Four Corners Rule prevails in Tenth Circuit

The U.S. Court of Appeals for the Tenth Circuit found that a plaintiff’s complaint failed to trigger a duty to defend the driver of a car in the underlying suit because the complaint failed to state any facts that could have plausibly given rise to a claim covered by the relevant insurance policy. Also, without extrinsic evidence, it could not be concluded from the relevant documents, the complaint and the policy, that the driver was an insured under the policy.

The case

While driving a car owned by another person and insured by Arizona Automobile Insurance Company (Arizona Ins.) Marlena Whicker rear-ended a taxi and caused injury to the taxi’s passenger, Georgiana Chavez. No one disputes that Whicker was responsible for the accident. At the time of the incident, Whicker was living with the vehicle’s owner but was not related to him. He was one of the vehicles three named insureds, but she was not included in that number. Since she was not covered, the policy did not automatically cover Whicker’s use of the vehicle. The policy did, although, cover drivers of the vehicle with the named insured’s permission, making car users insureds in their own right.

Before the case made it to the state court, Arizona Ins. learned that Whicker lived with the insured. Arizona Ins. attempted to contact the named insured twice, unsuccessfully, to determine if Whicker’s use of the vehicle was permissive. Arizona Ins then denied coverage because it could not determine whether or not Whicker was actually a covered driver.

Since the claim was not satisfied, Chavez demanded a settlement from Arizona, seeking the policy limits. Arizona Ins. once again denied coverage. Chavez sued Whicker in state court and sent a notice to Arizona Ins. of the suit. Neither Whicker nor Arizona defended the suit and the $700,000 default judgment was entered against Whicker. She was unable to satisfy the judgment and assigned Chavez the right to pursue the bad faith claim she had against Arizona Ins. in lieu of payment. Chavez brought this action as assignee of Whicker against Arizona Ins. to recover the damages. She alleged that Arizona Ins. breached its duty to defend Whicker in the underlying suit.

Chavez claims Arizona breached its duty of good faith in the earlier case and argues that Arizona Ins. had a duty to defend Whicker because it knew she might have used the vehicle with a named insured’s permission, and might have been covered by the policy.

Colorado has adopted the “complaint rule” as a pleading requirement in cases like this one, to determine if the policy is implicated and when the duty to defend arises. In cases of failure to defend, the complaint rule is applied to determine if the duty was properly triggered in the litigation and so breached by the failure of the insured to provide a defense. The Colorado complaint rule requires that a complaint alleges facts that would plausibly yield insurance coverage. In determining this, the court looks only within the four corners of the complaint and the four corners of the policy.

So, for Chavez to establish that the allegations in the underlying complaint, and not extrinsic evidence, demonstrated coverage for her injuries, she must establish that the complaint alleged that Whicker was covered in her capacity as a driver of the covered car when she caused the accident and that the damage itself is the type covered by the policy.

Since Whicker was not named in the policy, mentioning her name does not automatically satisfy the requirement that the insured be identified as an insured. Chavez could have identified Whicker as an insured by issuing a statement that her permissive use of the vehicle made her an insured for the purposes of the suit, but she did not. Chavez failed to establish that Whicker could have been a permissive driver, so as a result of a lack of allegations Arizona had no duty to defend her. Chavez’s complaint failed to establish on its face any facts that could have even plausibly given rise to a claim covered by an Arizona policy, so the order to dismiss the case was affirmed.

The case is Chavez v. Ariz. Auto. Ins. Co., No. 18-1473, 2020 U.S. App. LEXIS 1603 (10th Cir. Jan. 17, 2020).

Editors Note: The complaint rule can be used in two ways, either offensively or defensively. Here, Chavez used it offensively, to trigger a duty to defend. Insurers can also use the complaint rule to avoid defending claims against them in cases where plaintiffs thoroughly fail to properly allege any facts or claims, so they do not trigger any duty.

There have been several instances where the Colorado Supreme Court has stated that an insurer can be forced to consider only allegations in a complaint when attempting to avoid a duty to defend. It has also held that an insured cannot show that a duty to defend exists solely based on extrinsic evidence.

Related:

• Duty to defend: ‘Four corners’ or ‘four corners, but…’?
• ‘Four corners’ legal interpretation puts defendants and their insurers in a corner