I’ve Made Up My Mind – Don’t Confuse Me With Facts

I’ve Made Up My Mind – Don’t Confuse Me With Facts

The Four Corners Rule, applied in Pennsylvania and several other states, limits the decision to defend and/or indemnify an insured to a review of the allegations of a complaint. As such, it ignores facts extrinsic from the wording of the complaint, and provides an insured with coverage that would not exist if the court applied the facts rather than the allegations. In Lanigan v. T.H.E. Insurance Co., 646 WDA 2013 (Pa.Super. 03/14/2014), a Pennsylvania appellate court was asked to reverse a summary judgment in favor of an insurer by ignoring the facts and applying only the allegations of the complaint.

FACTS

William Michael Lanigan (“Mr. Lanigan”) filed the within declaratory judgment and bad faith action against T.H.E. Insurance Company (“Insurer”) seeking a declaration that the Insurer breached its duty to defend him under a commercial liability policy and acted in bad faith. Insurer filed a motion for summary judgment as to both claims; Mr. Lanigan filed a cross-motion for summary judgment solely on the duty to defend issue. The trial court granted summary judgment in favor of Insurer as to both counts contained in the complaint, and Mr. Lanigan appealed.

Mr. Lanigan was driving his car in a race at the Mercer Raceway Park in Mercer, Pennsylvania. The throttle stuck unexpectedly, Mr. Lanigan lost control on a turn, and he struck the catch-fence. Steven Guthrie, Jr. and Samuel Ketcham were standing behind the fence in the pit area when the impact occurred. Mr. Guthrie died as a result of his injuries, and Mr. Ketcham was seriously injured.

Mr. Lanigan was sued and tendered his defense to Insurer, which verbally denied him a defense on December 7, 2009. Insurer responded in writing stating that the denial was based upon Exclusion 8 of the policy endorsement which excluded coverage for “Bodily injury… to any participant against another participant while practicing for or participating in a racing program, which is sponsored by the Insured.”

Mr. Lanigan retained his own counsel to defend him in the underlying litigation. Prior to the filing of the within declaratory judgment action on August 18, 2010, he was dismissed from that litigation. All that remained was a claim for the costs of defense.

Analysis

At issue is an insurance company’s duty to defend its insured. The courts of this Commonwealth have long held that the duty to defend is a distinct obligation, separate and apart from the insurer’s duty to provide coverage. In making a determination whether there is a duty to defend in Pennsylvania, a court must compare the four corners of the insurance contract to the four corners of the complaint. An insurer may not justifiably refuse to defend a claim against its insured unless it is clear from an examination of the allegations in the complaint and the language of the policy that the claim does not potentially come within the coverage of the policy.

Mr. Lanigan contends that he is an insured under the commercial general liability policy at issue and that neither the factual allegations of the underlying complaints nor the complaints joining him as an additional defendant support Insurer’s denial of a defense. He continues that the complaints asserted negligence claims against him that potentially fell within the coverage and the “participant” exclusion relied upon by Insurer is to be strictly construed against it.

Mr. Lanigan was an insured for purposes of the policy. “Participant” was defined as individuals who have registered to and actually do engage in the racing activity provided under the raceways program – including drivers, mechanics, pitmen, race officials, flagmen, announcers, ambulance crews, newsmen, photographers, gate workers, and all other persons bearing duly and officially assigned credentials and/or guest pit passes for the program.

Insurer relied upon an exclusion that provided: “This insurance does not apply to any loss on any premises owned by, rented to, or controlled by any insured for any of the following:… “(8) bodily injury or property damage to any participant against another participant while practicing for or participating in a racing program, which is sponsored by the Insured.”

While Mr. Lanigan was an insured the exclusion prevented coverage if the injured party was also a participant. Insurer maintains that, immediately after the accident, it commenced an investigation, which “established that both accident victims were members of the Guthrie Motor Sports pit crew, had executed the Agreements granting them the right to be present in the restricted pit area, that both had been issued armbands allowing such access and that both were present in the pit area when the accident happened.”

The trial court defined the issue before it as, whether “Mr. Guthrie and Mr. Ketcham were ‘participants’ at the time ofthe accident.” In making that determination, it expressly considered facts obtained during the discovery process in the underlying litigation. The issue, properly framed, is whether, examining only the underlying complaints and the insurance policy, the claims of negligence against Mr. Lanigan were potentially covered under the policy, giving rise to a duty to defend. The appellate court concluded the trial court erred when it considered the Insurer’s investigation and discovery in the underlying case in ascertaining whether there was a duty to defend.

Additionally, the complaint contained an allegation that the victims sustained their injuries while they were in the pit area. The complaint, however, contains no averments that they were registered to engage in racing activities or that they were actually engaged in such activities. It did not indicate that they were participants as defined in the policy.

In deciding that Insurer did not owe a duty to defend, the trial court applied the wrong legal standard. It looked beyond the policy and the allegations of the complaint to discovery and investigative reports. The facts that indicate that plaintiffs purchased a pit pass, signed a release form, and wore an armband, are not present in the complaint.

In essence, the court concluded that the policy exclusion applied to negate coverage, and absent coverage, there was no duty to defend. In so holding, the trial court was complicit in Insurer’s attempt to define its duty to defend based on the outcome of the coverage determination, an approach the Pennsylvania Supreme Court rejected. The appellate court found that the allegations of the underlying consolidated complaints could possibly have resulted in coverage under the endorsement. Based on the allegations in the complaints and the policy, Insurer was obligated to defend Mr. Lanigan in the underlying action until it was conclusively determined that the claims asserted were not covered. Hence, summary judgment on the duty to defend issue should have been entered in favor of Mr. Lanigan rather than Insurer.

Pennsylvania courts recognize that a bad faith claim is separate from the basic claim for coverage, and the success of the bad faith claim is not dependent upon the success of the underlying claim. Furthermore, the common law provides a remedy for bad faith breach of a duty to defend in addition to statute. Since it concluded that Insurer should have provided Mr. Lanigan with a defense in the underlying action, there is a material issue whether Insurer’s refusal to do so was made in bad faith.

In order to constitute bad faith, it is not necessary that the refusal to defend be fraudulent. However, mere negligence or bad judgment is not enough. Mr. Lanigan acknowledges that in order to prove bad faith, he must show by clear and convincing evidence that Insurer (1) did not have a reasonable basis for denying benefits under the policy, and (2) knew or recklessly disregarded its lack of a reasonable basis in denying the claim. The fact finder is charged with deciding whether the insurer recklessly disregarded its duty to defend against the claim, and if this disregard rose to the level of improper purpose and beyond gross negligence, which proves bad faith.

The case was remanded to the trial court for entry of summary judgment in favor of Mr. Lanigan on the duty to defend issue and for further proceedings in the bad faith action.

ZALMA OPINION

The four corners rule worked an injustice in this case. It found a duty to defend and potential bad faith because the insurer, whose investigation established facts that made it impossible for there to be coverage, because the lawyer who sued its insured failed to allege the facts that eliminated coverage. This is allowing a judge-made rule overcome logic and justice. Many states allow insurers to use extrinsic evidence – not alleged in the complaint – to make a decision on coverage. Often that extrinsic evidence provides coverage that would have been eliminated by the allegations of the complaint as well as defeat coverage.

The problem with the four corners rule is it allows a plaintiff’s counsel to plead a case that would prevent an insured from receiving defense to punish the defendant when if extrinsic facts were considered it would get coverage. The rule makes no sense and not only hurts insurers but those insured.