The Stimac Decision: Cutting Corners on the Four-Corners Rule
The application of the well-established four-corners rule precludes courts from considering extrinsic evidence outside the complaint and the applicable insurance policy to decide whether the insurer owes a duty to defend. The rule is long-rooted in Wisconsin law. Courts, lawyers, and litigants have learned to apply it, and to measure an insurer’s obligation to defend based on the facts alleged in the plaintiff’s complaint. The four-corners rule has benefits for both insureds and insurers. The rule complements and furthers important policy goals that the Wisconsin Supreme Court has identified over the years. The supreme court has rightly resisted efforts to dilute the rule, and should continue to safeguard it.
Over the years, insurers have frequently chosen to defend an insured under a reservation of rights, and then promptly sought to bifurcate the case, stay proceedings on the merits, and secure a declaration from the court on whether the insurer owes the insured a duty to defend and indemnify under the applicable policy. Where the insurer does this, the duty to indemnify on the allegations as pleaded can also be reached, because the duty to defend is much broader than the duty to indemnify.
This procedure protects the insured against the plaintiff, while also ensuring that the insurer that believes it has no duty to defend or indemnify based on the allegations in the complaint does not breach any duties owed to the insured under the policy should the court disagree. The court and parties then have the complaint and the policy, and can apply the four-corners rule, without subjecting the insured to proceedings on the merits of the plaintiff’s claim.
Despite these important policies supporting application of the four-corners rule to the analysis of the insurer’s duty to defend, the Wisconsin Court of Appeals, in a recent decision, Stimac Family Trust v. Power & Light,1 confined the four-corners rule to such narrow circumstances that it will be weakened, and in the process, could encourage insurers to more frequently flatly deny a defense in order to be able to utilize the efficiency and simplicity of the four-corners rule.
The Four-Corners Rule
The four-corners rule is “well-established” in Wisconsin.2 The rule states that the insurer’s duty to defend its insured is determined by comparing the allegations contained within the four corners of the complaint to the policy language, and this rule has been consistently stated by the courts over the years:
Longstanding case law requires a court considering an insurer’s duty to defend its insured to compare the four corners of the underlying complaint to the terms of the entire insurance policy.
... [A]n insurer’s duty to defend its insured depends on the allegations contained in the four corners of the complaint.3
Two recent Wisconsin Supreme Court decisions have emphasized the vitality of the rule. In Marks v. Houston Casualty Co., the court stated: “[O]nly 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.”4 The insured in Marks tried to argue that the policy exclusions could not be considered. The court rejected that limitation.5
In Water Well Solutions Service Group Inc. v. Consolidated Ins. Co., the court rejected the argument that the complaint could be incomplete or ambiguous such that extrinsic evidence like affidavits could be used to supplement the facts considered in determining the duty to defend.6 In doing so, the supreme court rejected the idea that there are any exceptions to the four-corners rule, stating: “[T]here is no exception to the four-corners rule in duty to defend cases in Wisconsin.”7
Marks and Water Well are just the latest in a long line of decisions, dating back fifty years, in which the supreme court has repeatedly made use of the four-corners rule while at the same time rejecting the use of extrinsic evidence to determine the insurer’s duty to defend.8
Applying the four-corners rule favors the insured. At the early stage of the litigation, the rule requires that the allegations within the four corners of the complaint be construed liberally in favor of finding insurance coverage in order to protect the insured. This approach also recognizes that the duty to defend is broader than the duty to indemnify.9 The complaint sets the outer bounds for any judgment that may result.10
Sneaking Outside of the Four Corners
Despite the four-corners rule’s long standing, decisions of the Wisconsin Court of Appeals have occasionally strayed from a strict application of the rule. The usual source of this straying is a snippet or excerpt from some earlier decision which, without consideration of context, can yield a result at odds with the four-corners rule. One example is Berg v. Fall.11 In Berg, the court of appeals addressed the insurer’s duty to defend a complaint arising out of a fight where the insured struck the plaintiff, but the insured claimed self-defense. The complaint obviously did not allege self-defense. The insurer moved for summary judgment, seeking a declaration that it had no defense or indemnity obligations, while the insured opposed the motion, arguing that he had been defending himself and did not intend to injure the plaintiff. In doing so, the insured relied on deposition testimony.12 Instead of a strict application of the four-corners rule, the court of appeals in Berg agreed to rely on the extrinsic evidence—the deposition testimony—to conclude that the plaintiff’s injury was outside of the insurance policy’s intentional injury exclusion, and that the insurer therefore had a duty to defend the insured.13
The Berg court cited the Wisconsin Supreme Court’s 1967 decision in Grieb v. Citizens Casualty Company as support for its decision to carve out a “self-defense exception” to the four-corners rule.14 Grieb had noted in dicta, citing to the American Law Reports (ALR), that there were four exceptions to the four-corners rule.15 The ALR exceptions included “a conflict of allegations and known facts, where the allegations are ambiguous or incomplete.”16 While the Berg decision did not expressly refer to the ALR exceptions, it effectively applied them in finding that there was a duty to defend.
