In Allstate v. A.R., a late-July decision from a federal court — the Western District of Washington — the court held that an insurer may rely on facts outside the “four corners” of the complaint to deny the duty to defend if the issue is whether the plaintiff is an “insured” under the policy and therefore subject to an “insured-versus-insured” type exclusion. In the underlying case a minor sued her mother for negligently permitting her to be alone with her grandfather, who abused the minor. The mother’s homeowner’s insurance policy with Allstate had an exclusion for claims brought by another “insured” and defined “insured” to include any relative who “resided” with the insured defendant. The underlying complaint did not specify whether the minor lived with her mother, although in fact the minor apparently did live with her mother most of the time, but also lived sometimes with her father, and with her grandparents. Allstate investigated where the minor resided, and came to the conclusion that the exclusion applied.
In the coverage case the minor protested that Allstate was not permitted to go outside the “four corners” of the complaint and that doing so was bad faith. The court noted that in Woo v. Fireman’s Fund the Washington Supreme Court had held that an insurer can investigate facts relating to whether a defendant is an insured and rely on those facts in its defense coverage determination. The court then extended the Woo reasoning to coverage Allstate’s investigation into the minor’s living situation, reasoning that the question Allstate was trying to answer was whether the minor was an “insured,” and held that the exclusion did apply, and that Allstate had not acted in bad faith.
The problem with the court’s reasoning, of course, is that Woo did not concern a policy exclusion, and Washington courts have held that an exclusion may not be the basis for a denial of defense based on extrinsic evidence. The court’s characterization in this case of Allstate’s investigation as involving “insured status” is facile – what Allstate was really investigating was an exclusion. And the court’s extension of Woo to this situation is not supported by Woo’s reasoning, which has everything to do with helping defendants get coverage. Because of this flaw this case may be the subject of an appeal, so stay tuned.