Most liability insurance policies do two things: (1) protect against an adverse judgment or settlement; and (2) defend the insured in suits seeking damages. With regard to the latter, the traditional rule is that an insurer has a duty to defend its insured if any of the allegations in a complaint filed against the insured, even if eventually proven untrue, would be covered under the policy. Known as the "four corners rule" or "eight corners rule" in various jurisdictions, courts generally do not consider extrinsic facts, i.e. those not alleged in the complaint, when determining a duty to defend. Florida has long adhered to this rule.

A recent unpublished decision from the Eleventh Circuit Court of Appeals, Composite Structures, Inc. v. Continental Insurance Company, -- Fed.Appx.--, 2014 WL 1069253 (Case No.12-15866) (11th Cir. March 20, 2014), casts uncertainty on Florida's four-corners rule, especially with respect to an insurer's right to deny a defense based on extrinsic facts relating to a policy exclusion. The court held that an insurer could deny a defense based on facts outside the complaint if those facts would not normally be alleged in a complaint. The result may leave policyholders scratching their heads. 

In Composite Structures, the insured sued its insurer for a declaratory judgment determining a duty to defend. In the underlying action in which the insured needed a defense, two seamen alleged they were injured by carbon monoxide poisoning on a yacht designed, manufactured, and sold by the insured. The insured notified the insurer of the underlying action and requested a defense under two marine commercial general liability policies that contained a pollution exclusion. However, that exclusion would not apply to an "occurrence" that was learned of by the insured within 72 hours of its commencement and reported to the insurer within 30 days of becoming known by the insured. The seamen's complaint was silent as to the date of their alleged exposure to the carbon monoxide, but in a later filing they claimed the exposure occured from July 5, 2004 through January 22, 2005, when the insured supposedly repaired the defect. After learning of those facts, the insurer denied coverage. 

In finding the insurer had no duty to defend, the District Court relied on a narrow exception to the four corners rule that allows consideration of extrinsic facts if those facts would not normally be alleged in a complaint. Few prior Florida decisions address this exception, and even fewer have applied it to deny coverage. Relying on this exception, however, the District Court found that the insured could not rebut the pollution exclusion due to the uncontroverted evidence as to when the occurrence began and when the insurer received notice.

The Court of Appeals affirmed. It agreed with the District Court that an insurer may consider extrinsic evidence of the date of written notice when determining a duty to defend because the date of such notice is not a fact that would normally be alleged in the complaint. An earlier decision by the Supreme Court of Florida, Higgins v. State Farm Insurance and Casualty Company, 894 So. 2d 5 (Fla. 2005), suggested that an insurer may be required to file a declaratory judgment action to establish any extrinsic facts the insurer could rely on to deny a defense. However, the court in Composite Structures agreed with the insurer that a declaratory judgment was not necessary if the extrinsic facts relied on by the insurer were not disputed by the insured.

The four-corners rule provides certainty for insureds and insurers alike. The rule is particularly important in jurisdictions like Florida that bifurcate determinations of the duty to defend from the duty to indemnify and determinations of coverage from those of bad faith. The duty to defend in Florida has always been broader than the duty to indemnify. While a court may consider only alleged facts when determining a duty to defend, it considers the actual facts in determining a duty to indemnify. However, Composite Structures leaves policyholders facing litigation on shakier footing, as they must now give far greater consideration to what extrinsic facts an insurer may rely upon to deny a defense.

As applied in Composite Structures, the four-corners exception opens the door for insurers to deny a defense for a variety of policy exclusions, so long as the facts supporting the exclusion would not normally be alleged in the underlying complaint. Although the exception should apply only where the extrinsic evidence supporting the lack of coverage is "uncontroverted," the Eleventh Circuit has left it in the hands of the insurers, rather than the courts, to weigh the extrinsic evidence and make the initial determination whether the duty to defend exists notwithstanding allegations susceptible to coverage. As a result, policyholders in Florida should be all the more vigilant in providing insurers with notice of facts that may eventually give rise to a claim or relate to an exclusion, and they should do so long before litigation has been filed or threatened. 

Policyholders also should not be surprised if their insurers are more emboldened to deny a defense to a complaint alleging covered facts. Indeed, the insurer in Composite Structures recently requested the Eleventh Circuit to publish the decision in order to "guarantee that the exception to the general duty to defend standard under Florida law is uniformly applied in the Eleventh Circuit." Counsel for the insured intends to object to the request. A published opinion would ensure thatComposite Structures has binding effect on all federal courts in Florida, Georgia and Alabama. Such application will leave policyholders vulnerable to increased denials of defenses and increased coverage litigation in all courts applying Florida law.