E.2d 396, 401 (Ind. Ct. App. 2007). In many jurisdictions, an insurer defending under a reservation of rights must retain independent counsel to defend the insured. See, e.g., Williams v. Amer. Country Ins. Co., 833 N.E.2d 971 (Ill. App. 2005) (conflict arising from insurer's reservation of rights gives insured right to choose independent counsel); CHI of Alaska, Inc. v. Employers Reins. Corp., 844 P.2d 1113 (Alaska 1993) (same). See also Robert P. Alpert and Jeffrey K. Douglass, “Conflicts of Interest Between an Insurer and Its Insured: The Insured's Right to Independent Counsel,” Insurance Coverage Law Bulletin, Volume 7, Number 7, August 2008.

Sources for Determining Whether the Insurer Has a Duty to Defend

The Four Corners Approach

In determining whether the insurer has a duty to defend, some courts look solely at the allegations within the four corners of the complaint and within the four corners of the policy. See Hochheim Prairie, 255 S.W.3d at 149 (stating that if a complaint does not allege facts within the scope of the policy's coverage, an insurer does not have a duty to defend); Trammell, 2008 U.S. Dist. Lexis 97341; Collins Holding Corp. v. Wausau Underwriters Ins. Co., 666 S.E.2d 897, 899 (S.C. 2008). Such an approach to the duty to defend is known as the “four corners rule.” See Trammell, 2008 U.S. Dist. Lexis 97341. If the complaint does not allege facts within the scope of the coverage, “an insurer is not legally required to defend a suit against its insured.” Hochheim Prairie, 255 S.W.3d at 149. Thus, facts not stated in the complaint, even if easily ascertainable, are not considered in adjudicating the duty to defend. Id.

In Trammell, a third party alleged that the insured was liable for discrimination against persons with disabilities in violation of the Fair Housing Act and the American Disabilities Act of 1990. 2008 U.S. Dist. Lexis 97341. An endorsement to the insured's commercial general liability insurance policy tagged the insurer with a duty to defend against any suit seeking damages for a covered “personal injury,” and the policy specifically stated that discrimination because of a physical disability fell under the personal injury provision. Id. The insurer declined to defend on the grounds that the complaint did not allege facts that could be considered a personal injury, the alleged discrimination occurred outside of the policy period, and the alleged discrimination fell within the willful violation of an ordinance exclusion. Id. The court rejected the insurer's contention, stating that the insured had “established beyond peradventure that [the] complaint state[d] claims that potentially [fell] within the [p]olicy's coverage, and because [the insurer failed] to raise a genuine issue of material fact concerning the application of any policy exclusion.” Id.

Moreover, among the courts that follow the four corners rule, it has been held that “in examining the complaint, the court must look beyond the labels describing the acts to the acts themselves which form the basis of the claim against the insurer.” Collins Holding, 666 S.E.2d at 899. In Collins, a third-party filed suit against the insured, a distributor of “then-legal” gambling machines, for harm caused by the gambling machines. Id. The insurer declined to defend because it believed that the allegations in the complaint did not constitute an “occurrence” within the policy, which was defined as an accident. Id. The court held that the insurer did not breach its duty to defend because the “complaint did not allege the possibility of an occurrence as defined in the policy.” Id. The court reasoned that the allegations were intentional, not accidental, in nature, and that the negligent misrepresentation claim, which would ordinarily trigger a duty to defend, incorporated the same intentional facts and did not allege an occurrence. Id. The court noted that a court must look beyond the mere labels of the cause of action and must look at the underlying facts of the complaint to determine if the cause of action is supported by facts that would trigger the duty to defend. Id.