In Water Well, the Wisconsin Supreme Court expressly overruled Berg, emphasizing that courts are not to consider any extrinsic evidence in determining the insurer’s duty to defend:
We now unequivocally hold that there is no exception to the four-corners rule in duty to defend cases in Wisconsin. This position is consistent with long-standing precedent, including Grieb. Our passing reference in Grieb to “at least four exceptions to the general rule,” 33 Wis. 2d at 558, should not be read as an adoption of any exception to the four-corners rule. Rather, by citation to the American Law Reports, this passage in Grieb merely recognized that exceptions exist in other jurisdictions. That Grieb did not adopt any exceptions to the four-corners rule is further supported by the fact that Grieb never specifically enumerated or described any exception to the four-corners rule. Furthermore, our analysis in Grieb plainly reveals that we did not consider extrinsic evidence; rather, we applied the four-corners rule to conclude that the allegations against Grieb in the taxpayer’s suit did not fall within the coverage provided by the insurance policy at issue. Id. at 559. We overrule any language in Berg suggesting that evidence may be considered beyond the four corners of the complaint in determining an insurer’s duty to defend its insured.17
Despite this language in Water Well, the court of appeals in the recent Stimac decision has again found a way to employ extrinsic evidence despite the four-corners rule.
Stimac: A Recent Departure from the Four Corners
The court of appeals’ recent decision in Stimac creates a significant exception to the four-corners rule in a way detrimental to both insurers and insureds and contrary to the Wisconsin Supreme Court’s recent decisions. The decision holds that any time an insurer defends under a reservation of rights and moves to bifurcate and stay until the circuit court rules on the duty to defend, the fourcorners rule does not apply and extrinsic evidence must be considered: “When an insurer provides a defense to its insured, any extrinsic evidence offered by either party must be considered by the court on the question of coverage.”18
In Stimac, the plaintiff alleged sewage and mold contamination to a home. The plaintiff alleged Wisconsin Power and Light Company (WPL) negligently broke a sewer line while excavating, causing sewage back up. WPL hired Aquire Contracting and Restoration, Inc. (Aquire), which was alleged to have negligently failed to properly restore the property, causing further mold growth and exacerbation of “sewerage and mold odors.” The insurer was named as a defendant, answered, and initially provided Aquire with a defense under a reservation of rights. However, the insurer immediately moved to bifurcate and stay, and then moved for summary judgment on the duty to defend and indemnify. It relied on the long-standing four-corners rule, presenting no extrinsic evidence. The insurer argued that damages alleged in the complaint were specifically excluded by the policy’s fungi and bacteria exclusion, pollution exclusion, and business risk exclusions.
In response, both the plaintiff and Aquire submitted affidavits and expert reports covering a broad range of issues, including the work done by Aquire and its subcontractors, mold contamination, and sewage odors and habitability. The insurer objected to the use of extrinsic evidence, relying on the four-corners rule.
The circuit court held that it must apply the four-corners rule, and concluded that the fungi and bacteria, pollution, and business risk exclusions all precluded coverage, and that the insurer therefore had no duty to defend Aquire.
The court of appeals reversed. The court recognized that the insurer had moved to bifurcate and stay, relied solely on the four-corners rule, and submitted no extrinsic evidence. Nonetheless, because the insurer chose to defend its insured under a reservation of rights, the court of appeals rejected application of the four-corners rule and held that the circuit court should have considered extrinsic evidence in that circumstance. The court of appeals remanded the case back to the circuit court for consideration of extrinsic evidence, and even invited additional discovery.
