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In Massachusetts, when an insured’s act falls within an exclusion in the policy, the insurance company may be entitled to declaratory or summary judgment, which ultimately relieves it from its contractual duty to defend.[1]  Policies, however, are to be construed strictly against insurers when courts analyze any ambiguity.[2]  Insurance companies and policyholders become frustrated with the courts when they attempt to strike a balance between the competing interests: insurance companies believe they should not be required to pay for a policyholder’s litigation when it is the insurance company’s belief that the behavior falls explicitly within an exception.  Contrasting the insurance companies interest is that of the policyholders, who, as consumers, believe they are entitled to protection when there are differing interpretations because they did not drafted the policies, but merely assented to them.  Both the insurer and the insured have valid arguments, but how does a court decide in favor of one over the other?

When there are ambiguities in contract interpretation, these ambiguities are to be construed against the insurance company because they were the ones in control when drafting the contract.[3]  Quite often, policyholders will argue a clause is ambiguous and they are entitled to coverage.  Most insurance contracts, however, are quite detailed to avoid this issue; when language within a policy is free of ambiguity, the words must be construed in their “usual and ordinary sense.”[4]  This is where the issue arises because it is usually not clear whether an ambiguity exists.

Typically, when a court evaluates whether an insurance company has a duty to defend, it may only look to the plaintiff’s complaint and the policy.[5]  The same goes for an insurance company:  they should compare the allegations contained within the complaint with the terms of the policy.  Courts across the country often refer to this as the “four corners” rule because they only look within the four corners of the document; they do not consider other documents when evaluating this broad duty.[6]  This seemingly logical rule makes sense because an insurer’s duty to defend is decided at the beginning of the case, long before many facts come to light during discovery.  In very rare circumstances, however, an insurance company may have undisputed extrinsic knowledge of a fact that “takes the case outside the coverage and that will not be litigated at the trial of the underlying action.”[7]

Massachusetts case law provides only one binding case in which the Appeals Court allowed the introduction of extrinsic evidence when evaluating whether an insurance company has a duty to defend.[8]  In Whelpley, the complaint alleged that a child sustained injuries from an accident involving an all-terrain vehicle; however, the complaint failed to allege where the accident occurred.[9]  The insurer disclaimed coverage because they had knowledge that the accident occurred on a public way, which was part of an exclusionary provision.[10]  The court affirmed that the insurance company was permitted to include extrinsic evidence to negate its duty to defend because the fact that the accident occurred on a public way was known by the insurer and undisputed by the insured.[11]

If an insurer is unsure or has doubts as to whether they have a duty to defend, a suggested course of action would be to send the insured a letter, stating they will defend under a reservation of rights.[12]  A reservation of rights allows the insurance company flexibility to defend the insured, but if some fact comes to light that makes it clear the insured is not covered under the policy, the insurance company may disclaim coverage and stop its defense.[13]  This allows the opportunity for the insureds to take precautionary steps to protect their rights.  If an insurance company ultimately disclaims coverage, they cannot retain any control over the remainder of the proceedings.[14]

The duty to defend is often tied together with the duty to indemnify, but the duty to indemnify is much narrower.[15]  An indemnification provision requires an insurance company to pay its insured only when judgment is rendered against the insured and for an act or omission that is within the policy provisions.[16]  The duty to indemnify is based on the facts decided upon at trial, compared to the duty to defend, which usually only looks to the complaint and the policy.[17]

As of 2016, only thirty-one states have adopted varying degrees of exceptions to the “four corners” rule, including Massachusetts.[18]  It appears that states are becoming more liberal with allowing more extrinsic evidence, however, usually they are very limited in what they allow.[19]  This could be beneficial to insurance companies because a poorly-drafted complaint may intentionally or unintentionally leave out key information that would immediately enable them to disclaim coverage.  Also from a logic standpoint, it would make sense for an undisputed material fact that was not alleged in the complaint to be introduced if it would undoubtedly disclaim coverage; why should an insurance company use its valuable time and resources on preparing for litigation proceedings when they are certain–based on extrinsic evidence–the event was not covered?

While policyholders do need protection, and are afforded arguably more protection than insurance companies, if insurance companies are required to defend frivolous cases they should not be defending, it will ultimately cause more grief to the policyholders.  First, if the insurer was defending under a reservation of rights and it came to light later in proceedings that it may be disclaimed, the policyholder would be required to take over the rest of the case.[20]  This would be a daunting task for an insured who assumes they will have a minimal involvement in the case and everything will be handled by the insurance company.  Second, with increasing claims associated with accidents or catastrophic events, insurance companies may be required to defend even more claims than in the past without being able to introduce extrinsic evidence that would undoubtedly disclaim coverage.[21]  In order to offset these costs in the future, insurance companies could increase premiums, thereby causing more grief to policyholders.

