Does Wisconsin’s Four-Corners Rule Govern an Insurer’s Duty to Defend?

01 October 2015 Wisconsin Appellate Law Blog

Those who follow the work of the Wisconsin appellate courts might recognize this question as one that District II of the Court of Appeals certified to the Supreme Court nearly five years ago in Wilkinson v. Arbuckle, 2011 WI 1, 330 Wis. 2d 442, 793 N.W.2d 71, before the parties ducked an answer to the question by settling their differences, after the Supreme Court decided to accept the case.

Last month District II decided Water Well Solutions Service Group Inc. v. Consolidated Insurance Co., No. 2014AP2484 (Sept. 9, 2015), an opinion written by Chief Judge Lisa Neubauer—and, in the words of the late, great Yogi Berra, it’s like déjà vu all over again.

If Water Well decides to file a petition for review (due 30 days after the decision), the affirmative vote of three or more members of the Supreme Court should come as no surprise. Judge Paul Reilly dissented in Water Well, called on the Supreme Court specifically to answer this question, and disagreed with the majority’s assessment that the four-corners rule was “well-established” in Wisconsin—invoking the somewhat controversial rule from Cook v. Cook, 208 Wis. 2d 166, 560 N.W.2d 246 (1997), that the Court of Appeals lacks authority to overrule its own decisions to argue that the majority could not dismiss earlier Court of Appeals decisions recognizing exceptions to the four-corners rule as having been “tacitly overruled” by the same court. Only time will tell, but Water Well could present an interesting case not only for the insurance-defense bar, but for all appellate practitioners in Wisconsin.

Water Well began (as one might have guessed) with allegedly negligent repairs to a municipal water well. The City of Waukesha hired Water Well to replace an old pump and, if necessary, to rethread the pipe column and to replace any deteriorated pipe with new pipe. The pump later unthreaded from the column and fell to the bottom of the well. The city’s insurer sued Water Well, which tendered its defense to its insurer. But its insurer denied coverage and refused to defend. Water Well settled the case with the city’s insurer and then sued its own insurer for breaching the duty to defend.

Water Well’s dispute with its insurer, both in the Circuit Court and the Court of Appeals, focused on two policy exclusions: for “your product” and “your work.” The policy didn’t cover losses stemming from product that Water Well supplied and work that it performed, though it did cover losses arising from product supplied by and work performed by others (e.g., by a subcontractor). Following the four-corners rule, the Circuit Court and the Court of Appeals looked only to the allegations of the underlying complaint in the action against Water Well to decide that the exclusions applied because allegedly it was Water Well’s faulty pipe column and negligent threading that caused the pump to fall. The Circuit Court granted summary judgment; the Court of Appeals affirmed.

But, Water Well claims, that wasn’t the whole story. In fact, Water Well hadn’t supplied all the faulty pipe, and a subcontractor had performed at least some of the rethreading work.

Naturally, those facts weren’t in the underlying complaint. The city’s insurer certainly had no incentive to draft an initial pleading containing facts that might diminish Water Well’s liability. Water Well attempted to prove the rest of the story by affidavit in its case against its insurer, but that was outside of what the Court of Appeals thought that it could consider—outside of the four corners of the underlying complaint.

Judge Reilly described this result as “absurd,” effectively allowing the city’s insurer, “an entity that has no privity of contract[,] to dictate whether [Water Well’s policy] provides defense and coverage.” It would be fairer, in his view, if Water Well could have introduced extrinsic facts showing that the actual claim against it fell outside the exclusions.

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