Beyond the Four Corner of the Complaint

Other courts venture outside the four corners of the complaint to determine whether the insurer has a duty to defend. Citizens Ins., 755 N.W.2d at 566; Sarkis v. Cincinnati Ins. Co., Case No. 280860 (Mich. Ct. App., Nov. 13, 2008); USAA Property & Casualty Ins. Co. v. Clegg, 661 S.E.2d 791, 798 (S.C. 2008) (the duty to defend may be determined by facts outside of the complaint that are known by the insurer); Great Western Drywall Inc. v. Interstate Fire & Casualty Co., 74 Cal.Rptr.3d 657, 662 (Cal. Ct. App. 2008) (“[t]he determination of whether the duty to defend arises is made by comparing the terms of the policy with the allegations of the complaint and any known extrinsic facts”). If the insurer's duty to defend does not arise from the four corners of the complaint, the duty to defend still may arise where the insurer has knowledge of or should have become aware of extrinsic facts after a reasonable investigation. Gilmore, 174 P.3d at 443; Southwest Steal Coil, Inc. v. Redwood Fire & Casualty Ins. Co., 148 P.3d 806, 812; Jolley v. Marquis, 923 A.2d 264, 271 (N.J. Super. Ct. App. Div., 2007) (stating that “to allow the insurance company to construct a formal fortress of the pleadings and to retreat behind its walls, thereby successfully ignoring true but unpleaded facts within its knowledge that require it, under the insurance policy, to conduct the putative insured's defense, would not be fair”). In addition, the courts that go beyond the four corners of the complaint reason that if an insurer did not have a duty to investigate facts outside the complaint, the courts would be allowing the allegations of a third party to determine the insured's rights under the contract. Colonial Oil Indus. Inc. v. Underwriters Subscribing to Policy Nos. T031504670 and T031504671, 491 S.E.2d 337, 339 (Ga. 1997). Finally, if true facts were ascertainable to the insurer at the time the complaint was filed, the insurer has a duty to defend the insured as if the complaint against the insured falsely alleged coverage.” Penn-Am., 490 S.E.2d 374 (Ga. 1997).

In Citizens Ins., 755 N.W.2d at 565, a potential insured under his mother's policy, was involved in a car accident while driving his mother's car. Two people died and two were critically injured. The son's insurer notified the mother's insurer that it had a duty to defend, but the mother's insurer declined to defend. Id. at 566. The son's insurer alleged that the driver was an insured of the mother's insurer because state law required properly certified insurance policies to insure any person operating the vehicle with the owner's consent. Id. The court held that the underlying complaints, coupled with a rebuttable presumption under state law that the driver had consent, was enough to conclude that the mother's insurer had a duty to defend. Id. at 566-67. The court reasoned that the insurer's argument that the driver was operating the vehicle without the owner's consent did not defeat the insurer's duty to defend. Id. at 567-568.

In Southwest Steel, the insured was sued by the estate of an individual who died while working at the insured's plant. 148 P.3d at 808. The insurer declined to defend the insured, contending that the decedent was not the insured's employee for purposes of triggering the policy's coverage. Id. The court, however, found a duty to defend. Id. at 812. While noting that the complaint did not allege that the decedent was an employee of the insured, the court found that an affidavit and other exhibits “created a question of fact regarding the decedent's employment status, [that] could be considered sufficient to arguably bring the decedent's claim within the policy coverages, thereby creating a duty to defend.” Southwest Steal Coil, Inc. v. Redwood Fire & Casualty Ins. Co., 148 P.3d 806, 812.

Finally, in Sarkis, the insured allegedly assaulted a third party after the insured threw a drink at the third party's face. Case No. 280860. The insured argued that its homeowner's insurer had a duty to defend because the policy provided coverage for an accident that resulted in personal or bodily injury. Id. The court found a duty to defend because of doubt as to coverage. Id. The court noted that even though the complaint clearly set forth only allegations of intentional acts, a deposition raised barely enough information to determine that coverage was arguable. Id. The court also noted that the doubt, “slim though it might be, must be resolved in the insured's favor.” Id.

Beyond the Four Corners upon Insured's Notification

Some courts hold that the insurer does not have a duty to investigate unless and until the insured notifies the insurer about the facts that would bring the claim under the policy's coverage. JLM Enterprises, Inc. v. Houston Gen. Ins. Co., 196 F. Supp. 2d 1299 (S.D. Ga. 2002); Lawyers Title Ins. Corp. v. Stribling, Case No. A08A1073 (Ga. Ct. App., Nov. 5, 2008). Specifically, if the complaint on its face does not trigger coverage, but the insured notifies the insurer of facts that would trigger such coverage, the insurer has a duty to make a reasonable investigation into the insured's contentions. Lawyers Title, Case No. A08A1073 (stating that requiring the insurer to make a reasonable investigation in the limited circumstances in which the insured notifies the insurer is not an unreasonable burden). The requirement that the insured notify the insurer is reasonable because the insured is in the best position to investigate and reveal facts that will address the issue of coverage. Colonial Oil, 491 S.E.2d at 338.

