Wisconsin’s Duty To Defend And The “Four-Corners” Rule

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The Wisconsin Supreme Court has recently had occasion to clarify the issue of whether extrinsic evidence can be considered in determining an insurer’s duty to defend in the case of Water Well Solutions Serv., Inc. v. Consolidated Ins. Co., 2016 WI 54 (2016). In this case, the Court refused to modify the longstanding “four-corners” rule used in determining whether a complaint triggers the duty to defend. This decision is helpful in bringing clarity to the issues of whether insurance carriers are required to look at factors outside the complaint whenever they are confronted with a duty to defend issue.

The facts of this case are straightforward. In 2009, Waukesha Water Utility contracted with Water Well Solutions Services, Inc. (“Water Well”) to perform work on an existing well. In February 2011, the well pump installed by Water Well failed. As a result, the city’s insurer filed suit against Water Well to recover damages caused by their alleged negligence. Water Well subsequently tendered defense of this matter to their insurer, Consolidated Insurance Company (“Consolidated”), who had previously issued a Commercial General Liability (CGL) policy in effect at the time of the loss. Consolidated denied this tender of defense contending that the “Your Work” and the “Your Product” exclusions within the policy applied and removed coverage for the damages alleged in the Complaint.

Following the denial notice, Water Well hired its own counsel and eventually settled the pump claim. Water Well then filed suit against Consolidated alleging a breach of duty to defend and bad faith. The circuit court granted summary judgment in favor of Consolidated finding no duty to defend and concluding that under applicable Wisconsin case law, a court must compare the “four-corners” of the complaint to the terms of the entire insurance policy whenever it decides if an insured breached its duty to defend. In a published opinion, the Court of Appeals affirmed. See, 2015 WI App. 78.

On appeal, the Wisconsin Supreme Court was asked to decide whether the addition of extrinsic evidence should be allowed under a limited exception to the “four-corners” rule in cases where: (1) the policy provides an initial grant of coverage based on facts alleged in the complaint; (2) the insurer denies a duty to defend its insured based on the application of specific policy exclusions, but without seeking a coverage determination from a court; and (3) the insured asserts that the underlining complaint is factually incomplete or ambiguous. The Court was further asked to determine whether a court should compare the “four-corners” of the complaint to the entire insurance policy, including exclusions and exceptions, or if the court’s review is limited to comparing the complaint to the terms of the policy governing the initial grant of coverage.

In its decision in favor of Consolidated, the Court noted that they had held in the companion case of Marks v. Houston Cas. Co., 2016 WI 53 (2016) that, “…the “four-corners” rule requires a court to compare the complaint to the terms of the entire insurance policy in determining whether the duty to defense is triggered.” The Court further held, “The longstanding four-corners comparison rule applies to all duty to defend cases…” Finally, after comparing the “four-corners” of the underlying complaint to the terms of the insurance policy at issue, the Court concluded that the “Your Product” exclusion applied to preclude coverage.

In a dissent, Justice Ann Walsh Bradley disagreed with the majority opinion to forgo even a narrow exception to the “four-corners” rule as “[a] majority of states allow for exceptions to the four-corners rule.” Furthermore, Justice Bradley wrote that the majority opinion turns a “blind eye to bias and heretofore well-recognized principles of insurance law: the duty to investigate, privity, and the broad application of the duty to defend.”

Although the Supreme Court did rule in favor of Consolidated, it is important to keep in mind that the Court noted in their decision that they continue to “strongly encourage insurers to follow one of the judicially-preferred approaches rather then make a unilateral determination to refuse to defend an insured.” Rather, the Court held, an insurer may: (1) request a bifurcated trial on the issue of coverage and move to stay all proceedings on liability until a coverage determination is made; (2) enter into a non-waiver agreement in which the insurer would agree to defend and the insurer would acknowledge the right of the insurer to contest coverage; or (3) the insurer may choose to provide an initial defense and seek a declaratory judgment ono coverage. As the Court noted, “[an] unilateral refusal to defend without first attempting to seek judicial support for that refusal can result in otherwise avoidable expenses and efforts to litigants and court, deprive insureds of their contracted-for protections, and estop insurers from being able to further challenge coverage”

If you have any questions about this article, an insurance carrier’s duty to defend, or the preferred approach for insurance carriers in dealing with coverage issues, please contact Doug Lehrer at [email protected].

Douglas W. Lehrer

Douglas W. Lehrer is an insurance trial lawyer and partner with the law firm of Matthiesen, Wickert & Lehrer, S.C. Doug has lectured extensively before insurance companies as well as other professional organizations around the country on various insurance-related issues.