The general rule for determining whether a duty to defend exists for a particular claim is easily stated. If the allegations against the insured fall within the scope of coverage afforded by a liability policy, then the insurer has a duty to defend its insured. This general rule is commonly referred to as the four corners rule.
However, insurers frequently face a dilemma in determining whether they have a duty to defend where the allegations in a tendered suit arguably fall within the scope of coverage under the policy, but undisputed facts known by the insurer — but not within the four corners of the complaint — justify a denial of coverage. For example, an insured may tender a construction defect claim to an insurer where the complaint fails to reference to the dates that the insured performed the construction work, although the insurer knows that the insured began and completed all of its work after the expiration of its policy based upon contract and invoice documents provided by the insured. Notwithstanding this information, the insurer would arguably still be obligated to provide coverage to the insured based upon the application of the four corners rule even though the policy had expired before the insured ever stepped foot on the project.
To avoid this illogical result, most courts modify the four corners rule to allow an insurer to consider information beyond the pleadings (extrinsic evidence) to avoid a duty to defend where the insurer’s position that there is no duty to defend is based upon information that would not normally be alleged in the underlying complaint. In our example, the insurer would be permitted to consider the dates that its insured performed construction in determining whether its policy was triggered by the construction defect claim.
In a decision recently issued by a Florida appellate court in Advanced Systems, Inc. v. Gotham Insurance Co., No. 3D18-1744 (Fla. Dist. Ct. App.), the appellate court significantly narrowed this commonly accepted exception to the four corners rule, holding that it only applied in “exceptionally rare cases.” As such, the court reversed the trial court’s determination that the insurer did not have a duty to defend, finding that the trial court erred in applying the exception to the four corners rule.
The Advanced Systems case arose out of a failed foam fire suppressant system in an aircraft hangar that resulted in damage to several airplanes. According to the allegations in underlying lawsuit, moisture infiltrated the manual release stations in the system, resulting in the unintended activation of the system and damage to the airplanes.
The insurer filed a motion for summary judgment, arguing that it did not have a duty to defend its insured because coverage was excluded by the terms of the total pollution exclusion in its policy. In support of its motion, the insurer submitted a declaration of a claims specialist, which attached a copy of the Material Safety Data Sheet (MSDS) for the foam fire suppressant that had been released into the aircraft hangar. The insurer argued that the chemical composition set forth in the MSDS demonstrated that the suppressant was within the scope of the pollution exclusion. The trial court agreed and denied coverage to the insured.
The appellate court reversed the trial court’s decision, holding that the trial court’s reliance on evidence beyond the pleadings and the insurance policy was improper. Specifically, the court rejected the insurer’s argument that the exception to the four corners rule “where an insurer’s claim that there is no duty to defend is based on factual issues that would not normally be alleged in the underlying complaint” applied to the case. In rejecting the trial court’s reliance on extrinsic evidence, the appellate court held that the “narrow exception” to the four corners rule applied by the trial court only applies “[i]n exceptionally rare cases” where “courts have crafted an equitable remedy when it is manifestly obvious to all involved that the actual facts placed the claim outside the scope of coverage.” Because the evidence was not “uncontroverted or manifestly obvious to all,” the court held that the exception to the four corners rule did not apply. Notably, the appellate court did not indicate that there was any evidence raised by the insured to refute the affidavit or attached MSDS produced by the insurer in support of its motion for summary judgment (other than argument of counsel for the insured questioning the nature of the nature and composition of the fire suppressant).
The decision in the Advanced Systems case will certainly be used by insured counsel to argue that the exception to the four corners rule permitting use of extrinsic evidence only applies in exceptionally rare cases, and that any argument raised by counsel for the insured (regardless of whether it is grounded upon admissible evidence) questioning the evidence relied upon by the insurer is sufficient to avoid the application of such exception. The lesson learned from the Advanced Systems case is that an insurer must be diligent in establishing an evidentiary record in a coverage action, in order to demonstrate facts beyond dispute (or even argument) that relieve the insurer of its duty to defend.