Scope of Duty To Defend

WI Supreme Court Adheres To “Four-Corners” Rule, Even If Extrinsic Evidence Would Have Triggered Duty To Defend.

The Wisconsin Supreme Court, applying Wisconsin law, refused to consider extrinsic evidence in assessing whether Consolidated Insurance Company (“Consolidated Insurance”) had a duty to defend Water Well Solutions Service Group Inc. (“Water Well”), putting Wisconsin among the minority and dwindling number of jurisdictions who do not recognize an exception to the four-corners rule.

Waukesha Water Utility (“Waukesha”) contracted with Well Water to remove an existing water pump and to install a new pump.  After installation was complete, the well pump unthreaded from the pipe column and fell to the bottom of the well, causing damage to the water pump.  Waukesha’s insurer, Argonaut Insurance Company (“Argonaut Insurance”), covered the loss and then filed a subrogation action against Water Well.  Water Well tendered the subrogation action to its insurer, Consolidated Insurance.  Consolidated Insurance refused to defend Water Well.  Water Well hired its own counsel, settled with Argonaut Insurance, and sued Consolidated Insurance for breaching its duty to defend.

The Wisconsin Supreme Court addressed two main issues:  (1) whether a court should consider extrinsic evidence under an exception to the four-corners rule to determine an insurer’s duty to defend, where the policyholder asserts that the complaint is factually incomplete or ambiguous; and (2) whether the “Your Product” exclusion barred coverage.

As to the first issue, the court initially observed that, under longstanding Wisconsin jurisprudence, an insurer’s duty to defend is determined by the four-corners rule:  “The four-corners rule prohibits a court from considering extrinsic evidence when determining whether an insurer breached its duty to defend.”  Water Well urged the court to establish a limited exception to the rule to allow Water Well to submit extrinsic evidence to dispute Consolidated Insurance’s position that exclusions in the policy barred coverage.  The court rejected Water Well’s invitation, holding that Wisconsin adopted the four-corners rule because it generally favors Wisconsin insureds, even if it did not result in coverage in this case.  “The rule ensures that courts are able to efficiently determine an insurer’s duty to defend, which results in less distraction from the merits of the underlying suit.”  If courts considered extrinsic evidence, insurers could deny coverage based on extrinsic evidence, where the four corners of the complaint otherwise trigger a duty to defend.  The court also held that the four-corners rule ultimately favors policyholders in another way:  where a plaintiff’s first complaint does not contain allegations that trigger a duty to defend, if discovery reveals extrinsic facts that would trigger coverage, “[s]ooner or later those facts will be alleged in an amended complaint because the plaintiff will want coverage for the defendant-insured.”

As to the second issue, the court considered whether the “Your Product” exclusion barred coverage.  The “Your Product” exclusion barred coverage for “‘property damage’ to ‘your product’ arising out of it or any part of it.”  “Property damage” was defined as “[physical] injury to tangible property,” and “Your Product” was defined as “goods or products…manufactured, sold, handled, distributed or disposed of by” Water Well.

Water Well argued that the “Your Product” exclusion did not apply, because the underlying action was ambiguous regarding what property was actually damaged when the well pump unthreaded from the pipe column and fell to the bottom of the well.  In other words, Water Well argued that damage occurred to property other than the pump that Water Well installed, thereby resulting in property damage that fell outside the “Your Product” exclusion and triggering a duty to defend.

The court disagreed.  The underlying complaint alleged the following pertinent facts:  Water Well installed the well pump, including inspections and repairs of the well; in connection with installing the well pump, Water Well failed to install two setscrews, which resulted in torques and vibrations causing the well pump to unthread from the pipe column and fall to the bottom of the well; as a result of the faulty installation, the well pump was damaged.  Based on these allegations, the court held:  [T]he complaint does not contain any ambiguity as to what property was damaged.  The Argonaut complaint contains no allegation that any damage occurred to anything other than Water Well’s products.”  Water Well Solutions Service Group Inc. v. Consolidated Insurance Company, Case No. 2014-AP-2484 (Wis. June 30, 2016).

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