In American Safety Indemnity Company v. T.H. Taylor, Inc., No. 11-cv-12245, 2013 WL 978804 (11th Cir. Mar. 14, 2013), the Court of Appeals for the Eleventh Circuit, applying Alabama law, affirmed the district court’s reliance on facts outside of the underlying complaint to hold that the insurer did not have a duty to defend the policyholder because the underlying claim was based on intentional conduct and not an accident. 

The relevant insurance policy required the insurer to defend the policyholder for claims involving a covered “occurrence," which was defined as an “accident.” Am. Safety Indem. Co., 2013 WL 978804, at *1.  Although not defined in the policy, under Alabama law “accident” means “‘an unintended and unforeseen injurious occurrence . . . something unforeseen, unexpected, or unusual.’”  Id. (quoting Hartford Cas. Ins. Co. v. Merchants & Farmers Bank, 928 So.2d 1006, 1011 n.1 (Ala. 2005).  The insurer, American Safety, sought a declaratory judgment that it did not have a duty to defend the policyholder in an arbitration proceeding against the policyholder, a general contractor, for allegedly misrepresenting the progress of construction in order to obtain draws from a construction loan, because the policyholder’s conduct was not accidental.  Am. Safety Indem. Co., 2013 WL 978804, at *2.

The underlying complaint against the policyholder did not “expressly identify a legal cause of action or theory of recovery.”  Id.  Accordingly, the district court considered additional facts outside of the complaint that demonstrated that the claims against the policyholder were based on its alleged “misrepresentations, falsity or fraud” when seeking advances under the construction loan. Id.  On that basis, the district court held that the insurer did not have a duty to defend because the claims against the policyholder were based on intentional wrongdoing and not an “accident.”  Id. at *1.

On appeal, the Eleventh Circuit noted that the general rule under Alabama law is that courts determine whether there is a duty to defend by “look[ing] to the issue pleadings alleging the claim being made against the insured.”  Id. at *2.  However, where the underlying pleading does “not specify either a legal theory of recovery or allege any detail concerning the operative facts,” the court may “extend[] the inquiry beyond the [underlying] complaint and examin[e] the available evidence concerning the facts.”  Id. at *3 (citing Hartford Cas., 928 So. 2d at 1010).  In light of those principles, the Eleventh Circuit held that the district court did not err when it considered facts outside of the complaint to conclude that the insurer did not have a duty to defend.  Am. Safety Indem. Co., 2013 WL 978804, at *3.

In making its ruling, the Eleventh Circuit flatly rejected the policyholder’s contention that “when the district court could not resolve the issue on the basis of the arbitration complaint standing alone, it should have given [the policyholder] the benefit of the rule that, in the case of doubt or ambiguity in the application of an insurance policy, the issue is to be resolve in favor of the insured.”  Id. at *4.  In so ruling, the Eleventh Circuit noted that Alabama law does not require such an inference.  Instead, under Alabama precedent, where there is doubt or ambiguity in the nature of the underlying claim against the policyholder, “the reviewing court is directed to go beyond the pleadings and examine the evidence” to determine whether there is a duty to defend.  Id.

This decision is an important reminder that the duty to defend analysis is not always limited to the so-called “eight corners rule.”  Rather, if the underlying pleadings do not sufficiently identify the operative facts and/or theories of recovery against the policyholder, facts outside of the pleadings may be considered – at least in some jurisdictions.