Argonaut Insurance Company, Waukesha's insurer, sued Water Well, alleging that “Water Well, its agents, employees and representatives” had been negligent in the installation and reinstallations of the well pump and that “Water Well, its agents, employees and/or representatives” had breached their contractual obligations. Specifically, Argonaut's complaint alleged that the well pump had “unthreaded and separated from the pipe column,” which had “caused the Well Pump, including the motor, to fall to the bottom of the approximately 1910-foot-deep well.” Argonaut asserted that Water Well had failed to install two setscrews, which had “allowed operating torques and vibrations to cause the Well Pump to rotate and unthread from the pipe column and caused the Well Pump to fall to the bottom of the well.”

Argonaut sought $300,465.48 in subrogated damages.

Water Well was insured under a commercial general liability primary policy with Consolidated Insurance Company at the time the alleged damages occurred and it tendered its defense to Consolidated.

Consolidated denied Water Well's defense tender, stating that it had no duty to defend or indemnify Water Well under the CGL policy because the “Your Work” and the “Your Product” exclusions applied and removed coverage for the damages alleged in Argonaut's complaint.

After Consolidated refused to defend Water Well in the Argonaut action, Water Well obtained counsel, incurred attorneys' fees and costs, and eventually settled with Argonaut for $87,500.

Water Well then sued Consolidated, alleging that Consolidated had breached its duty to defend Water Well in the underlying action initiated by Argonaut. Water Well also alleged that Consolidated had acted in bad faith when it had refused to provide a defense.

The trial court granted Consolidated's motion for summary judgment. It determined that, under applicable Wisconsin case law, a court had to compare the four corners of the complaint to the terms of the entire insurance policy when deciding whether an insurer had breached its duty to defend its insured. The trial court concluded that this comparison encompassed the policy's coverage provisions and exclusions, but not extrinsic evidence Water Well had offered in support of its assertion that its subcontractor's work on preexisting pipes had triggered coverage under the policy.

Based on a comparison of the four corners of the complaint and the terms of the entire policy, the trial court determined that the allegations in the Argonaut complaint fell under both the “Your Product” and the “Your Work” exclusions. Therefore, it concluded that there was “no covered claim and therefore there was no duty to defend.”

The court of appeals affirmed, and the dispute reached the Wisconsin Supreme Court.

Water Well urged the court to establish a limited exception to the four-corners rule that would allow it to submit extrinsic evidence to dispute Consolidated's unilateral decision to refuse to defend Water Well in the Argonaut suit based on Consolidated's position that exclusions in the policy precluded coverage. Ultimately, Water Well asked the court to create an exception to the four-corners rule in duty to defend cases when:

(1) The policy provided an initial grant of coverage based on facts alleged in the complaint;

(2) The insurer declined to defend its insured based on the application of specific policy exclusions but without seeking a coverage determination from the trial court; and

(3) The insured asserted that the underlying complaint was factually incomplete or ambiguous.

The Consolidated Policy

The policy's

Your Product

exclusion precluded coverage for:

“Property damage” to “your product” arising out of it or any part of it

It defined:

property damage

to include:

[p]hysical injury to tangible property

as well as:

[l]oss of use of tangible property that is not physically injured

In addition, the policy defined:

Your Product

to include:

goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by 

the insured, Water Well.

The Wisconsin Supreme Court's Decision

The court affirmed, rejecting Water Well's request to create an exception to the four-corners rule.

In its decision, the court explained that, in 1967, in Grieb v. Citizens Cas. Co. of New York, 148 N.W.2d 103 (Wisc. 1967), it held that an insurer's duty to defend, regardless of its origin, depended on a comparison of the four corners of the underlying complaint to the terms of the policy, reasoning:

Whether a third-party suit comes within the coverage of this clause [the defense-coverage clause] or an implied duty to defend under an indemnity clause depends upon its allegations which are referred to as a general rule as the measure in the first instance. These allegations must state or claim a cause of action for the liability insured against or for which indemnity is paid in order for the suit to come within any defense coverage of the policy unless the express defense coverage is broader.

The Water Well court then “unequivocally” held that there was “no exception to the four-corners rule in duty to defend cases in Wisconsin.”

Upon comparing the allegations in the Argonaut complaint to the CGL policy, the court found that there was no coverage because the “Your Product” exclusion applied. The court reasoned that the Argonaut complaint alleged that the well pump fell to the bottom of the well, the well pump was comprised of various components, and Water Well provided each of the well pump components. It found “no ambiguity in these allegations,” and “absolutely no indication in the complaint that any damage occurred to anything other than the well pump.”

Accordingly, the court concluded that, in comparing the four corners of the complaint to the policy terms, the “Your Product” exclusion applied; there were no exceptions to the “Your Product” exclusion; coverage was barred; Consolidated had not breached its duty to defend Water Well in the Argonaut action; and Consolidated was entitled to summary judgment as a matter of law.

The case is Water Well Solutions Service Group Inc. v. Consolidated Ins. Co., No. 2014AP2484 (Wisc. June 30, 2016). Attorneys involved include: For the plaintiff-appellant-petitioner, there were briefs by Timothy M. Hansen, Charles J. Crueger, James B. Barton, and Hansen Reynolds Dickinson Crueger LL, and oral argument by Timothy M. Hansen; For the defendant-respondent, there was a brief by William J. Katt, Christina A. Katt, Corey J. Wright and Wilson Elser Moskowitz Edelman & Dicker, LLP, and oral argument by William J. Katt.

