Defense Digest

Thinking Inside The Box - Pennsylvania Supreme Court Upholds The "Four Corners" Rule In Insurance Coverage Disputes

It is well-settled under Pennsylvania law that an insurer's duties to defend and indemnify under an insurance policy are triggered by the allegations included within the "four corners" of a complaint against the insured. Based upon this legal principle, the Supreme Court of Pennsylvania in Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888 (Pa. 2006), recently held that the Superior Court erred by looking to information beyond the "four corners" of the complaint and holding that the insurer may have a duty to defend where the damages asserted may have been the result of an accidental "occurrence."

In Kvaerner, the insurance coverage dispute arose out of an underlying action brought by Bethlehem Steel Corporation against Kvaerner where claims of breach of contract and breach of warranty were asserted. In the underlying complaint, Bethlehem alleged that it entered into a contract with Kvaerner whereby Kvaerner agreed to design and construct a coke oven battery. Bethlehem contended that Kvaerner breached this contract because the battery was "damaged" and "did not meet the contract specifications and warranties, or the applicable industry standards for construction. . ." Bethlehem further incorporated by reference into its complaint a non-performance list, specifying the alleged damages and breaches by Kvaerner.

After being served with the underlying complaint, Kvaerner notified its insurer, National Union, of the suit, seeking defense and indemnity pursuant to two commercial general liability policies. National Union subsequently notified Kvaerner that it was disclaiming coverage, defense, and indemnity because Bethlehem's claims did not fall with the coverage provisions of the policies. Based upon this disclaimer of coverage, Kvaerner filed an action in the Court of Common Pleas of Northampton County against National Union, seeking a declaratory judgment that National Union had a duty to defend and indemnify it. The trial court granted summary judgment in National Union's favor because it found that National Union was only required to provide coverage for "accidental" damages. In reaching this conclusion, the trial court specifically looked to the allegations contained in Bethlehem's complaint and found that Bethlehem was solely seeking damages for Kvaerner's breach of contract rather than damages caused by an accident.

Kvaerner appealed to the Superior Court, which reversed and remanded the trial court's decision. Despite the Superior Court's acknowledgement that under Pennsylvania case law an insurer's duty to defend and indemnify is dependant upon whether the underlying complaint triggers coverage, it found that it could look beyond the allegations raised in Bethlehem's complaint because there was no requirement in the policies themselves that a complaint be filed to trigger coverage. As part of its analysis, the Superior Court examined the expert report submitted by Kvaerner with its cross-motion for summary judgment. Based upon that examination, the Superior Court determined that National Union had a duty to defend Kvaerner because the damages to the battery may have been the result of an accidental "occurrence" under the applicable policy.

The Pennsylvania Supreme Court granted allocatur to consider whether the Superior Court erred by, among other things, looking beyond the "four corners" of Bethlehem's complaint. The Pennsylvania Supreme Court found that the Superior Court erred by looking to information not contained in the underlying complaint. The Kvaerner Court relied upon the well-established law of this commonwealth that an insurer's duties to defend and indemnify under an insurance policy are triggered solely by the language of the complaint against the insured. The Court found no reason to deviate from this long-standing rule and, therefore, found that the Superior Court's approach in looking behind Bethlehem's complaint was reversible error. Rather, the Court examined the language of the policies themselves, along with Bethlehem's complaint, to determine whether the allegations contained therein constituted the type of instances that trigger coverage and a duty to defend.

The Court reviewed the pertinent provisions of the National Union policies, which provided the duty to defend any "suit" seeking "property damage" caused by an "occurrence" in the "coverage territory." The policies defined "property damage" as "[p]physical injury to tangible property, including all resulting loss of use of that property." An "occurrence" was defined as "an accident, including continuous or repeated exposure to substantially the same or general harmful conditions." Finally, the policies defined "suit" as "a civil proceeding in which damages because of . . . 'property damage,' . . . to which this insurance applies are alleged." Since the policies did not define "accident," the Court applied the ordinary definition of "accident" as "unexpected" and found that this implied "a degree of fortuity that is not present in a claim for faulty workmanship." The underlying suit alleged only property damage to the battery itself from faulty workmanship. The Pennsylvania Supreme Court, therefore, found that such an event did not constitute an accident or occurrence under the policies and that National Union had no duty to defend or indemnify Kvaerner. The Court opined that to hold otherwise would be "to convert a policy for insurance into a performance bond," and the Court was unwilling to do so.

With its opinion in Kvaerner, the Pennsylvania Supreme Court upheld the well-established "four corners" rule in insurance coverage disputes. This case should, therefore, serve as a reminder to every carrier that their duty to defend and indemnify an insured under a policy is triggered solely by the allegations of the complaint against the insured.

* Allison is an associate in our Philadelphia, Pennsylvania, office. She can be reached at (215) 575-2897 or aibressler@mdwcg.com.