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Insurer’s Duty to Defence and Exceptions to the “Four Corners” Rule

Lupu v. Loan City, LLC, Nos. 17-1944 & 17-2024 (3d Cir. September 10, 2018) Ambro, C.J. 
What is the duty of a real estate title insurer in Pennsylvania to defend the insured party (here the successor to a lender) against claims of the borrower/mortgagor? Its courts, we predict, would not apply the “in for one, in for all” rule (known also as the complete defense rule)1—whereby a single covered claim triggers an obligation for the title insurer to defend the entire action—to a case about that insurer’s duty to defend. To identify a covered claim, we apply Pennsylvania’s rule that potentially covered claims are identified by “comparing the four corners of the insurance contract to the four corners of the complaint.” American & Foreign Ins. Co. v. Jerry’s Sport Center, Inc., 2 A.3d 526, 541 (Pa. 2010). The insured in its briefing used the latter term. As both the District Court and the title insurer refer to the rule by its more colloquial name, we do as well. 

Although the Pennsylvania Supreme Court was invited to make an exception to the “four corners” rule, it flatly declined, finding “no reason to expand upon the well-reasoned and long-standing rule that an insurer’s duty to defend is triggered, if at all, by the factual averments contained in the complaint itself.” Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888 (Pa. 2006). We thus honor its decision to maintain a simple, bright-line rule. In sum, per Kvaerner, the seminal case on the issue, we may not look for a covered claim beyond the four corners of Lupu’s complaint and how it matches up with the actual terms of the Title Policy. This dispute centers on the Third and Fourth Amended Complaints, to which we turn. The duty to defend arose when Lupu filed the Fourth Amended Complaint, including there the forgery allegations he had referred to earlier in response to interrogatories. After Lupu filed the Fourth Amended Complaint, Stewart Title agreed to provide a partial defense and retained counsel.

What is left to consider is whether it needed to defend Ocwen against the entire Complaint. We predict, for the same reasons, that the Pennsylvania Supreme Court would also create a title-policy exception to the “in for one, in for all” rule. Given the unique title insurance context, by doing so it would “consider the language of the policy and the expectation of the insured so as to give reasonable meaning to its terms.” Rood v. Commw. Land Title Ins. Co., 936 A.2d 488, 491 (Pa. Super. Ct. 2007) (citation omitted). As the issue is undecided by the Pennsylvania Supreme Court, the District Court reasoned that it must apply the general rule that “a title insurance policy is subject to the same rules of construction that govern other insurance policies[.]” Lupu, 244 F. Supp. 3d at 465 (quoting Rood, 936 A.2d at 491, which noted the rule is “general[]”). But the lack of state-law authority creating an exception to the “in for one, in for all” rule does not compel us to define its scope by that general statement. Federal courts, when sitting in diversity, are no ostriches. We do and “often must engage in a substantial amount of conjecture.” Wisniewski v. Johns-Manville Corp., 759 F.2d 271, 273 (3d Cir. 1985). While Pennsylvania courts have not addressed this issue, the reasoning applied in out-of-state cases is sufficient “persuasive data” to convince us of the direction they would go. Meyer v. CUNA Mut. Ins. Co., 648 F.3d 154, 162 (3d. Cir. 2011).

Pennsylvania’s Supreme Court tells us that an insurer’s duty to defend turns on the allegations within the four corners of a complaint matched against the terms of the insurance policy. Kvaerner, 908 A.2d at 896. We follow suit here in holding that Stewart Title’s duty to defend Ocwen against Lupu’s claims did not exist until the filing of the Fourth Amended Complaint. But is Stewart Title bound to defend the entire Complaint? Its Title Policy states that it would not also defend non-covered claims in the action. There was at least one covered claim in the litigation underlying this coverage dispute, and Stewart Title must defend it (or such other claims covered by the Title Policy). Beyond that, however, we hold the parties to their bargain. We thus affirm in part, reverse in part, and remand.