In Colonial Oil, the insured was sued for allegedly dumping hazardous materials on the property of a third party. 491 S.E.2d at 338. The insurer declined to defend the insured because the insurer believed the allegations of waste and pollution fell within a policy exclusion. Id. The court held that the insurer breached its duty to defend, because the insured maintained that the material did not contain waste or pollution and that the insured's notice triggered the insurer's duty to investigate. Id. at 338-39. The court noted that the insurer's reasonable investigation would have revealed the possible existence of coverage. Id. at 339. The court also noted that “an insurer who fails to investigate its insured's contentions and refuses a defense will be liable for a breach of the duty to defend if a reasonable investigation at the time would have established the potential for coverage.” Id. The court finally noted that “to relieve an insurer of any duty to investigate its insured's contentions would allow the allegations of a third-party to determine the insured's rights under the contract.” Id.

Beyond the Four Corners in Precluding a Duty to Defend

Some courts allow the insurer to conduct a reasonable investigation to determine that a duty to defend does not exist. Gilmore, 174 P.3d at 443. Specifically, where an insurer's investigation of the facts underlying the complaint reveals that a claim that is patently outside of the policy coverage, the insurer properly may refuse to defend. Liberty Mutual Ins. Co. v. Michigan Mutual Ins. Co., 891 N.E.2d 99, 105 (Ind. Ct. App. 2008) (affirming trial court's determination that insurer had no duty to defend because the isolated connection was insufficient to bring the accident within the coverage of the policy under the additional insured endorsement); Newnam Manufacturing, 871 N.E.2d at 401 (stating that if an insurer's independent investigation of the facts underlying a complaint against its insured reveals a claim is patently outside of the risks covered by the policy, the insurer may properly refuse to defend). In fulfilling its duty to investigate, it has been held that the insurer must investigate relevant facts from all available sources. Peterson, 724 N.W.2d at 773.

In Gilmore, an intoxicated patron of the insured sustained a head injury after the patron was intentionally pushed from behind by another individual and slipped on the insured's icy steps. 174 P.3d at 441. The insured had a commercial general liability policy, which alternatively contained an assault and battery exclusion. Id. The patron filed a complaint, alleging negligence and assault and battery against the insured. Id. at 443. The insurer declined to defend, citing the assault and battery exclusion in the policy. Id. The court held that the insurer had no duty to defend the insured because the complaint and the insurer's investigation revealed that the underlying action fell under the assault and battery exclusion. Id. at 444. In so holding, the court noted that the insurer's investigation of the claims, the police reports, and the interviews of witnesses, all indicated that assault and battery was the cause of the patron's injuries. Id. at 443-444.

In Peterson, the third-party filed a complaint for defamation as a result of the insured's statements concerning the third-party's professional competence. 724 N.W.2d at 769-70. The insured had a homeowner's insurance policy and a personal umbrella policy, both of which were issued by the same insurer. Id. at 770. The insurer denied coverage under both policies, determining that the defamation claim fell within the business pursuits exclusions of the policies. Id. at 772. The insured argued that the insurer had investigated insufficiently before declining to defend, thereby triggering a duty to defend. Id. at 774. The court held that, regardless of the insurer's investigation, the allegations and claims fell squarely within the policy exceptions and no additional facts supported coverage. Id. at 773. The court further stated that “an insurer's incomplete investigation without more, does not establish that it had a duty to defend a concluded lawsuit against its insured. Rather, it must be shown that a more thorough investigation would have disclosed facts which would establish the existence of a duty.” Id. at 774.

Although some courts hold that the insurer may conduct a reasonable investigation to determine that a claim does not fall within the policy coverage, other courts hold that the insurer may not rely on facts outside the complaint to decline to defend the insured. Woo v. Fireman's Fund Ins. Co., 164 P.3d 454 (Wash. 2007) (en banc). In Woo, the insured, a dentist, as a practical joke, inserted boar tusk flippers during a dental procedure on one of the insured's employees while the employee was under anesthesia. Woo, 164 P.3d at 457. The insured took photographs of the boar tusk flippers inside of the employee's mouth and the employee eventually was shown the photographs. Id. The employee quit her job and filed suit against the insured alleging, among other things, battery,
invasion of privacy, false light, medical negligence and lack of informed consent. Id. at 458. The insurer refused to defend the insured on the grounds that the actions alleged fell outside of the policy's coverage. Id. The court held that that the insurer had a duty to defend under the professional liability and general liability provisions of the policy, because the acts conceivably fell within the policy's coverage and the duty to defend is premised upon the possibility of liability, not upon actual liability. Id. at 463-6. More importantly, the court stated that “[t]he insurer may not rely on facts extrinsic to the complaint to deny the duty to defend ' it may do so only to trigger the duty.” Id. at 460.

