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The “Four Corners rule” (a.k.a. the “Eight Corners rule”) is the foundation for many states’ common law regarding the Duty to Defend under liability policies. Under that regime, the court treats “the underlying complaint and the insurance policy” as “the only documents relevant” to deciding whether an insurer owes the policyholder a duty to defend.  Badger Mining Corp. v. First Am. Title Ins. Co., 534 F. Supp. 3d 1011, 1020 (W.D. Wis. 2021); 1 General Liability Insurance Coverage § 5.02 (5th ed.) (providing a “50-State Survey: Duty to Defend Standard: ‘Four Corners’ or Extrinsic Evidence?”).

The rule presents a problem for policyholders when the complaint’s allegations do not raise a duty to defend on their face, however, during the course of the litigation, it becomes apparent that claims that do give rise to a duty to defend are, in fact, at issue.  If the case is pending in federal court, policyholders can assert the “constructive amendment doctrine”; that is, that the complaint has been effectively amended to include the unpleaded claims and, therefore, the insurance company should provide a defense.Continue Reading Expanding the “Four Corners” rule through constructive amendment

States continue to disagree about whether an insurer that defends its insured in a lawsuit can reserve a right to recoup its defense costs from the policyholder if the carrier wins a declaratory judgment that it owed no duty to defend.  Courts in New York and Nevada recently took opposite positions on the issue, but both cited an article that described a simple policy language-based approach policyholders can urge to resolve the issue in their favor. 

The California Buss case permitted recoupment

The California Supreme Court issued a famous opinion favoring recoupment in Buss v. Superior Court, 939 P.2d 766 (Cal. 1997).  It held an insurer has an implied in law right to seek recoupment to avoid unjustly enriching its policyholder if the insurer establishes that a suit’s claims were not even potentially covered. The court said recoupment would not disturb the parties’ arrangement because standard insurance policies do not obligate the insurer to bear those costs.Continue Reading Don’t forget the supplementary payments solution to the defense cost recoupment problem