The insurer’s approach in Stimac was consistent with Water Well. The insurer asked the court to analyze the duty to defend and indemnify based solely upon consideration of the four corners of the complaint and the insurance policy. The insurer did not unilaterally deny. Instead, it promptly sought a court declaration. The insurer did not hang its insured out to dry, instead defending under an express written reservation of rights, which is the procedure that has been recommended by the supreme court when coverage is disputed.19
By contrast, the plaintiff and Aquire both acted consistent with the overruled Berg decision. They submitted affidavits, expert reports, and work documents in an effort to alter and supplement the allegations of the complaint. The submission of this extrinsic evidence was no different than the submission of the extrinsic evidence in Berg, which had been expressly overruled by Water Well.
The rationale given for rejecting the four-corners rule was that the insurer had provided a defense under a reservation of rights. The court of appeals’ decision made a point of stating that, “[i]n this appeal, we address the procedure utilized when an insurer denies coverage.”20 It stated, as a generally applicable rule, that any time an insurer defends under a reservation of rights and moves to bifurcate and stay until the circuit court rules on the duty to defend, the four-corners rule does not apply: “When an insurer provides a defense to its insured, any extrinsic evidence offered by either party must be considered by the court on the question of coverage.”21
The Stimac decision effectively limits the four-corners rule to situations where the insurer denies a defense outright.22 This will effectively confine the four-corners rule to a handful of cases, rather than have it serve as the principal measure of the insurer’s duty to defend, as stated in Water Well. If insurers continue the cautious approach, defending under a reservation of rights, the Stimac decision will also make every duty to defend determination subject to an avalanche of dueling affidavits and a multitude of extrinsic evidence. In addition, the duty to defend will be much less likely to be able to be determined promptly at the beginning of the lawsuit, a benefit to both insurers and insureds, because the extrinsic evidence that will now be necessary for a coverage determination is rarely developed enough at the outset of the lawsuit. As a result, extensive discovery will likely now be required in most duty to defend cases, effectively nullifying the entire purpose of seeking a bifurcation and stay.
The court of appeals in Stimac relied on two Wisconsin Supreme Court decisions, Estate of Sustache v. Am. Family Mut. Ins. Co. and Olson v. Farrar, which considered extrinsic evidence in determining coverage. However, both of those decisions involved very different circumstances, where the case had proceeded through discovery, the insurer and insured submitted extrinsic evidence, and all of the parties were headed for a trial on coverage.23 Neither decision held that the four-corners rule was inapplicable just because the insurer had agreed to defend the insured under a reservation of rights.
In Sustache, the insurer submitted extrinsic evidence, affidavits, and two depositions, and “asked for a coverage hearing.”24 Plainly, discovery had occurred and the matter was headed to a coverage determination on the facts revealed in discovery and presented to the court.
Olson, too, stated that extrinsic evidence may be considered, but suggested that it was because the case was headed towards a coverage trial.25 In Olson, the insurer and the insured submitted affidavits with extrinsic evidence.26 Olson was focused on the potential for “a coverage trial [where] extrinsic evidence may be introduced ‘where appropriate to the resolution of the coverage question.’”27
Stimac presented very different circumstances. The insurer quickly sought a stay, very little discovery had happened, and the insurer moved for summary judgment solely on the four-corners rule. Olson and Sustache suggest a distinction between early-stage duty to defend and indemnify determinations that are properly made without considering extrinsic evidence under long-standing Wisconsin law, and coverage determinations made at or near the point of trial that may rely upon extrinsic evidence. However, neither Sustache nor Olson goes so far as to hold that extrinsic evidence may be considered every time an insurer provides a defense to its insured. Yet, that is the very holding in Stimac.28
The decisions in Sustache and Olson suggest a circumstance at the opposite end of the spectrum from Stimac, where the case has progressed for a substantial period of time, a significant amount of discovery has occurred on the coverage issue, and the parties collectively direct the court’s attention to discovery and not just to the complaint. In this circumstance, discovery may have shown that the broad allegations of the complaint are no longer representative of the plaintiff’s claim and the judgment that the plaintiff might recover.