Conclusion

In conclusion, an insurer has a duty to defend if the claim against the insured arguably falls within the insurance policy's coverage. To make such a determination, some courts will look solely at the four corners of the complaint. Other courts, however, will look at both the complaint and extrinsic facts to determine whether the insurer has a duty to defend.

Lewis E. Hassett, a member of this newsletter's Board of Editors, is a partner in the Atlanta office of Morris, Manning & Martin, LLP, and is co-chair of the firm's Insurance and Reinsurance Group. Jason T. Cummings is an associate in the Atlanta office of the firm. His practice focuses on insurance regulatory and coverage matters.

An insurer has a duty to defend a claim that is arguably within the policy's coverage. While some courts look solely to the complaint to determine the existence of a duty to defend, other courts consider extrinsic facts. This article discusses the parameters of the duty to defend, and identifies the evidence to be considered in analyzing that duty.

An Insurer's Duty to Defend Is Broader Than Its Duty to Indemnify

Coverage under a typical occurrence-based liability insurance policy consists of two separate and distinct obligations owed by the insurer to the insured. First is the insurer's duty to defend the insured against certain litigation. The other is the insurer's duty to indemnify the insured for any insured loss. See Peterson v. Ohio Casualty Group , 724 N.W.2d 765, 772 (Neb. 2006); Penn-Am. Ins. Co. v. Disabled Am. Veterans, Inc. , 490 S.E.2d 374 (Ga. 1997) (an insurer's duty to indemnify and its duty to defend are separate and distinct obligations); Regal Homes, Inc. v. CNA Ins. , 171 P.3d 610, 615 (Ariz. Ct. App. 2007) (noting an insurer's duty to defend is not the same as its duty to indemnify); Owners Ins. Co. v. Nationwide Ins. Co. , 854 N.E.2d 1120, 1123 (Ohio Ct. App. 2006) (“[i]n an insurance policy, an insurer promises to both indemnify the insured for losses incurred by the insured that arise out of the occurrence of a risk identified in the policy and defend the insured in an action arising because of that occurrence”); Dutton-Lainson Co. v. Continental Ins. Co. of New York , 716 N.W.2d 87 (Neb. 2006) (stating coverage under a typical insurance policy includes the duty to defend any suit filed against the insured and “the duty to pay, on behalf of the insured, sums for which the insured shall become legally obligated to pay because of injury caused to a third party by acts of the insured”).

An insurer's duty to defend is broader than its duty to indemnify. See Gilmore v. Beach House Inc. , 174 P.3d 439, 443 (Kan. Ct. App. 2008); Farmers Union Mutual Insurance Co. v. Rumph , 170 P.3d 934, 937 (Mont. 2007) (“[t]he duty to defend is independent from and broader than the duty to indemnify”); Knight v. Indiana Ins. Co. , 871 N.E.2d 357, 362 (Ind.App.Ct. 2005) (stating insurer's duty to defend is broader than its duty to indemnify). The duty to defend “concerns an insurance company's duty to affirmatively defend its insured against pending claims, while the duty to indemnify involves the insurer's duty to satisfy a judgment entered against the insured party.” Carl's Italian Rest. v. Truck Ins. Exch. , 183 P.3d 636, 638 (Colo.Ct.App. 2007). If the insurer has no duty to defend, then by definition it has no duty to indemnify. Trainwreck West Inc. v. Burlington Ins. Co. , 235 S.W.3d 33 (Mo. Ct. App. 2007).

When Does an Insurer Have a Duty to Defend?