Ultimately, if more courts throughout the United States allowed the limited use of extrinsic evidence–as Massachusetts does–less time, money, and efforts would be wasted by insurance companies and ultimately policyholders.  In a world of change and unlikely events, insurance claims continue to soar and readily known, undisputed facts that fall within policy exclusions should act to immediately disclaim coverage.

[1] See Sterilite Corp. v. Continental Cas. Co., 458 N.E.2d 338, 343-44 (Mass. App. Ct. 1983) (identifying declaratory judgment appropriate measure to resolve duty to defend).

[2] See id. n.10, citing Vappi & Co. v. Aetna Cas. & Sur. Co., 204 N.E.2d 273, 275-76 (Mass. 1965) (construing ambiguities against insurance company).

[3] See Transamerica Ins. Co. v. Norfolk & Dedham Mut. Fire Ins. Co., 279 N.E.2d 686, 688 (Mass. 1972) (stating ambiguities “resolved against the insurer”).

[4] See Barnstable County Mut. Fire Ins. Co. v. Lally, 373 N.E.2d 966, 968-69 (Mass. 1978) (addressing ambiguity concerns when interpreting policies).

[5] See Doe v. Liberty Mut. Ins. Co., 667 N.E.2d 1149, 1152 (Mass. 1996) (highlighting only documents with force when examining duty to defend).

[6] See Water Well Solutions Service Group, Inc. v. Consolidated Ins. Co., 881 N.W.2d 285, 294-95 (Wis. 2016) (explaining meaning behind four corners rule).

[7] See Farm Family Mut. Ins. Co. v. Whelpley, 767 N.E.2d 1101, 1104 (Mass. App. Ct. 2002) (uncovering unusual exception to four corners rule).

[8] See id. (illustrating “very rare” exception).

[9] See id. at 1102.

[10] See id.

[11] See Whelpley, 767 N.E.2d at 1104.

[12] See Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 788 N.E.2d 522, 538-39 (Mass. 2003) (permitting insurers to defend under reservation of rights).

[13] See id.; see also Salonen v. Paanenen, 71 N.E.2d 227, 230-31 (Mass. 1947) (comparing force of nonwaiver agreement to reservation of rights letter).

[14] See Salonen, 71 N.E.2d at 232 (describing lack of role for insurance company once coverage disclaimed).

[15] See A.W. Chesterton Co. v. Massachusetts Insurers Insolvency Fund, 838 N.E.2d 1237, 1256 (Mass. 2005) (distinguishing duty to defend from duty to indemnify).  “It is settled that an insurer’s duty to defend is independent from, and broader than, its duty to indemnify.” See id.

[16] See Boston Symphony Orchestra, Inc. v. Commercial Union Ins. Co., 545 N.E.2d 1156, 1157 (Mass. 1989) (explaining what indemnification provision entails).

[17] See id. (comparing requirements of duty to indemnify versus duty to defend), citing Desrosiers v. Royal Ins. Co., 468 N.E.2d 625, 627-28 (Mass. 1984).

[18] See David G. Jordan & Jeffrey J. Vita, Extrinsic Evidence: Use of Extrinsic Evidence in Determining Duty to Defend, Saxe Doernberger & Vita, P.C., [] (surveying fifty states and their use of extrinsic evidence); Randy Maniloff, Supreme Court Says 31 States Have Exceptions to the “Four Corners” Rule for Duty to Defend, Coverage Opinions, [] (highlighting recent decision discussing states allowing extrinsic evidence).

[19] See Jordan, supra note 18 (discussing varying degrees of evidence different states allow).

[20] See supra note 14 and accompanying text (explaining shift of responsibility once insurer disclaims coverage during proceedings).

[21] See Press Release, J.D. Power, Premium Increases Become Sticking Point for U.S. Auto Insurance Customers, J.D. Power Finds (Jun. 19, 2017), [] (acknowledging differences between customer service satisfaction and price satisfaction in insurance industry); Press Release, J.D. Power, Satisfaction with Property Insurance Claims Surges, Even as Number of Catastrophes Reaches 10-Year High, J.D. Power Finds (Mar. 1, 2017), [] (highlighting “ten-year high” in catastrophic events, which corresponded with low satisfaction in past).