More on an exception to the eight corners test

I posted here about an exception to the eight corners test stated in Farm Family Mut. Ins. Co. v. Whelpley, 54 Mass. App. Ct. 743, 747 (2002).

Andrew Caplan, a partner at Burns & Levinson, sent me a comment that made me realize that my post was not as clear as it should have been. Andy wrote:

Massachusetts state and federal cases go both ways on the issue of whether information derived from outside the complaint may serve to negate the duty to defend.

Yes. Farm Family Mut. Ins. Co. v. Whepley, 767 N.E.2d 1101, 1104 (Mass. App. Ct. 2002)( finding “rare exception” to general rule); Gateway Group Advantage, Inc. v. McCarthy, 300 F. Supp. 2d 236, 246 (D. Mass. 2003) (following Farm Family); Dash v. Chicago Ins. Co., 2004 WL 1932760, *5 (D. Mass. Aug. 23, 2004) (dicta).

No. Millipore Corp. v. Travelers, 115 F.3d 21, 35-36 (1st Cir., 1997), citing Nashua Corp. v. Liberty Mut. Ins. Co., 1997 WL 89163 (Mass. Super. Ct. Feb. 18, 1997) ("Where a complaint is susceptible on its face of a reading that brings the claim within the policy, the insurer cannot rely on facts outside the complaint to justify a unilateral refusal to defend."); Sterilite Corp. v. Continental Casualty Co., 17 Mass. App. Ct. 316, 324 n. 17, 458 N.E.2d 338 (1983)("[I]t is the claim which determines the insurer's duty to defend; and it is irrelevant that the insurer may get information from the insured, or anyone else, which indicates, or even demonstrates, that the injury is not in fact covered."); Essex Ins. Co. v. Berkshire Envtl. Consultants, Inc., 2002 WL 226172, *2 (D. Mass. Feb. 7, 2002); Metallized Prods., Inc. v. Travelers Ins. Co., 2003 WL 22481398, *3 (Mass. Super. Ct. Sept. 17, 2003).

Andy is correct that in most cases an insurer may not use information outside the underlying complaint to deny defense to an insured (although such information can be used to compel a duty to defend). The exception stated in Whelpley is quite narrow: it applies to facts that are (1) undisputed and (2) will not be litigated at the underlying trial, because they are irrelevant to the underlying claim.

In my previous post I discussed an example where an insurance policy covers only blue cars. The color of the car is undisputed. It will not be litigated at trial because the color of the car is irrelevant to liability. That would fall into the Whelpley exception.

The answer to a nagging duty to defend issue

As I discussed here, the duty of an insurer to defend an insured is determined by the "eight corners test." Under that test, "if the allegations of the complaint are 'reasonably susceptible' of an interpretation that they state or adumbrate a claim covered by the policy terms, the insurer has a duty to defend." (The "eight corners" comes from comparing the four corners of the complaint to the four corners of the insurance policy.)

But what about when the allegations of the underlying complaint are silent as to an issue that is important for determining coverage? For example, what if the insurance policy provides coverage for all blue cars owned by Lucy Smith? Smith is sued following a motor vehicle accident. The underlying complaint will probably allege the make and model of the car Smith was driving, but it is unlikely to state the color of the car because the color is irrelevant to Smith's liability. Can the insurer refuse to defend because its investigation reveals that the car Smith was driving at the time of the accident was yellow, and so not covered by the "blue car policy"?

Yes. In Farm Family Mut. Ins. Co. v. Whelpley, 54 Mass. App. Ct. 743, 747 (2002), the court held that there is an exception to the eight corners test for "the existence of an undisputed extrinsic fact that takes the case outside the coverage and that will not be litigated at trial of the underlying action."

U.S. Court of Appeals points out that duty to defend is determined by allegations of the complaint

In Narragansett Jewelry Co., Inc. v. St. Paul Fire and Marine Ins. Co., 555 F.3d 38 (1st Cir. 2009), the United States Court of Appeals for the First Circuit court reaffirmed that the "eight corners test" still determines the duty to defend under Rhode Island law.

Slane was a jewelry design company that contracted with Narragansett to develop jewelry models and molds based on Slane designs, and to produce jewelry ordered by Slane.

Slane sued Narragansett, alleging that Slane "owned certain models which it entrusted to [Narragansett] for use in the production of jewelry," and that Narragansett "caused physical damage to such models."

Narragansett sought defense and indemnity from its insurer, St. Paul. St. Paul denied coverage based on an exclusion for property damage to "[p]ersonal property that's in the care, custody, or control of [Narragansett]."

Narragansett filed a declaratory judgment action in Rhode Island. It argued that the alleged loss or damage "possibly" occurred during the shipment process, and thus not while the models were in Narragansett's care, custody or control.

The United States Court of Appeals for the First Circuit affirmed summary judgment for St. Paul, stating, "Regardless of what might be 'possible,' there are no allegations in the Slane lawsuit that support Narragansett's hypothesis." The court pointed out that the complaint specifically alleges that Narragansett caused the damages at issue.