A duty to defend arises if the claim arguably falls within the policy's coverage. Citizens Ins. Co. v. Secura Ins. , 755 N.W.2d 563, 566 (Mich. Ct. App. 2008); Trammell Crow Residential Co. v. Virginia Surety, Civil Action No. 3:08-CV-0501-D, 2008 U.S. Dist. Lexis 97341 (N.D.Tex., Dec. 1, 2008). That is, an insurer has a duty to defend absent “an unequivocal demonstration that the claim against the insured does not fall under the policy's coverage.” Farmers Union, 170 P.3d at 937. Further, an insurer has a duty to defend if the allegations of the complaint are not definitive as to coverage. Lavoi Corp. v. National Fire Ins. of Hartford , 666 S.E.2d 387, 395 (Ga. Ct. App. 2008); Hochheim Prairie Casualty Ins. Co. v. Appleby , 255 S.W.3d 146, 149 (Tex. App. 2008) (insurer has a duty to defend if the allegations of the complaint raise a potential for coverage under the insured's policy); State Farm Fire And Casualty Co. v. Superior Court of Los Angeles County , 78 Cal.Rptr.3d 828, 832 (Cal. Ct. App. 2008) (insurer has a duty to defend “even where coverage is in doubt and ultimately does not develop”). All questions must be resolved in favor of the insured. Lavoi, 666 S.E.2d at 395.

In addition, an insurer's duty to defend is not restricted to meritorious suits. Citizens Ins., 755 N.W.2d at 566. Rather, an insurer has a duty to defend against claims which are false, fraudulent or groundless, as long as the claims arguably come within the policy's coverage. Id.; Lavoi, 666 S.E.2d at 395. A duty to defend exists, “despite theories of liability asserted against any insured which are not covered under the policy, if there are any theories of recovery that fall within the policy.” Citizens Ins., 755 N.W.2d at 566.

An insurer may decline to defend the insured if no conceivable theory would bring the claim within the policy's coverage. State Farm, 78 Cal.Rptr.3d at 832; Peterson, 724 N.W.2d at 773 (“[i]f, according to the facts alleged in a pleading and ascertained by an insurer, the insurer has no potential liability to its insured under the insurance agreement, then the insurer may properly refuse to defend its insured”); Penn-Am., 490 S.E.2d at 376 (“only where the complaint sets forth true factual allegations showing no coverage that the suit is one for which liability insurance coverage is not afforded and for which the insurer need not provide a defense). After all, the duty to defend is not unlimited. See State Farm, 78 Cal.Rptr.
3d at 832. An insurer also need not defend if the claims are solely, entirely and unambiguously within a policy exclusion. Carl's Italian, 183 P.3d at 639. The insurer bears the burden of establishing the applicability of a policy exclusion. Hochheim Prairie, 255 S.W.3d at 149; Peterson, 724 N.W.2d at 774 (“the burden to prove that an exclusionary clause applies rests on the insurer”); Carl's Italian, 183 P.3d at 639 (stating that the insurer does not have a duty to defend if the insurer establishes that the claim is entirely within a policy exclusion and not subject to any other reasonable interpretation).

If the insurer decides not to defend because it concludes that the claim is outside the policy or within a policy exclusion, the insurer does so at its own peril. See Knight, 871 N.E.2d at 362. Thus, an insurer must draw a distinction between a groundless suit, on the one hand, and actions, which even if successful, would not fall within the policy's coverage. Great American Ins. Co. v. McKemie , 259 S.E.2d 39, 40 (Ga. 1979). If the insurer determines that no duty to defend exists, the insurer may protect its own interests by filing a declaratory judgment action for a judicial determination of its obligations or may defend its insured under a reservation of rights. See Newnam Manufacturing, Inc. v. Transcontinental Ins. Co. , 871 N.E.2d 396, 401 (Ind. Ct. App. 2007). In many jurisdictions, an insurer defending under a reservation of rights must retain independent counsel to defend the insured. See, e.g., Williams v. Amer. Country Ins. Co. , 833 N.E.2d 971 (Ill. App. 2005) (conflict arising from insurer's reservation of rights gives insured right to choose independent counsel); CHI of Alaska, Inc. v. Employers Reins. Corp. , 844 P.2d 1113 (Alaska 1993) (same). See also Robert P. Alpert and Jeffrey K. Douglass, “Conflicts of Interest Between an Insurer and Its Insured: The Insured's Right to Independent Counsel,” Insurance Coverage Law Bulletin, Volume 7, Number 7, August 2008.

