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Four Corners Rule: Duty to Defend
By: Nicholas Nardi, October 2010

Oregon courts traditionally held that the only documents relevant to determining an insurer's duty to defend are the "four corners" of the complaint and the policy. In Fred Shearer & Sons, Inc. v. Gemini Ins. Co. (Or. App. September 29, 2010), the Court of Appeals carved out an exception. Facts extrinsic to the complaint and policy may be examined, in order to determine whether an entity qualifies as an insured.

Four Corners Rule

In Fred Shearer & Sons, a stucco installer argued that it was an additional insured under a policy issued to the stucco distributer. The stucco distributer's policy contained an additional insured endorsement providing coverage for vendors of its products, to the extent that the injury arose out of products distributed in the "regular course" of the vendor's (installer's) business. The distributer's insurer (Gemini) asserted that, because the complaint was silent as to whether the installer distributed the stucco product "in the regular course" of its business, the installer had not proven that it was an insured.

The court held that the four corners rule only applies when determining whether the alleged "conduct" of the insured at issue in the underlying complaint triggers coverage, as opposed to the more fundamental question of whether an entity is an insured in the first instance. The court reasoned that facts necessary to establish that an entity is an insured often are not relevant to the merits of the case, and would not be pled. Therefore, it is not proper to apply the four corners rule in that context. This ruling provides support for the belief among practitioners in Oregon that the four corners rule probably does not apply when issues arise that would not normally be addressed in a complaint against the insured.

In a footnote, the court also held that the additional insured endorsement applies equally to vendors who sell the product "off the rack," and vendors who use the product in connection with providing a service.

Policy Exclusions

The court further held that three policy exclusions did not eliminate coverage. The work product exclusion did not eliminate coverage, because the complaint was ambiguous regarding whether "leaking and mold" caused by the defective stucco damaged only the stucco, or also other building components. The court followed the rule that ambiguities in a complaint should be construed against the insurer.

Next, the court held that the exclusion in the additional insured endorsement removing coverage when the vendor (installer) makes a physical or chemical change in the product (such as mixing it with water to install it), was ambiguous and should be construed against the insurer. Specifically, the court believed that it was unclear whether the exclusion applied to injury arising solely out of a defect in the product which existed before the product was altered by the installer.

Finally, the court held that an exclusion in the additional insured endorsement removing coverage when the vendor (installer) uses the product as a part or ingredient in something else, was also ambiguous, because it was unclear whether the exclusion applied to injury caused by a defect in the product which existed before the installed incorporated it into something else.

Notably, the court continued the current trend of not considering extrinsic evidence to resolve policy ambiguities. The proper use of extrinsic evidence in this context is not completely settled.

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