Sept. 15, 2015 – When an underlying complaint does not allege a covered insurance claim, courts must not look outside of the four corners of the complaint to determine whether there is a duty to defend, a state appeals court has ruled.

A three-judge panel for the District II Wisconsin Court of Appeals affirmed (2-1) the “four-corners” rule in Water Well v. Consolidated Insurance Co., 2014AP2484, (Sept. 9, 2015), despite one party’s claim that the court should find a duty to defend based on a reasonable inference of pre-existing damage, an allegation not found in the complaint.

The City of Waukesha hired Water Well Solutions Service Group Inc., (Water Well) in May 2009 to remove and replace an old water well pump. Water Well installed the pump, which included rethreading of a new pipe as needed.

In December 2009 and again in January 2010, Water Well reinstalled the pump, including cutting and rethreading pipe and installing new couplings.

While performing the reinstallations, Water Well failed to install two setscrews, which secure the pipe joint at each end, and which allowed the operating torques and vibrations to cause the well pump to rotate and unthread and then fall to the bottom of a 1,910-foot-deep well.

Argonaut Insurance Company, Waukesha Water Utility’s insurer, filed suit in the U.S. District Court for the Eastern District of Wisconsin against Water Well, alleging negligence and breach of contract and seeking $300,465 in damages.

Water Well tendered defense to its insurer, Consolidated Insurance Company, which denied coverage based on exclusions in the policy for “your product” and “your work.” Water Well ended up settling the case for $87,500.

In February 2014, Water Well filed a lawsuit against Consolidated, claiming that at least some of the damages alleged in the underlying complaint were covered and that Consolidated breached its duty to defend.

Both parties moved for summary judgment and Waukesha County Circuit Court granted summary judgment to Consolidated and denied Water Well’s motion. The court concluded that the insurer’s duty to defend is determined by reviewing the four corners of the underlying complaint, without resort to extrinsic evidence. Water Well appealed.

Analysis

Chief Appeals Court Judge Lisa Neubauer, in drafting the court’s opinion, first reviewed the underlying complaint from Argonaut’s suit against Water Well.

The underlying complaint noted multiple reinstallations and alleged that Water Well failed to install the two setscrews, which was a precipitating factor in the well pump unthreading and falling into the bottom of the well.

In determining if an insurer has a duty to defend, the court also reviews the insurance policy and determines if the policy provides an initial grant of coverage for the claims asserted in the complaint. If there is an initial grant of coverage, then the policy’s exclusions are reviewed to determine if any apply to preclude coverage.

Finally, if an exclusion applies, then the policy is examined to determine if there is an exception to the exclusion that would restore coverage. “In this analysis, we use the facts alleged in the four corners of the complaint,” Judge Neubauer noted.

“An insurer has a duty to defend only if the facts alleged in the compliant, if proved, would result in liability for the insured that arguably would be covered under the terms and conditions of the insurance policy. The four-corners rule means we must determine the insured’s duty to defend without considering extrinsic facts or evidence.”

Consolidated did not dispute that there was an initial grant of coverage, but relied on the exclusions for “your product” and “your work,” to ultimately deny coverage.

Under the policy, “your product” refers to “any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by” the insured.

This exclusion operates to bar coverage for the insured’s own faulty product. In this case, the products included the “column of pipes.”

Water Well argued that while it acknowledged the new pipe it sold to Waukesha would be subject to the “your product” exclusion, there was a reasonable inference of damage to pre-existing pipe, which would be covered. The court, however, found that there was no allegation of damage to pre-existing pipe in the underlying complaint, and since this inference is outside the four corners of the complaint, the circuit court was correct in determining that the “your product” exclusion applies to bar coverage.

The court also found that the “your work” exclusion in the policy applied, barring coverage for “property damage to your work arising out of it or any part of it,” however the exclusion does not apply if the damage that arises was performed “on your behalf by a subcontractor.” This provision excludes coverage of the negligent performance of a contractor’s work.

Water Well also argued that while it acknowledged that the “your work” exclusion applies, the subcontractor exception restores coverage, as the use of subcontractors is so prevalent in construction projects that it’s reasonable to infer that a subcontractor was used in this project, even though the complaint does not allege a subcontractor was used. Again the court reviewed the four corners of the underlying complaint and found no allegation that any work was performed by a subcontractor, and therefore the “your work” exclusion applies and the subcontractor exception does not.

Ultimately, the court reiterated that Wisconsin’s law is well settled: an insurer’s duty to defend is determined by comparing the facts alleged within the four corners of the complaint with the coverage provided under the insurance policy. As a result, the circuit court was correct to not consider extrinsic evidence in its granting Consolidated’s summary judgment motion, the appeals court concluded, affirming.

Dissent

Judge Reilly dissented, arguing that the four-corners rule is not “well-established” in Wisconsin, as there are two court of appeals decisions that conflict on the question, and one supreme court case implying that exceptions exist. Judge Reilly said “the viability or scope of the four-corners rule requires a clear answer from our supreme court.”