Sources for Determining Whether the Insurer Has a Duty to Defend

The Four Corners Approach

In determining whether the insurer has a duty to defend, some courts look solely at the allegations within the four corners of the complaint and within the four corners of the policy. See Hochheim Prairie, 255 S.W.3d at 149 (stating that if a complaint does not allege facts within the scope of the policy's coverage, an insurer does not have a duty to defend); Trammell , 2008 U.S. Dist. Lexis 97341; Collins Holding Corp. v. Wausau Underwriters Ins. Co. , 666 S.E.2d 897, 899 (S.C. 2008). Such an approach to the duty to defend is known as the “four corners rule.” See Trammell , 2008 U.S. Dist. Lexis 97341. If the complaint does not allege facts within the scope of the coverage, “an insurer is not legally required to defend a suit against its insured.” Hochheim Prairie, 255 S.W.3d at 149. Thus, facts not stated in the complaint, even if easily ascertainable, are not considered in adjudicating the duty to defend. Id.

In Trammell, a third party alleged that the insured was liable for discrimination against persons with disabilities in violation of the Fair Housing Act and the American Disabilities Act of 1990. 2008 U.S. Dist. Lexis 97341. An endorsement to the insured's commercial general liability insurance policy tagged the insurer with a duty to defend against any suit seeking damages for a covered “personal injury,” and the policy specifically stated that discrimination because of a physical disability fell under the personal injury provision. Id. The insurer declined to defend on the grounds that the complaint did not allege facts that could be considered a personal injury, the alleged discrimination occurred outside of the policy period, and the alleged discrimination fell within the willful violation of an ordinance exclusion. Id. The court rejected the insurer's contention, stating that the insured had “established beyond peradventure that [the] complaint state[d] claims that potentially [fell] within the [p]olicy's coverage, and because [the insurer failed] to raise a genuine issue of material fact concerning the application of any policy exclusion.” Id.

Moreover, among the courts that follow the four corners rule, it has been held that “in examining the complaint, the court must look beyond the labels describing the acts to the acts themselves which form the basis of the claim against the insurer.” Collins Holding, 666 S.E.2d at 899. In Collins, a third-party filed suit against the insured, a distributor of “then-legal” gambling machines, for harm caused by the gambling machines. Id. The insurer declined to defend because it believed that the allegations in the complaint did not constitute an “occurrence” within the policy, which was defined as an accident. Id. The court held that the insurer did not breach its duty to defend because the “complaint did not allege the possibility of an occurrence as defined in the policy.” Id. The court reasoned that the allegations were intentional, not accidental, in nature, and that the negligent misrepresentation claim, which would ordinarily trigger a duty to defend, incorporated the same intentional facts and did not allege an occurrence. Id. The court noted that a court must look beyond the mere labels of the cause of action and must look at the underlying facts of the complaint to determine if the cause of action is supported by facts that would trigger the duty to defend. Id.

Beyond the Four Corner of the Complaint

Other courts venture outside the four corners of the complaint to determine whether the insurer has a duty to defend. Citizens Ins., 755 N.W.2d at 566; Sarkis v. Cincinnati Ins. Co., Case No. 280860 (Mich. Ct. App., Nov. 13, 2008); USAA Property & Casualty Ins. Co. v. Clegg , 661 S.E.2d 791, 798 (S.C. 2008) (the duty to defend may be determined by facts outside of the complaint that are known by the insurer); Great Western Drywall Inc. v. Interstate Fire & Casualty Co. , 74 Cal.Rptr.3d 657, 662 (Cal. Ct. App. 2008) (“[t]he determination of whether the duty to defend arises is made by comparing the terms of the policy with the allegations of the complaint and any known extrinsic facts”). If the insurer's duty to defend does not arise from the four corners of the complaint, the duty to defend still may arise where the insurer has knowledge of or should have become aware of extrinsic facts after a reasonable investigation. Gilmore, 174 P.3d at 443; Southwest Steal Coil, Inc. v. Redwood Fire & Casualty Ins. Co. , 148 P.3d 806, 812; Jolley v. Marquis , 923 A.2d 264, 271 (N.J. Super. Ct. App. Div., 2007) (stating that “to allow the insurance company to construct a formal fortress of the pleadings and to retreat behind its walls, thereby successfully ignoring true but unpleaded facts within its knowledge that require it, under the insurance policy, to conduct the putative insured's defense, would not be fair”). In addition, the courts that go beyond the four corners of the complaint reason that if an insurer did not have a duty to investigate facts outside the complaint, the courts would be allowing the allegations of a third party to determine the insured's rights under the contract. Colonial Oil Indus. Inc. v. Underwriters Subscribing to Policy Nos. T031504670 and T031504671 , 491 S.E.2d 337, 339 (Ga. 1997). Finally, if true facts were ascertainable to the insurer at the time the complaint was filed, the insurer has a duty to defend the insured as if the complaint against the insured falsely alleged coverage.” Penn-Am., 490 S.E.2d 374 (Ga. 1997).

