In a recent decision, Stimac Family Trust v. Wis. Power and Light Co., the Wisconsin Court of Appeals rejected an insurer’s effort to limit a duty to defend inquiry based on the four-corners-rule. The four-corners rule requires courts to determine whether an insurer has a duty to defend its insured based on a comparison of the allegations within the four corners of the complaint to the terms of the insurance policy. Reference to extrinsic evidence other than the policy is not permitted. 

The insurer in the case, West Bend Mutual Insurance Company, asserted that it did not have a duty to defend, but provided counsel to its insured and successfully sought to bifurcate the coverage question. West Bend then moved for summary judgment, contending that it had no duty to defend or indemnify because certain policy exclusions precluded coverage. Concluding that it could not consider extrinsic evidence presented by the insured, the circuit court granted summary judgment to West Bend.

The court of appeals reversed. It held that, where an insurer has assumed the defense of its insured, the court must consider extrinsic evidence that is offered by either party on the question of coverage. The court of appeals’ holding is consistent with the Wisconsin Supreme Court’s decision in Estate of Sustache v. Am. Family Mut. Ins. Co., which articulated this exception to the four-corners rule nearly a decade ago. The court subsequently reaffirmed the exception in Olson v. Farrar.

Unlike Sustache and Olson, however, Stimac fails to also articulate the standard governing duty to defend determinations. It thereby blurs the distinction between the twin duties to defend and indemnify. A duty to defend is broader than the duty to indemnify. Its existence depends on the nature, not the merits, of the claim. Moreover, because potential coverage for just one claim requires defense of the entire suit, a finding of no duty to defend also necessarily eliminates any duty to indemnify. 

This distinction is important because it plays into insurers’ decisions regarding the timing and scope of coverage motions. Insurance policies contain many terms – some of which may appear at the outset to bar all potential coverage and others which may bar only certain damages or whose application may not be apparent until the evidentiary record is developed. With its broad reference to “coverage” hearings and the obligation to consider extrinsic evidence, a court or counsel that is less familiar with Wisconsin insurance law may interpret Stimac to preclude an insurer that is appropriately defending its insured from bringing an early coverage motion on its very duty to do so, believing the insurer must instead wait until the evidentiary record is complete. 

Such an interpretation, if accepted, would place insurers in a catch-22: Defend under reservation of rights as preferred by the courts and thereby forgo any meaningful opportunity to contest an underserved defense? Or deny a defense in order to timely raise defenses to the duty, but risk a court determination that the duty was breached? It also would undermine the very goal of the four-corners framework: namely, protecting the reasonable expectations of both the insured and insurer.

Luckily, Sustache is clear: An insurer’s duty to continue to defend is contingent upon the court’s determination that the insured has coverage “if the plaintiff proves his case.” Thus, the duty-to-defend standard remains the same regardless whether an insurer is providing a defense or extrinsic evidence is considered. And an insurer should reasonably be able to bring an early coverage motion focused on the duty to defend (i.e., no potential coverage), while reserving those policy terms and arguments that must await greater factual development if necessary for a later determination on indemnity.