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ALERT: The Third Circuit Chips Away at the Four Corners Rule, Adding Nuance to Coverage Disputes

April 6, 2016

Depending on which side of the “v.” you stand in a coverage dispute, Pennsylvania’s four-corners rule can be a blessing or a curse. Under the four corners rule, an insurer's potential 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). Said differently, the insurer’s duty to defend is determined by comparing the four corners of the complaint with the four corners of the insurance policy. A defendant in a coverage suit has reason to love the rule, because the plaintiff’s complaint in the underlying matter is often pleaded in such a way to foreclose the insured’s right to coverage in what would otherwise be a fully covered claim. The plaintiff in the coverage suit hates the rule because there is little he can do to receive coverage. The Third Circuit, in Ramara, Inc. v. Westfield Ins. Co., No. 15-1003 (3d Cir. Feb. 17, 2016), has taken a step to subtly undermine the analysis.

Ramara presented a typical situation where a tort plaintiff sued various entities for his workplace injuries including the site owner and general contractor, but not his employer, a sub-contractor, due to the immunities afforded it under the Pennsylvania Workers' Compensation Act (“Act”). Under the Act, the injured employee’s exclusive remedy is receipt of mandatory, employer-financed, no-fault insurance entitling him to compensation for lost wages and necessary medical treatment. The employee gets paid under the Act for his injuries, no questions asked, but, in exchange, he can’t sue his employer. The employer had a standard general liability policy of insurance which named the site owner as an additional insured but when the owner sought coverage under the policy, the insurer cited the four corners rule in deferring to the text of the complaint which set forth no allegations against its named insured, the plaintiff’s employer. No allegations against the named insured in the four corners of the complaint, no coverage. End of story.

Not so fast, the district court responded and the Third Circuit affirmed after the owner brought suit against the sub-contractor’s insurer. While making it abundantly clear that it was in no way undermining the four corners rule, the Third Circuit nevertheless held that:

[w]here the Workers' Compensation 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.

As such, the Third Circuit has taken a significant step in chipping away at the four-corners rule, even if it says it hasn’t. The lady doth protest too much, methinks.

The Ramara court’s decision does not constitute the opening shot of a revolution in the insurance industry. Courts are specifically warned not to impose on insurers 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.” Nonetheless, the Third Circuit’s decision may serve to empower courts to make-commonsense assessments of why the underlying tort complaint fails to include allegations pertaining to the named insured and in situations such as those presented Ramara, deem coverage to exist where, prior to the decision, court may have been loath to so rule. As such, no matter which side of the “v.” you may find yourself, the coverage landscape has shifted just a little bit.

For more information, please contact Noah Schwartz at 

*This case was not handled by Zarwin Baum attorneys.

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