In Citizens Ins., 755 N.W.2d at 565, a potential insured under his mother's policy, was involved in a car accident while driving his mother's car. Two people died and two were critically injured. The son's insurer notified the mother's insurer that it had a duty to defend, but the mother's insurer declined to defend. Id. at 566. The son's insurer alleged that the driver was an insured of the mother's insurer because state law required properly certified insurance policies to insure any person operating the vehicle with the owner's consent. Id. The court held that the underlying complaints, coupled with a rebuttable presumption under state law that the driver had consent, was enough to conclude that the mother's insurer had a duty to defend. Id. at 566-67. The court reasoned that the insurer's argument that the driver was operating the vehicle without the owner's consent did not defeat the insurer's duty to defend. Id. at 567-568.

In Southwest Steel, the insured was sued by the estate of an individual who died while working at the insured's plant. 148 P.3d at 808. The insurer declined to defend the insured, contending that the decedent was not the insured's employee for purposes of triggering the policy's coverage. Id. The court, however, found a duty to defend. Id. at 812. While noting that the complaint did not allege that the decedent was an employee of the insured, the court found that an affidavit and other exhibits “created a question of fact regarding the decedent's employment status, [that] could be considered sufficient to arguably bring the decedent's claim within the policy coverages, thereby creating a duty to defend.” Southwest Steal Coil, Inc. v. Redwood Fire & Casualty Ins. Co. , 148 P.3d 806, 812.

Finally, in Sarkis, the insured allegedly assaulted a third party after the insured threw a drink at the third party's face. Case No. 280860. The insured argued that its homeowner's insurer had a duty to defend because the policy provided coverage for an accident that resulted in personal or bodily injury. Id. The court found a duty to defend because of doubt as to coverage. Id. The court noted that even though the complaint clearly set forth only allegations of intentional acts, a deposition raised barely enough information to determine that coverage was arguable. Id. The court also noted that the doubt, “slim though it might be, must be resolved in the insured's favor.” Id.

Beyond the Four Corners upon Insured's Notification

Some courts hold that the insurer does not have a duty to investigate unless and until the insured notifies the insurer about the facts that would bring the claim under the policy's coverage. JLM Enterprises, Inc. v. Houston Gen. Ins. Co. , 196 F. Supp. 2d 1299 (S.D. Ga. 2002); Lawyers Title Ins. Corp. v. Stribling, Case No. A08A1073 (Ga. Ct. App., Nov. 5, 2008). Specifically, if the complaint on its face does not trigger coverage, but the insured notifies the insurer of facts that would trigger such coverage, the insurer has a duty to make a reasonable investigation into the insured's contentions. Lawyers Title, Case No. A08A1073 (stating that requiring the insurer to make a reasonable investigation in the limited circumstances in which the insured notifies the insurer is not an unreasonable burden). The requirement that the insured notify the insurer is reasonable because the insured is in the best position to investigate and reveal facts that will address the issue of coverage. Colonial Oil, 491 S.E.2d at 338.

In Colonial Oil, the insured was sued for allegedly dumping hazardous materials on the property of a third party. 491 S.E.2d at 338. The insurer declined to defend the insured because the insurer believed the allegations of waste and pollution fell within a policy exclusion. Id. The court held that the insurer breached its duty to defend, because the insured maintained that the material did not contain waste or pollution and that the insured's notice triggered the insurer's duty to investigate. Id. at 338-39. The court noted that the insurer's reasonable investigation would have revealed the possible existence of coverage. Id. at 339. The court also noted that “an insurer who fails to investigate its insured's contentions and refuses a defense will be liable for a breach of the duty to defend if a reasonable investigation at the time would have established the potential for coverage.” Id. The court finally noted that “to relieve an insurer of any duty to investigate its insured's contentions would allow the allegations of a third-party to determine the insured's rights under the contract.” Id.

