It is well-settled that an insurer does not have a duty to defend an insured in underlying litigation unless the allegations in the complaint could potentially support recovery under the policy. However, what an insurer may, or may not, consider when determining coverage can vary from jurisdiction to jurisdiction. Many jurisdictions have adopted the “four corners” rule (also called the eight corners rule) to determine whether an insurer has a duty to defend an insured. Under this rule, the insurer’s duty to defend is determined by comparing the four corners of the complaint with the four corners of the insurance policy.
Pennsylvania is a “four corners” jurisdiction and usually strictly applies this rule when determining whether the insurer has a duty to defend. The Pennsylvania Supreme Court has explained “[i]f 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.” Erie Ins. Exch. v. Transamerica Ins. Co., 533 A.2d 1363, 1368 (Pa. 1987). As such, the duty to defend is “determined solely by the allegations of the complaint in the [underlying] action.” Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888, 896 (Pa. 2006) (emphasis in original) (citation omitted).
The boundaries of the “four corners” rule in Pennsylvania were recently tested in the Third Circuit. In Ramara, Inc. v. Westfield Ins. Co., No. 15-1003 (3d Cir. Feb. 17, 2016), Ramara, Inc., the insured, tendered its defense of a personal injury lawsuit brought by Anthony Axe, an employee of Ramara’s subcontractor Fortress Steel Services, Inc., to Fortress’s insurer, Westfield Insurance Company. Ramara was an additional insured under Fortress’s policy with Westfield; however, Axe did not name Fortress as a defendant in his lawsuit because, under the Pennsylvania Workers’ Compensation (“Act”), Fortress would be immune from tort liability for workplace injuries to its employees. Id., Slip op. at 3. Following Pennsylvania’s “four corners rule,” Westfield denied coverage to Ramara on grounds that the complaint did not include Fortress as a defendant and failed to aver any facts regarding Fortress’s liability for Axe’s injuries. Westfield, therefore, contended that it did not have a duty to defend Ramara because the allegations within the four corners of the complaint fell outside of the four corners of the policy. The District Court held that Westfield must defend Ramara and Westfield appealed the decision.
The Third Circuit noted that under Fortress’s policy, Ramara would be considered an additional insured and entitled to a defense if Fortress’s employee’s injuries potentially were ‘caused, in whole or in part’ by Fortress’s acts or omissions or the acts or omissions of someone acting on Fortress’s behalf.” Id. at 24. The court then determined that the underlying complaint sufficiently pled such allegations even though Fortress was not named as a defendant, whether the causation required by the policy was interpreted under either a “but for” or “proximate cause” standard. Id. at 25.
Although the Third Circuit affirmed Westfield’s duty to defend Ramara, the court upheld Pennsylvania’s strict construction of the “four corners” rule and did not expand or modify an insurer’s obligations under the rule. However, it also explained that an insurer (or a court) should not ignore the practical effects of the Act on pleadings when applying that rule. The court held that: “[W]here the … Act is relevant to a coverage determination, insurers (and the courts that review their determinations) must interpret the allegations of an underlying complaint recognizing that the plaintiff’s attorney in the underlying action drafted the complaint taking the existence of the Act into account. In this way, the Act operates as an interpretive constraint, making it more difficult for insurers to claim that the allegations of an underlying complaint fall patently outside the scope of coverage.” Id. at 36-37.
The take-away from Ramara is that when applying the “four corners” rule, an insurer should not ignore the existence of obvious facts not included in a complaint that might trigger coverage if there is a logical reason, such as an employer’s immunity for tort liability afforded under workers’ compensation statutes. Even so, the court took pains to state that “We are not suggesting that insurers have a duty to make investigations to find facts or information beyond those set forth in the complaint in order to find a basis for triggering coverage.” Id., at 36, n.12. Thus, the court’s rationale should be seen as limited to very obvious facts that may not be contained in a pleading, such as the effect of the relevant statute here.