Practical Effect and Consequences of Stimac
The insurer who defends under a reservation of rights, moves to bifurcate and stay, and promptly moves for summary judgment based on the complaint allegations is doing precisely what the supreme court has said it prefers. The insurer should not be penalized for doing so by losing the certainty of the four-corners rule.29 The natural result of the Stimac decision will be fewer defenses provided to insureds, as insurers will not want to lose the clarity and efficiency of the four-corners rule. This result is contrary to what the Wisconsin Supreme Court has said is good public policy. The supreme court believes that “[u]nilateral determinations to refuse to defend an insured” are disfavored, and insurers do so at their own peril.30 Under Water Well, when an insurer takes the preferred approach and seeks a stay and determination of the duty to defend from the circuit court, the insurer is protected from the negative consequences of a potential breach, and the court is to apply the four-corners rule without exception in analyzing whether a duty to defend exists. The court of appeals in Marks noted the interplay of incentives and penalties:
By using the normal duty to defend test to assess whether the insurer has breached its duty to defend, Professional Office Bldgs. provides a strong incentive to insurers to provide a defense to insureds, even when the insurer contests its obligation to provide coverage. The substantial benefit to insurers of providing an initial defense and promptly litigating the duty to defend is that, if the insurer is wrong in its assessment that it has no duty to defend, the insurer does not forfeit its right to contest coverage based on the facts, as further developed in discovery or as found by a fact finder. Under the Professional Office Bldgs. estoppel rule, if the insurer unilaterally denies a defense, it runs the risk that it will be required to provide coverage, even if later it can be shown that its policy does not provide coverage under the developed facts. The risk of being wrong is ample incentive for insurers to err on the side of caution, without the additional burden imposed by Grube.31
Prompt litigation of the duty to defend typically addresses the duty to indemnify as well, because the comparative breadth of the duty to defend necessarily encompasses the duty to indemnify. The court of appeals recently noted this, stating: “The duty to defend is broader than the duty to indemnify, ... and, accordingly, if there is no duty to defend there is also no duty to indemnify.”32 This reflects age-old law that “[a]s a general rule judgments must conform to the pleadings and the relief granted is limited by that demanded in the complaint, both as to character and amount.”33 Thus, a final declaratory judgment on both the duty to defend and the duty to indemnify based on the four corners is consistent with Wisconsin law at the outset of a lawsuit.
The Stimac decision has a petition for review pending. The supreme court may clarify the vitality of the four-corners rule, and the impact of providing a defense to an insured under a reservation of rights to dispute coverage. The policy goals identified over the decades of the four-corners rule suggest that the mere fact of providing a defense should not render the four-corners rule inapplicable. Insurers and insureds would be disserved. So, too, would courts faced with a surge in coverage disputes requiring a fact-intensive analysis of affidavits, depositions, and other extrinsic evidence that will be filed, when previously the complaint allegations and the policy terms were dispositive.
Jeff Leavell was admitted to the Bar in 1983. He graduated from the University of Chicago, with honors, in 1980, and the University of Wisconsin Law School, J.D., cum laude, in 1983. He was judicial law clerk for the Wisconsin Court of Appeals District IV from 1983-1985.
Mr. Leavell is a frequent lecturer and author, and has spoken to numerous Civil Trial Counsel of Wisconsin Conferences and Wisconsin Defense Counsel Conferences over the last two decades. He regularly represents insurers and other parties in duty to defend disputes, in Wisconsin and other states and federal venues. Some recent duty to defend decisions include Stimac Family Trust v. Power & Light, 2017 WI App 33; Smith v. Anderson, 2016 WI App 16; Weis v Kapinos, 2015 WI App 37; Schinner v. Gundrum, 2013 WI 71; Sawyer v. West Bend Mut. Ins. Co., 2012 WI App 92. He is the principal and founder of Jeffrey Leavell, S.C., established in 1994.
Mr. Leavell is a Board Certified Civil Trial Specialist by the National Board of Trial Advocacy. He has been elected by his peers as “Superlawyer” every year since 2006 as published in Milwaukee Magazine. Jeffrey Leavell, S.C. has been recognized annually since 1995 by Martindale-Hubbell in its Bar Register of Preeminent Lawyers as a most distinguished law practice, achieving the highest level of legal and ethical standards. He served on the Board of Governors of the Racine County Bar Association, and is past President of the Racine County Bar Association. He is past President of the Wisconsin Defense Counsel.
1 Stimac Family Trust v. Power & Light, 2017 WI App 33, ___ Wis. 2d ___, ___ N.W.2d ___ (Ct. App. April 19, 2017) (opinion ordered published; petition for review pending).
