The “Eight Corners” Rule and Its Limits: Five Recent Cases on the Duty to Defend

Massachusetts’s partner William L. Boesch recently issued a Litchfield Alert reviewing five recent cases regarding the eight corners rule and its limits on duty to defend.

Background
When a policyholder is sued and seeks a defense under a liability-insurance policy, the insurer must often decide quickly whether a defense is available under the policy—that is, whether the insurer will fund and potentially control the defense. At this early stage, available information about the claim may be limited and undeveloped. With these exigencies in mind, courts developed the rule that the duty to defend should initially be determined from information within the “eight corners” of the complaint and the governing insurance policy.

Details
The eight-corners principle is widely recognized, but it is insufficient to answer many duty-to-defend questions. Most courts recognize various exceptions that permit—or indeed require—consideration of extrinsic evidence.

First, many courts say that if the facial allegations of the complaint would not trigger a duty to defend, but the insurer has other information that implicates coverage, the insurer must consider the additional information and recognize a duty to defend.

Second, some courts say that the insurer may consider extrinsic evidence if it bears on a subject about which the complaint is silent—that is, a subject that is material to coverage, but not to the underlying litigation. For example, an insurer may consider extrinsic evidence about whether a person or property identified in the complaint is the same as the person or property named in the policy.

And in the case of a claims-made policy, the insurer may consider evidence about issues such as when the policyholder had notice of the claim or a potential claim, or whether the subject claim is related to another claim.

Further, the eight-corners principle is designed for the situation immediately after service of a complaint. The insurer should be free to continue evaluating the duty to defend as the case progresses and more information is gathered. While the central question will remain whether the case includes a covered or potentially covered claim, the eight-corners principle should not require conducting the analysis based on a fictional or hypothetical version of the claim asserted.

Most courts agree that if developments in the litigation eliminate the basis for the initial duty to defend—for example, if all potentially covered claims are dismissed—the insurer may withdraw the defense.

Most courts would also agree that the insurer may bring a separate suit seeking a judicial declaration that it has no duty to defend. In that case, the court may consider extrinsic evidence and decide factual issues material to the duty to defend—at least so long as doing so does not prejudice the policyholder’s defense in the underlying suit. Recent Cases. Five cases decided this year, and discussed briefly below, show how parties and courts continue to grapple with when and how to apply the eight-corners principle.

Courts in two similar cases reached opposite results about whether coverage questions concerned with an underlying plaintiff’s employment status could be resolved based on extrinsic evidence. In Mt. Hawley Insurance Company v. H&M Builders, LLC (January 2024),[1] a Florida federal district court declined to allow a CGL insurer to rely, in a declaratory-judgment action, on extrinsic evidence about the employment status of a worker who was fatally injured during a construction project. The insurer argued that the underlying lawsuit against an insured contractor was excluded from coverage because the worker was considered a “statutory employee” of the contractor under Florida worker’s compensation law, triggering an “employer liability” exclusion, and because the claim arose from work by another contractor, and certain policy conditions for coverage of such claims had not been met. The court held that the worker’s employment status was a matter in dispute in the underlying case, and could not be readily resolved through extrinsic evidence in the insurance action. Thus, the insurer was required to continue defending.

A Texas federal court reached a somewhat contrary result in another construction-accident case, LM Insurance Corporation v. Nautilus Insurance Company (March 2024).[2] The general contractor’s insurer sought a declaration that the accident arose from the work of the subcontractor who employed the injured worker, thus triggering additional-insured coverage under the subcontractor’s policy. The subcontractor’s insurer pointed out that the worker’s employment status was not addressed in the complaint, and thus argued that the trigger for additional-insured defense could not be found within the four corners of the complaint. But the court held that the issue could be resolved by extrinsic evidence because the identity of the worker’s employer did not “overlap with the merits of liability” or “contradict any facts alleged in” the underlying suit, and the issue was “conclusively established by the extrinsic documents.” Thus, the subcontractor’s insurer was required to defend.

