The “Eight Corners” Rule to the Duty to Defend: When Eight is Not Enough

In most jurisdictions, an insurer’s duty to defend is determined based on what is commonly referred to as the “eight corners rule”.  Under the eight corners rule, the only relevant pieces of information when determining the duty to defend are the coverage promises contained within the four corners of the insurance policy and the allegations contained within the four corners of the complaint against the policyholder.  The “actual facts” are ignored for duty to defend purposes, since most insurance policies promise to provide a defense even against claims that are “groundless, false or fraudulent”.  Further, since most complaints contain only a short and plain statement of the claim, any uncertainties regarding the true nature of the claims must be construed in favor of coverage.

Many jurisdictions have created exceptions to the eight corners rule, to allow certain extrinsic facts to be considered for duty to defend purposes.  These jurisdictions allow a policyholder to introduce evidence to demonstrate that, even if the facts and allegations in the complaint do not trigger coverage, evidence from outside of the complaint demonstrates the possibility of coverage.  New York, for example, has long followed the rule that a policyholder can introduce extrinsic evidence on a duty-to-defend determination to establish the possibility of coverage, but an insurer cannot use extrinsic evidence to contradict the allegations as pled.  See, e.g., Fitzpatrick v. American Honda Motor Co., Inc., 78 NY2d 61, 571 N.Y.S.2d 672 (1991).

Allowing a policyholder, but not an insurer, to rely on material outside the four corners of the complaint, is consistent with basic insurance principles.  The duty to defend is broader than the duty to indemnify.  Thus, it would make no sense to allow the insurer to deny a defense based on the allegations in the complaint, but then indemnify the loss when the “true facts” demonstrate that the claims are within coverage.  Such a result would make the duty to defend narrower than the duty to indemnify.

That brings me to the recent decision of the Middle District of Florida in Composite Structures, Inc. v. Continental Ins. Co., Case No. 8:12-cv-173-JDW-TGW (M.D. Fla. Oct. 12, 2012).  In Composite Structures, a boat manufacturer was sued by workers who claimed to have suffered bodily injury as a result of exposure to carbon monoxide fumes while working on a boat.  The boat manufacturer’s general liability policy contained a pollution exclusion, but the policy also had a pollution buy back clause that reinstated pollution coverage when the policyholder became aware of the occurrence within 72 hours of its commencement.

The underlying complaint did not specify when the boat manufacturer became aware of the exposure.  There was no reason for the complaint to address this issue, since it was not relevant to the personal injury suit.  It was critical to the issue of coverage, however.  During the course of the underlying litigation, the claimants asserted that the policyholder learned of the exposure more than 72 hours after the occurrence.  Upon learning of this evidence, the insurer promptly disclaimed coverage obligations under the pollution exclusion.

In the ensuing declaratory judgment action, Judge James Whittemore started his analysis by noting that Florida generally follows a strict eight corners rule.  Judge Whittemore proceeded to cite dicta contained in a footnote in the Florida Supreme Court decision of Higgins v. State Farm Fire & Cas. Co., 894 So.2d 5, 10, n.2 (Fla. 2004) to support the view that there are some “natural exceptions” to the eight corners rule where there are factual issues that “would not normally be alleged in the underlying complaint.”  Judge Whittemore then took the unprecedented approach of invoking a “natural exception” to the eight corners rule to allow the insurer to avoid its duty to defend based on evidence developed in the underlying action.

Florida courts have joined many other jurisdictions that have loosened the strict eight corners rule to allow a policyholder to introduce extrinsic facts to demonstrate a duty to defend.  See, e.g., Victoria Select Ins. Co. v. Vrchota Corp., 805 F.Supp.2d 1337, 1343 (S.D. Fla. 2011); Broward Marine, Inc. v. Aetna Ins. Co., 459 So.2d 330, 331 (Fla. 4th DCA 1984).  As Judge Kenneth Marra correctly noted in Victoria Select, where a policyholder notifies its insurer of facts that would potentially place the claim within the policy coverages, the insurer has an obligation to consider the insured’s factual contentions, conduct a reasonable investigation into those facts, and base its duty-to-defend decision on “true facts.” 

No other Florida court has taken the extraordinary step of allowing an insurer to use evidence developed in an underlying action to disprove coverage for a complaint that triggers the duty to defend.  The only Florida cases in which insurers have been allowed to introduce extrinsic evidence on a duty-to-defend determination have involved one of two threshold coverage issues: (a) whether the defendant is actually an insured; and (b) whether the claim arose within the policy period.  In both of these situations, courts have allowed extrinsic evidence to avoid a situation where an insurer must defend a case filed against a party who is a stranger to the policy.

Further, and perhaps most importantly, Florida courts have only allowed insurers to develop such extrinsic evidence in a subsequent declaratory judgment action.  That is, the insurer always has the obligation to initially defend its policyholder, and then must prove in the declaratory judgment action that there is no possibility of indemnity coverage in the underlying action.  Then, and only then, may an insurer be relieved of its duty to defend.

On Wednesday, Composite Structures filed its notice of appeal.  Hopefully the Eleventh Circuit will recognize the flaws in Judge Whittemore’s reasoning, and will reject the notion that an insurer can work against its own policyholder in an underlying case to avoid having to defend.  The Eleventh Circuit should follow other jurisdictions that have rejected insurers’ attempts to go outside the eight corners to avoid their duty to defend, and heed the advice of the venerable Dick Van Patten, who knew that eight is enough.