The Wisconsin Supreme Court recently issued two decisions, Marks v. Houston Casualty Co., 2016 WI 53, and Water Well Solutions Service Group, Inc. v. Consolidated Insurance Co., 2016 WI 54, concerning the four-corners rule, which was the subject of our previous blog post. Water Well and Marks reaffirm the application, without exception, of the four-corners rule in Wisconsin. The Court’s rationale in the Water Well and Marks decisions is not entirely convincing, especially given the broad applicability of the four-corners rule and the use of exceptions to temper the rule in most states.
Facts and Procedural History
Water Well: Water Well contracted with the Waukesha Water Utility to replace the pump in an existing well. Less than two years later, the pump unthreaded, separated from the pipe column, and fell to the bottom of the well. Waukesha’s insurer brought suit against Water Well. Water Well’s insurer, Consolidated, declined to defend Water Well. After Water Well settled with Waukesha, it sued Consolidated.
Consolidated argued it owed Water Well no defense against Waukesha’s complaint, because that complaint alleged that Water Well had used its own pipe and done its own installation, so that the “Your Product” and “Your Work” exclusions to Water Well’s policy applied. Water Well responded by submitting an affidavit, which asserted that (1) that some of the pipe at issue was preexisting pipe that did not need to be re-cut or re-threaded by Water Well and (2) some of the work on the pump and the pipes was performed by a subcontractor, rather than by Water Well. On the basis of the affidavit, Water Well argued that neither exclusion applied and Consolidated had a duty to defend Water Well against Waukesha’s claims.
The lower courts ruled in favor of Consolidated. In the Supreme Court, Water Well argued that the lower courts had erred by refusing to consider its unrebutted affidavit that showed the exclusions did not apply and Consolidated had a duty to defend.
Marks: Marks was the trustee to two large trusts. Those trusts owned a controlling stake in Titan Global Holdings, Inc. Because Marks served on Titan’s board of directors, he was a named defendant in several lawsuits filed around the country alleging impropriety in Titan’s financial dealings. Marks sought to have his professional liability insurer defend him in these lawsuits. The insurer declined, arguing that the coverage did not extend beyond Marks’ role as trustee and citing an exclusion to the policy that disclaimed coverage for liability arising from Marks’ activities as a director of a business enterprise not named in the policy.
When Marks sued the insurer, the lower courts held that the claims in the lawsuits fell within a liberal reading of his professional liability policy, but that the exclusion applied, so that he was not entitled to either defense or indemnity. In the Supreme Court, Marks argued that the duty-to-defend analysis turns on the complaint and the main body of policy alone, not the exclusions, so that his insurer had an obligation to defend him, even if evidence at trial may ultimately have shown that an exclusion to the insurance policy applied.
The Supreme Court heard oral argument in Water Well and Marks on the same day.
Water Well and Marks Reaffirm the Four-Corners Rule
Wisconsin courts have traditionally adhered to the so-called four-corners rule. Under that rule, an insurer has a duty to provide its insured with a legal defense against a claim brought by a third party only if “the complaint alleges facts which, if proven at trial, would give rise to the insurer’s liability under the terms of the policy.” Doyle v. Engelke, 219 Wis. 2d 277, 284-85, 580 N.W.2d 245 (Wis. 1988). Strictly construed, the four-corners rule looks only to “allegations contained within the four corners of the complaint,” excluding all extrinsic facts or evidence. Fireman’s Fund Ins. Co. of Wis. v. Bradley, 2003 WI 33, ¶19, 261 Wis. 2d 4, 660 N.W.2d 666.
While the basic idea of the four-corners rule has been widely adopted, the majority of states have retreated from the absolutist approach that Water Well and Marks reaffirm. According to Justice Ann Walsh Bradley’s dissenting opinion in Water Well, thirty-one states recognize various exceptions to the four-corners rule and four states have conflicting case law on the applicability of exceptions. 2016 WI 54, ¶53 n.2. By contrast, only Wisconsin and thirteen other states maintain strict fealty to the rule without exception. Id., ¶42.
Swimming against the national tide, the Supreme Court denied both Water Well and Marks’ arguments that the four-corners rule should not be enforced to their detriment. In so doing, the Court reaffirmed that Wisconsin strictly follows the four-corners rule. As the Marks decision explained, “only two documents are germane in any four-corners analysis: the insurance policy and the complaint against the insured. No examination of extrinsic facts or evidence takes place.” 2016 WI 53, ¶39. Lest there be any doubt, the Water Well decision was even more emphatic, “unequivocally hold[ing] that there is no exception to the four-corners rule in duty to defend cases in Wisconsin” and “overrul[ing] any language [in a prior court of appeals decision] suggesting that evidence may be considered beyond the four corners of the complaint in determining an insurer’s duty to defend its insured.” 2016 WI 54, ¶24.
