Tests For Determining Duty To Defend

A Video Explaining Duty to Defend and the Four Corners Rule

Some states apply a rule of interpretation of the duty to defend a liability claim by limiting their review to the facts alleged in the lawsuit and the wording of the insurance policy.

They refuse to consider any evidence extrinsic to the allegations of the suit.

If any of the allegations are potentially covered by the policy, the duty to defend is established. If none of the allegations in the complaint is potentially covered by the policy, the insurer can generally refuse to defend.

“Four corners” refers to the parameters of the policy; there is a variant test known as the “eight corners rule.” There is little difference between the two; they both take into consideration the four corners of the suit and the four corners of the policy.

Courts operating under the four corners or eight corners rule will not consider extrinsic facts or the potential for a suit drafted out of spite. The prudent insurer will, before making a decision, determine what rule or test is applied in the jurisdiction where the loss occurred.

The rationale behind the two rules is to require insurers to defend their insureds against all covered claims regardless of merit. Allowing an insurer to admit extrinsic evidence that contradicts a plaintiff’s allegations to establish the applicability of a policy exclusion would circumvent the very reason for the rules.52

Many jurisdictions have ruled that any doubt regarding the obligation to defend is to be resolved in favor of the insured [Miller v. Elite Ins. Co., 100 Cal. App. 3d 739 (1980)].

Potentiality

The insurer is not required to indemnify the insured if the potentiality of an accidental cause never materializes, if the jury finds that the insured intentionally caused the plaintiff’s injury, or if the insured is convicted of the crime of battery. However, even though a policy excludes liability arising from violations of law, there is the potentiality that the jury would find there was no violation of law and that the policy provided coverage. However, if the claims of negligence against the insured were potentially covered under the policy the insurer will have a duty to defend.

Determining whether insurance coverage exists requires analysis of the claims asserted in the state court action. [ Elec. & Power Co. v. Northbrook Prop. & Cas. Ins. Co., 475 S.E.2d 264, 265-66 (Va. 1996); Bohreer v. Erie Ins. Grp., 475 F. Supp. 2d 578, 584 (E.D. Va. 2007)] noting that Virginia recognizes the "potentiality rule," wherein an insurer's duty to defend is triggered if there is any possibility that a judgment against the insured will be covered under the insurance policy. The "eight corners rule," compares the four corners of the insurance policy with the four corners of the underlying complaint to determine whether coverage exists. [Erie Ins. Exch. v. State Farm Mut. Auto. Ins. Co., 60 Va. Cir. 418 (Va. Cir. Ct. Dec. 16, 2002); AES Corp. v. Steadfast Ins. Co., 725 S.E.2d 532, 535 (Va. 2012]

© 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

He is available at http://www.zalma.com and zalma@zalma.com. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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