FC&S Legal Comment

Thirty one states allow for exceptions to the four corners rule in determining whether a duty to defend exists. Chandler v. Alabama Mun. Ins. Co., 585 So.2d 1365, 1367 (Ala. 1991); Williams v. GEICO Cas. Co., 301 P.3d 1220, 1225 (Alaska 2013); Regal Homes, Inc. v. CNA Ins., 217 P.3d 610, ¶ 19 (Ariz. Ct.App. 2007); Safeco Ins. Co. of America v. Fireman's Fund Ins. Co., 55 Cal.Rptr.3d 844, 850 (Ct.App. 2007); Hartford Cas. Ins. Co. v. Litchfield Mut. Fire Ins. Co., 876 A.2d 1139, 1145–1146 (Conn. 2005); Shafe v. Am. States Ins. Co., 653 S.E.2d 870, 874 (Ga. 2007); Sentinel Ins. Co. v. First Ins. Co. of Haw., 875 P.2d 894, 905 (Haw. 1994); Shriver Ins. Agency v. Utica Mut. Ins. Co., 750 N.E.2d 1253, 1259 (Ill. 2001); Talen v. Emp'rs Mut. Cas. Co., 703 N.W.2d 395, 406 (Iowa 2005); Miller v. Westport Ins. Corp., 200 P.3d 419, 424 (Kan. 2009); Aetna Cas. & Sur. Co. v. Cochran, 651 A.2d 859, 864 (Md. 1995); Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 788 N.E.2d 522, 530 (Mass. 2003); Am. Bumper & Mfg. Co. v. Hartford Fire Ins. Co., 550 N.W.2d 475, 452 (Mich. 1996); Pedro Cos. v. Sentry Ins., 518 N.W.2d 49, 51 (Minn. Ct.App. 1994); Auto. Ins. Co. of Hartford v. Lipscomb, 75 So.3d 557, 559 (Miss. 2011); Allen v. Cont'l W. Ins. Co., 436 S.W.3d 548, 552–53 (Mo. 2014); Revelation Industries, Inc. v. St. Paul Fire & Marine Ins. Co., 206 P.3d 919, 926 (Mont. 2009); Peterson v. Ohio Cas. Group, 724 N.W.2d 765, 773–774 (Neb. 2006); Ross v. Home Ins. Co., 773 A.2d 654, 657 (N.H. 2001); Abouzaid v. Mansard Gardens Assocs., LLC, 23 A.3d 338, 347 (N.J. 2011); Sw. Steel Coil, Inc. v. Redwood Fire & Casualty Ins. Co., 148 P.3d 806, 812 (N.M. 2006); Cumberland Farms, Inc. v. Tower Grp., Inc., 28 N.Y.S.3d 119, 122 (N.Y. App.Div. 2016); Duke University v. St. Paul Fire & Marine Ins. Co., 386 S.E.2d 762, 764 (N.C. 1990); Great Am. Ins. Co. v. Hartford Ins. Co., 621 N.E.2d 796, 798 (Ohio 1993); First Bank of Turley v. Fid. & Deposit Ins. Co., 928 P.2d 298, 303 (Okla. 1996); City of Hartsville v. S.C. Mun. Ins. & Risk Fin. Fund, 677 S.E.2d 574, 578–79 (S.C. 2009); State Farm Fire & Cas. Co. v. Harbert, 741 N.W.2d 228, 234 (S.D. 2007); Fire Ins. Exchange v. Estate of Therkelsen, 27 P.3d 555, 24–25 (Utah 2001); R.L. Vallee, Inc. v. Am. Intern. Specialty Lines Ins. Co., 431 F.Supp.2d 428, 438 (D. Vt. 2006); Campbell v. Ticor Title Ins. Co., 166 Wash.2d 466, 471 (Wash. 2009); Farmer & Mechs. Mut. Ins. Co. of W. Va. v. Cook, 557 S.E .2d 801, 806 (W.Va. 2001).

In four states, because of conflicting cases, it is unclear whether they allow for exceptions to the four corners rule. Compare Cotter Corp. v. Am. Empire Surplus Lines Ins. Co., 90 P.3d 814, 829 (Colo. 2004), with United Fire & Cas. Co. v. Boulder Plaza Residential, LLC, 633 F.3d 951, 960–61 (10th Cir. 2011); compare Transamerica Ins. Services v. Kopko, 570 N.E.2d 1283, 1285 (Ind. 1991), with Ind. Farmers Mut. Ins. Co. v. N. Vernon Drop Forge, Inc., 917 N.E.2d 1258, 1268 (Ind. Ct.App. 2009) (citing Auto–Owners Ins. Co. v. Harvey, 842 N.E.2d 1279, 1291 (Ind. 2006)); compare James Graham Brown Found., Inc. v. St. Paul Fire & Marine Ins. Co., 814 S.W.2d 273, 279 (Ky. 1991), with Lenning v. Commer. Union Ins. Co., 260 F.3d 574, 581 (6th Cir. 2001); compare GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305, 308 (Tex. 2006), with Weingarten Realty Mgmt Co. v. Liberty Mut. Fire Ins. Co., 343 S.W.3d 859 (Tex. Ct.App. 2011).