Two other cases dealt with the potential effects of an insurer’s request for information from the policyholder related to coverage.

In AIG Property Casualty Company v. Rosenthal (March 2024),[3] a boating accident and drowning in Boston Harbor produced a suit by the owner of one vessel against the operator of another who allegedly failed to provide assistance. The second operator sought coverage under his homeowner’s policy, which offered some watercraft coverage but excluded larger and more powerful vessels—such as the one he was operating. The homeowner’s insurer asked to examine the policyholder under oath, but he refused. In an ensuing declaratory-judgment action, a Massachusetts federal court upheld the insurer’s right to find coverage forfeited based on the refusal to submit to examination. The court also suggested that the issue of vessel size was “not relevant” in the underlying action and thus would have been subject to determination by extrinsic evidence.

A contrasting case was the Fourth Circuit’s application of Hawaii law in Koppers Performance Chemicals, Inc. v. Argonaut-Midwest Insurance Company (June 2024).[1] A plaintiff with cancer sued a maker of wood-preservation chemicals. His complaint suggested that he had been exposed to the defendant’s product during his years of employment. But in his subsequent deposition, the plaintiff suggested that he had also been exposed during childhood, through work done by his parents. The liability policies at issue applied to years when the plaintiff had been a young child. A district court judge held that under the eight-corners rule, since childhood exposure was not alleged in the complaint, the insurer had no duty to defend. But the Fourth Circuit reversed, noting that the insurer had at some point specifically asked the policyholder about the plaintiff’s alleged years of exposure. The Appeals Court predicted that Hawaii courts would find an exception to the eight-corners principle not only permitting but requiring the insurer to consider the extrinsic evidence obtained in response to such an inquiry.

Last, an Illinois appellate court applied the eight-corners rule against the policyholder in State Auto Property & Casualty Insurance Company v. Distinctive Foods, LLC (April 2024).[2] The case involved a commercial dispute between a food manufacturer and a supplier, and the supplier’s seizure of manufacturing equipment after the disagreement arose. When the manufacturer sued, the supplier’s insurer denied coverage on the ground that the alleged conduct was undoubtedly knowing and intentional, and thus excluded. The policyholder argued that the insurer—and the court in a subsequent declaratory-judgment action—should have considered extrinsic evidence that the supplier believed its actions were justified. But the appellate court held that this disputed and “self-serving” evidence did not warrant review under any exception to the eight-corners rule. Thus, the insurer’s denial of a defense was upheld.

Summary
Courts turn to the “eight-corners rule” as a means of simplifying the analysis of an insurer’s duty to defend. But as these cases illustrate, questions often arise about whether and when extrinsic evidence may be relevant, and even necessary, to fairly resolve duty-to-defend disputes. In reality, outside the context of initial assessment of the potential for a covered claim, the eight-corners principle may have limited utility.

William Boesch is a trial and appellate lawyer with more than 30 years’ experience in insurance, professional-liability, and other matters.

[1] Mt. Hawley Ins. Co. v. H&M Builders, LLC, 711 F.Supp.3d 1373 (S.D.Fla. January 11, 2024). Appeal pending.

[1] LM Ins. Corp. v. Nautilus Ins. Co., 2024 WL 1185122 (S.D.Tex. March 18, 2024).

[1] AIG Property Casualty Company v. Rosenthal, 2014 WL 1075157 (D.Mass. March 12, 2024).

[1] Koppers Performance Chemicals, Inc. v. Argonaut-Midwest Ins. Co., 105 F.4th 635 (4th Cir. June 27, 2024)

[1] Koppers Performance Chemicals, Inc. v. Argonaut-Midwest Ins. Co., 105 F.4th 635 (4th Cir. June 27, 2024)

[2] State Auto Property & Casualty Ins. Co. v. Distinctive Foods, LLC, 2024 WL 1688092 (Ill.App. April 19, 2024)