Insurer Could Not Rely on Extrinsic Evidence to Circumvent Its Duty to Defend

In First Mercury Insurance Co. v. First Florida Building Corp., et al., a federal district court ordered that an insurer had a duty to defend its insured against an underlying personal injury lawsuit. 2023 WL 23116, at *1 (M.D. Fla. Jan. 3, 2023). First Mercury is a cautionary tale about how insurers may try to circumvent their obligations by improperly considering extrinsic evidence when determining whether they have a duty to defend their insureds.

First Mercury is a coverage dispute over an underlying personal injury lawsuit that was filed against the insured, a construction company, for injuries the claimant allegedly sustained at a construction site. Id. The claimant alleged that he was at the construction site as an invitee who was “working with” the insured. Id. The insurer agreed to defend the insured against the personal injury lawsuit under a reservation of rights. Id. However, the insurer filed a coverage action seeking a declaration that coverage for the personal injury lawsuit was excluded under the policy. Id. Specifically, the insurer, on summary judgment, argued that the claimant was an employee of the insured who was injured in the course of his employment, thus falling within the employer’s liability and workers’ compensation exclusions in the policy. Id. Although the insurer acknowledged that the personal injury complaint against the insured triggered its duty to defend under the policy, the insurer argued that those exclusions relieved its duty to defend or indemnify the insured. Id.

The court, however, rejected the insurer’s arguments and denied its motion for summary judgment. As the court explained, under applicable law, an insurance company’s duty to defend is normally determined solely from the “eight corners” of the complaint and policy. Id. If the allegations in the complaint state facts that bring the injury within the insurance policy’s coverage, the insurer must defend regardless of the merits of the lawsuit. Id. The insurer, however, tried to circumvent these principles by arguing that a rare exception to the eight corners rule applied. Id. at *2. Under the exception to the eight corners rule, a court may consider extrinsic facts in determining whether there is coverage, if those facts are undisputed and clearly would have placed the claims outside the scope of coverage had they been alleged in the underlying action against an insured. Id.    

Specifically, the insurer argued that the claimant had omitted from his complaint the undisputed fact that he was an employee of the insured who was injured in the course of his employment. Id. The insurer supported this contention with records showing that the claimant was paid by the insured, as well as with witness statements that the claimant was employed by the insured. Id. The court concluded that the exception to the eight corners rule did not apply because the identity of the claimant’s employer was not undisputed. Id. To the contrary, the court explained that the identity of the claimant’s employer was being actively contested in the personal injury lawsuit. Id. Additionally, whether the claimant was a temporary worker was also in dispute, a status that would render the policy exclusions inapplicable. Id. The court further explained that even if it could consider the extrinsic evidence offered by the insurer, the evidence was insufficient to establish that the exclusions barred coverage for a personal injury lawsuit. Id.

For the reasons above, the court denied the insurer’s motion for summary judgment and, instead, granted summary judgment sua sponte for the insured. Id. The insurer tried to avoid entry of summary judgment for the insured by arguing that the ruling was improper because the evidentiary record was incomplete. Id at *3. The court swiftly rejected that argument, explaining that the record was complete because, for purposes of the duty to defend, the court had to consider only the complaint against the insured and the insurance policy. Id.  

First Mercury highlights how insurers may try to avoid their contractual obligations under the insurance policies they issue to companies and individuals even when the duty to defend, which is broader than the duty to indemnify, clearly applies. Because an insurer may try to advance legal arguments beyond what is allowed under applicable law, policyholders should seek to understand their full rights under the substantive laws that govern their insurance policies, as well as the insuring agreements, conditions to coverage, and exclusions under their policies. Retaining experienced coverage counsel to help with a claim can mitigate the risk that an insurer will try to make arguments inconsistent with the terms of the policy or applicable law.