2 See Water Well Sols. Serv. Grp. Inc. v. Consol. Ins. Co., 2016 WI 54, ¶ 21, 369 Wis. 2d 607, 881 N.W.2d 285.
3 Id., ¶¶ 15, 20.
4 Marks v. Hous. Cas. Co., 2016 WI 53, ¶ 39, 369 Wis. 2d 547, 881 N.W.2d 309.
5 Id., ¶ 75.
6 Water Well, 369 Wis. 2d 607, ¶ 18.
7 Id., ¶ 24.
8 See, e.g., Fireman’s Fund Ins. Co. v. Bradley Corp., 2003 WI 33, ¶ 19, 261 Wis. 2d 4, 660 N.W.2d 666; Smith v. Katz, 226 Wis. 2d 798, 815-16, 595 N.W.2d 345 (1999); Doyle v. Engelke, 219 Wis. 2d 277, 284 n.3, 580 N.W.2d 245 (1998); City of Edgerton v. General Cas. Co., 184 Wis. 2d 750, 765, 517 N.W.2d 463 (1994); Elliott v. Donahue, 169 Wis. 2d 310, 320-21, 485 N.W.2d 403 (1992); Sola Basic Industries, Inc. v. United States Fidelity & Guaranty Co., 90 Wis. 2d 641, 646, 280 N.W.2d 211 (1979); Grieb v. Citizens Cas. Co., 33 Wis. 2d 552, 557-58, 148 N.W.2d 103 (1967).
9 Fireman’s Fund, 261 Wis. 2d 4, ¶ 20 (“The duty to defend is necessarily broader than the duty to indemnify because the duty to defend is triggered by arguable, as opposed to actual, coverage.”)
10 Kehl v. Kehl, 215 Wis. 353, 357, 254 N.W. 639 (1934) (“As a general rule judgments must conform to the pleadings and the relief granted is limited by that demanded in the complaint, both as to character and amount.”)
11 Berg v. Fall, 138 Wis. 2d 115, 405 N.W.2d 701 (Ct. App. 1987).
12 Id. at 118-19.
14 Berg, 138 Wis. 2d at 122 (citing Grieb, 33 Wis. 2d 552).
15 Grieb, 33 Wis. 2d at 558.
16 Estate of Sustache v. Am. Family Mut. Ins. Co., 2007 WI App 144, ¶ 11, 303 Wis. 2d 714, 735 N.W.2d 186, aff’d by 2008 WI 87, 311 Wis. 2d 548, 751 Wis. 2d 845.
17 Water Well, 369 Wis. 2d 607, ¶ 24.
18 Stimac, 2017 WI App 33, ¶ 12.
19 Maxwell v. Hartford Union High Sch. Dist., 2012 WI 58, ¶¶ 61-62, 341 Wis. 2d 238, 814 N.W.2d 484.
20 Stimac, 2017 WI App 33, ¶ 1.
21 Id., ¶ 12.
22 Id., ¶ 11 n.1.
23 See Olson v. Farrar, 2012 WI 3, ¶¶ 17-18, 35, 338 Wis. 2d 215, 809 N.W.2d 1; Estate of Sustache v. Am. Family Mut. Ins. Co., 2008 WI 87, ¶¶ 28-29, 311 Wis. 2d 548, 751 N.W.2d 845.
24 Sustache, 311 Wis. 2d 548, ¶ 28.
25 Olson, 338 Wis. 2d 215, ¶¶ 35-37.
26 Id., ¶¶ 17-18.
27 Id., ¶ 35 (quoting Lucterhand v. Granite Microsystems, 564 F.3d 809, 812 n.2 (7th Cir. 2009)).
28 Stimac, 2017 WI App 33, ¶ 12.
29 See Water Well, 369 Wis. 2d 607, ¶ 27 (providing that “proceed[ing] under a reservation of rights” rather than making a unilateral determination refusing to defend is “one of the judicially-preferred approaches” to resolving duty to defend issues).
30 Id., ¶ 27-28.
31 Marks v. Bedford Underwriters, Ltd., 2015 WI App 44, ¶ 16, 363 Wis. 2d 505, 866 N.W.2d 393.
32 Great Lakes Bevs., LLC v. Wochinski, 2017 WI App 13, ¶ 15, 373 Wis. 2d 649, 892 N.W.2d 333.
33 Kehl, 215 Wis. at 357.28 Stimac, 2017 WI App 33, ¶ 12.