Beyond the Four Corners in Precluding a Duty to Defend

Some courts allow the insurer to conduct a reasonable investigation to determine that a duty to defend does not exist. Gilmore, 174 P.3d at 443. Specifically, where an insurer's investigation of the facts underlying the complaint reveals that a claim that is patently outside of the policy coverage, the insurer properly may refuse to defend. Liberty Mutual Ins. Co. v. Michigan Mutual Ins. Co. , 891 N.E.2d 99, 105 (Ind. Ct. App. 2008) (affirming trial court's determination that insurer had no duty to defend because the isolated connection was insufficient to bring the accident within the coverage of the policy under the additional insured endorsement); Newnam Manufacturing, 871 N.E.2d at 401 (stating that if an insurer's independent investigation of the facts underlying a complaint against its insured reveals a claim is patently outside of the risks covered by the policy, the insurer may properly refuse to defend). In fulfilling its duty to investigate, it has been held that the insurer must investigate relevant facts from all available sources. Peterson, 724 N.W.2d at 773.

In Gilmore, an intoxicated patron of the insured sustained a head injury after the patron was intentionally pushed from behind by another individual and slipped on the insured's icy steps. 174 P.3d at 441. The insured had a commercial general liability policy, which alternatively contained an assault and battery exclusion. Id. The patron filed a complaint, alleging negligence and assault and battery against the insured. Id. at 443. The insurer declined to defend, citing the assault and battery exclusion in the policy. Id. The court held that the insurer had no duty to defend the insured because the complaint and the insurer's investigation revealed that the underlying action fell under the assault and battery exclusion. Id. at 444. In so holding, the court noted that the insurer's investigation of the claims, the police reports, and the interviews of witnesses, all indicated that assault and battery was the cause of the patron's injuries. Id. at 443-444.

In Peterson, the third-party filed a complaint for defamation as a result of the insured's statements concerning the third-party's professional competence. 724 N.W.2d at 769-70. The insured had a homeowner's insurance policy and a personal umbrella policy, both of which were issued by the same insurer. Id. at 770. The insurer denied coverage under both policies, determining that the defamation claim fell within the business pursuits exclusions of the policies. Id. at 772. The insured argued that the insurer had investigated insufficiently before declining to defend, thereby triggering a duty to defend. Id. at 774. The court held that, regardless of the insurer's investigation, the allegations and claims fell squarely within the policy exceptions and no additional facts supported coverage. Id. at 773. The court further stated that “an insurer's incomplete investigation without more, does not establish that it had a duty to defend a concluded lawsuit against its insured. Rather, it must be shown that a more thorough investigation would have disclosed facts which would establish the existence of a duty.” Id. at 774.

Although some courts hold that the insurer may conduct a reasonable investigation to determine that a claim does not fall within the policy coverage, other courts hold that the insurer may not rely on facts outside the complaint to decline to defend the insured. Woo v. Fireman's Fund Ins. Co. , 164 P.3d 454 (Wash. 2007) (en banc). In Woo, the insured, a dentist, as a practical joke, inserted boar tusk flippers during a dental procedure on one of the insured's employees while the employee was under anesthesia. Woo, 164 P.3d at 457. The insured took photographs of the boar tusk flippers inside of the employee's mouth and the employee eventually was shown the photographs. Id. The employee quit her job and filed suit against the insured alleging, among other things, battery,
invasion of privacy, false light, medical negligence and lack of informed consent. Id. at 458. The insurer refused to defend the insured on the grounds that the actions alleged fell outside of the policy's coverage. Id. The court held that that the insurer had a duty to defend under the professional liability and general liability provisions of the policy, because the acts conceivably fell within the policy's coverage and the duty to defend is premised upon the possibility of liability, not upon actual liability. Id. at 463-6. More importantly, the court stated that “[t]he insurer may not rely on facts extrinsic to the complaint to deny the duty to defend ' it may do so only to trigger the duty.” Id. at 460.

Conclusion

In conclusion, an insurer has a duty to defend if the claim against the insured arguably falls within the insurance policy's coverage. To make such a determination, some courts will look solely at the four corners of the complaint. Other courts, however, will look at both the complaint and extrinsic facts to determine whether the insurer has a duty to defend.

Lewis E. Hassett, a member of this newsletter's Board of Editors, is a partner in the Atlanta office of Morris, Manning & Martin, LLP, and is co-chair of the firm's Insurance and Reinsurance Group. Jason T. Cummings is an associate in the Atlanta office of the firm. His practice focuses on insurance regulatory and coverage matters.