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Insurer Not Entitled to Rely on Facts Outside Complaint to Avoid Duty to Defend

On January 18, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Zurich Am. Ins. Co. v. Don Buchwald & Assocs., Inc., Index. No. 655533/2016, holding that an insurer could not rely on “extrinsic discovery” to avoid its duty to defend.

In Zurich, an insurer sought a declaratory judgment that it had “no duty to defend or indemnify defendants in an action proceeding in Florida on the grounds that . . . the acts alleged in the underlying action were outside the scope of defendant Tony Burton’s . . . employment with defendant Don Buchwald & Associates, Inc."  The insurer sought discovery “relating to the issue of whether Burton’s actions were outside the scope of his employment.” But Justice Sherwood denied the insurer’s motion to compel, explaining:

The discovery plaintiff seeks fails with respect to plaintiff’s duty to defend. Under New York law, plaintiff is required to provide a defense unless it can demonstrate that the allegations of the complaint in the underlying action cast that pleading solely and entirely within the policy exclusions, and, further, that the allegations, in toto, are subject to no other interpretation. So long as the allegations in that complaint suggest a reasonable possibility of coverage, plaintiff must provide a defense. Importantly, such a duty remains even though facts outside the four corners of the pleadings indicate that the claim may be meritless or not covered. Accordingly, the extrinsic discovery plaintiff seeks has no bearing on its duty to defend, as its duties there are determined solely by examining the allegations of the complaint in the underlying action.

Notably, although an insurer may not look to evidence outside the “four corners” of the complaint to avoid its duty to defend, New York law does not permit the insurer to employ a “wooden application of the ‘four corners of the complaint’ rule” “when it has actual knowledge of facts establishing a reasonable possibility of coverage” – even if those facts are not pled in the complaint. See Fitzpatrick v. American Honda Motor Co., 78 N.Y.2d 61, 66-67 (1991). In other words, extrinsic facts cannot be used to avoid the duty to defend, but in some circumstances must be considered to establish a duty to defend.

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