Executive Summary Using the “four corners” rule, the U.S. Court of Appeals for the Third Circuit decided in Ramara, Inc. v. Westfield Insurance Co., No. 15-1003 (3d Cir. Feb. 17, 2016), that an insurer owed a garage owner a duty to defend because it was an “additional insured” under a subcontractor’s commercial general liability policy. The Third Circuit held that duty was triggered because – applying either a “but-for” causation standard or the more demanding “proximate” causation standard – the bodily injury alleged in the underlying complaint was “caused” by the subcontractor’s acts or omissions. Ultimately agreeing that “but-for” causation was the relevant standard, the court considered not just the policy’s “Additional Insured Endorsement” but another policy provision, explaining that courts must construe the policy “as one harmonious document.” The Third Circuit also addressed the propriety of recognizing the impact of the Pennsylvania Workers’ Compensation Act in applying the “four corners” rule, holding that, in assessing coverage, an insurer cannot ignore the impact the Act may have on plaintiff’s counsel’s drafting of a personal-injury complaint. “[A]n insurer cannot bury its head in the sand,” the court cautioned, “and disclaim any knowledge of coverage-triggering facts.”

Discussion At issue in Ramara was whether a parking garage owner was entitled to a defense under a subcontractor’s general liability insurance policy in a suit brought by one of the subcontractor’s employees, who was injured while working at the owner’s garage. The insurer denied coverage, based largely on the perceived absence of allegations in the complaint regarding the role of the subcontractor, which allegations the insurer viewed as necessary to trigger an obligation to defend the garage owner. Despite the state of the pleadings, however, the insurer had knowledge that the underlying plaintiff was the subcontractor’s employee, and it was clear that had the plaintiff alleged actions by the subcontractor, he could have risked facing defenses under the Pennsylvania Workers’ Compensation Act.

Pennsylvania’s “four corners rule” The Third Circuit observed that the question whether the insurer owed the garage owner a defense required it to compare “the language of the allegations” in the underlying complaint “to the language of the [p]olicy.” “Pennsylvania adheres to the ‘four corners’ rule (also known as the ‘eight corners’ rule), under which an insurer’s potential duty to defend is determined solely by the allegations of the complaint in the [underlying] action,” the court explained.

Policy language and causation Pursuant to the policy’s “Additional Insured Endorsement,” the garage owner was covered under the subcontractor’s policy “only with respect to liability for ‘bodily injury’ … caused, in whole or in part, by” the subcontractor’s “acts or omissions ....” The insurer argued that this provision limited coverage to only those instances where a subcontractor’s acts or omissions proximately caused a plaintiff’s injuries. The garage owner countered that only less-restrictive “but-for” causation was required to trigger coverage for “additional insureds.”

The court concluded that the insurer’s obligations were triggered here under either test. It found that the injured employee’s complaint was “rife with allegations” indicating that the subcontractor’s acts were a proximate cause of the employee’s injuries, even though the complaint asserted no claim against the subcontractor itself. Because the complaint satisfied the more restrictive “proximate” cause test, the court concluded that it also necessarily satisfied the “but-for” cause test. That said, the court held that the garage owner’s “but-for interpretation is correct,” reasoning that the policy’s “Other Insurance Endorsement” could not be squared with the insurer’s restrictive “proximate” cause test, and stating that “[c]ourts must interpret an insurance policy as one harmonious document and resolve ambiguities in favor of coverage.”

The Pennsylvania Workers’ Compensation Act Finally, the Third Circuit considered the interplay between the Pennsylvania Workers’ Compensation Act and the “four corners” rule. The court acknowledged that the employee pleaded very little about his employer, the subcontractor, in the complaint against the garage owner, but recognized this was because the Act barred any such claim. The Third Circuit continued: “The four corners rule – even under Pennsylvania’s strict construction – does not permit an insurer to make its coverage decision with blinders on, disclaiming any knowledge of coverage-triggering facts.” Rather, the court held that where the Act is “relevant to a coverage determination,” the Act must serve as an “interpretive constraint” in applying the “four corners” rule – meaning that insurers “must interpret the allegations of an underlying complaint recognizing that the plaintiff’s attorney in the underlying action drafted the complaint taking the Act into account.” The court took pains to emphasize that its conclusion expressed only “what should be obvious” – that “an insurer cannot bury its head in the sand and disclaim any knowledge of coverage-triggering facts[.]” Viewing the case against the garage owner through the prism created by the Workers' Compensation Act, the court found it natural and understandable that the complaint said very little expressly about the employer, but read the complaint in a more fulsome manner to acknowledge the employer’s contribution to the factual scenario.

Impact of Ramara The Third Circuit’s Ramara decision will make it more difficult for insurers to evade defense obligations, particularly where the insurer knows that the underlying complaint may not expressly tell the entire story of the claim against the insured. While the decision does not change Pennsylvania’s strict “four corners” rule of determining a duty of defend, it signals significant dangers for any insurer that attempts to construe the allegations of a complaint too narrowly in an effort to escape defense obligations when it has other, independent knowledge counseling that its interpretation of the factual allegations is too cramped. In Ramara, the court concluded that, knowing the contextual impact of the Workers' Compensation Act on the allegations, it was unreasonable for the insurer to interpret the complaint as it had.

When confronted with a claim or suit, it is critical for insureds to seek guidance from experienced coverage counsel, who can help ensure that insureds receive the defense to which they are entitled.