How the Wisconsin Supreme Court Framed the Water Well and Marks Decisions
What’s interesting about these decisions—beyond the fact that they reaffirm Wisconsin’s place “among the 14 and ever dwindling number of jurisdictions that have clearly declined to recognize any exceptions to the four-corners rule,” 2016 WI 54, ¶42 (Bradley, J., dissenting)—is how the Court chose to frame them. Repeatedly, the Supreme Court asserts that strict adherence to the four-corners rule “protects,” “benefit[s],” and “favors” Wisconsin insureds. Marks, 2016 WI 53, ¶41; Water Well, 2016 WI 54, ¶¶2, 25, 26. Even setting aside the fact that these statements appear in decisions that both labor to rule in the insurers’ favor, the consequences of the Court’s holding are not as clear-cut as the Court insists.
There is plenty to be said for bright-line rules, which promote clarity and predictability in the law. But they do so at the cost of preventing courts from tailoring their judgments to the facts of individual cases. The Court does not acknowledge that the four-corners rule—like any bright-line rule—is by its nature both over- and under-inclusive. The Water Well decision explains that sometimes the four-corners rule will impose upon an insurer “‘a clear duty to defend a claim that is utterly specious because, if it were meritorious, it would be covered.’” 2016 WI 54, ¶25 (quoting Smith v. Katz, 226 Wis. 2d 798, 806-07, 595 N.W.2d 345 (Wis. 1999)). Yet, the Court offers no corresponding recognition that the four-corners rule’s reliance on the bare allegations of the complaint will sometimes lead to a finding that the insurer has no duty to defend, even where the full facts bring the claim squarely under the insurance policy at issue.
The problem is that a savvy plaintiff can exploit the intersection of Wisconsin’s liberal notice-pleading regime and the four-corners rule to craft a complaint deliberately omitting information that would trigger the insurer’s duty to defend. In the absence of an exception to the four-corners rule that allows consideration of extrinsic facts, such an approach allows the plaintiff not only to interfere with the contractual relationship between insurer and insured, but also to exert leverage over the defendant/insured. (Notably, where the determinative facts for purposes of determining insurance coverage are only tangential to the plaintiff’s claims, those facts may be addressed in the complaint only vaguely or omitted altogether; this is what happened in both Marks and Water Well, where the Court recognized the absence of clear allegations on these issues tangential to liability and construed the resulting ambiguities against the insureds.)
Once the insurer takes the position that the plaintiff’s complaint does not trigger the duty to defend and refuses to provide a defense, the defendant faces a Hobson’s choice between funding its own litigation defense or settling to avoid incurring litigation costs. The Supreme Court insists that “the plaintiff will want coverage for the defendant-insured” and will therefore have “the incentive to file an amended complaint” with “additional facts that … would trigger a duty to defend.” Water Well, 2016 WI 54, ¶26 (internal quotation marks omitted). But this view, as the dissent notes, “fails to take into account the realities of litigation,” id., ¶71, including that sometimes the plaintiff prefers to keep the insurer at a distance. For that reason, Water Well does not address “circumstances in which refusing to consider known facts extrinsic to the complaint would unfairly deny an insured the benefit of a defense to which it is entitled.” Id., ¶50 (Bradley, J., dissenting).
The Court’s refusal to grapple with this issue—which it derides as a “hypothetical possibilit[y],” id., ¶30, n.17, despite the analogous facts present in Water Well itself—creates a loophole that can be exploited by litigants who wish to pressure insured opponents into settling by denying them the defense that should be provided by their insurer. As the dissent notes, in such a situation, “‘[t]he four-corners rule shuts down [the insured’s] entitlement … to a defense for which the insurer has been paid a premium.’” Id., ¶67 (quoting Estate of Sustache v. Am. Fam. Mut. Ins. Co., 2007 WI App 144, ¶20, 303 Wis. 2d 714, 735 N.W.2d 186).
The existence of this loophole is not fatal to the four-corners rule. As noted above, bright-line rules have virtues, as well as shortcomings. But it would be helpful if the Supreme Court were more open about the benefits and the detriments of strict adherence to the four-corners rule. When the Wisconsin Supreme Court first adopted the four-corners rule, it acknowledged that some states had developed exceptions to the rule’s application. See Water Well, 2016 WI 54, ¶19 (citing Grieb v. Citizens Cas. Co. of N.Y., 33 Wis. 2d 552, 557-59, 148 N.W.2d 103 (Wis. 1967)). But the Court says Grieb “did not actually adopt or apply any of the exceptions.” Id. Now the Court does not want even to examine the exceptions, or their rationales. That’s unfortunate. Doing so would allow the Court to explain why a majority of the Justices favors strict adherence to the rule, even as their counterparts in most states have adapted the rule by crafting exceptions to make its application more equitable.
 The Water Well decision “continue[s] to strongly encourage insurers to follow one of the judicially-preferred approaches rather than make a unilateral determination to refuse to defend an insured.” 2016 WI 54, ¶27. But, in the context of the Court whittling away the duty to defend, such urging rings hollow; at the very least, the Court’s holdings undermine the oft-repeated observation that an insurer unilaterally refuses a tendered defense “‘at its own peril.’” Id., ¶28 (quoting Elliot v. Donohue, 169 Wis. 2d 310, 321, 485 N.W.2d 403 (Wis. 1992)). The Marks decision more forthrightly explains that, though prior decisions sought to dissuade insurers from unilateral refusals to defend, courts should let insurers determine the risks and benefits of various legal strategies. 2016 WI 53, ¶41 n.21.