The Eight Corners Rule is a rule of contract interpretation employed by courts analyzing the duty to defend requirement in liability policies. In short, when determining whether an insurer owes a duty to defend, the court strictly limits its review by comparing the terms of the four corners of the insurance policy to the four corners of the underlying complaint. If the underlying complaint alleges facts that are plausibly covered, then the insurer must defend. Some states only require that the insurer defend the potentially covered claims while most states require a defense of the entire lawsuit.
The United States Court of Appeals for the Eleventh Circuit just visited this issue in relation to the denial of coverage for late notice by the insured. Composite Structures, Inc. v. Continental Ins. Co., 2014 WL 1069253 (11th Cir. March 20, 2014). The case arose in Florida as a toxic torts matter brought by crew on a yacht claiming exposure to carbon monoxide due to a construction defect. They brought the claim against the manufacturer. The manufacturer provided the lawsuit to its broker, which sent it on to Continental Insurance Company citing one policy. The insured had three possible policies for coverage. Unfortunately, the broker did not reference all of the policies and actually referenced one that did not provide coverage for the claim. A Pollution Buy Back endorsement required notice to the carrier within 30 days and that the “occurrence” become known to the insured within 72 hours after its commencement. Continental first issued a reservation of rights letter but soon after denied coverage. The policyholder brought a declaratory judgment action and lost at the trial court.
The appellate court took the case in order to address the following question: did the insurer improperly rely on extrinsic evidence outside the Eight Corners due to the fact that the underlying complaint did not provide any factual allegations regarding notice by the insured or insurer? The policyholder argued that the insurer could only rely on allegations in the underlying complaint to make a “late notice” determination.
The court ruled that reliance on the outside evidence concerning when the insured knew of the occurrence and when notice was provided to the insurer are not items that would normally be pleaded by a personal injury plaintiff in its lawsuit. Thus, the reliance on this information to determine coverage fell within an exception to the Eight Corners Rule. As the court noted, “indeed, plaintiffs would likely not know, when filing suit, when a defendant informs its insurer provided sufficient notice of the claim is . . . a factual issue that would not normally be alleged in the underlying complaint.” The Florida Supreme Court had previously created an exception to the Eight Corners Rule “when an insurer’s claim that there is no duty to defend is based on factual issues that would not normally be alleged” in the underlying complaint.
This opinion adds a wrinkle to the traditional Eight Corners Rule rubric. Whether there is coverage requiring a duty to defend the underlying complaint as to the allegations pleaded still requires a strict review of only the complaint and applicable insurance policy. However, if the insurer believes that its insured has not complied with certain conditions it may rely on extrinsic evidence to reach that conclusion. The takeaway for policyholders is that they absolutely must know and understand what the conditions precedent are in their policies. In addition, it is critical that policyholders then follow these conditions in order to be able to invoke coverage. Late notice defenses by insurers are common and many policyholders do not understand the draconian results that can arise due to their failure to comply. The Florida exception to the rule make sense, but it highlights the tension between policyholders and insurers related to the duties of each when it comes to coverage.