NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

No. 21-2265

REPUBLIC FRANKLIN INSURANCE COMPANY,

Appellant

v.

EBENSBURG INSURANCE AGENCY; KEYSTONE INSURERS GROUP INC; AMERICAN BUILDERS INSURANCE CO, f/n/a Association Insurance Company

Appeal from the United States District Court for the Middle District of Pennsylvania (D.C. Civil Action No. 4-20-cv-01741) District Judge: Honorable Matthew W. Brann

Submitted Under Third Circuit L.A.R. 34.1(a) on September 19, 2022

Before: RESTREPO, FUENTES, AMBRO * Circuit Judges

(Opinion Filed: June 9, 2023)

OPINION **

* Judge Ambro assumed senior status on February 6, 2023. ** This disposition is not an opinion of the full Court and under I.O.P. 5.7 does not constitute binding precedent. AMBRO, Circuit Judge

Republic Franklin Insurance Company (“Republic”) sought a declaratory judgment

that it was not required to defend or indemnify its insureds, Ebensburg Insurance Agency

(“Ebensburg”) and Keystone Insurers Group, Inc. (“Keystone”), in a pending civil suit.

The District Court denied its request. For the following reasons, we affirm.

I.

American Builders Insurance Company (“American”), yet another insurer, filed the

underlying action against Ebensburg and Keystone. In that case, American alleges

Ebensburg (a Keystone partner agency) submitted, on behalf of its client Custom

Installations, an inaccurate workers’ compensation insurance application to American.

American accepted the application, issued a policy, and paid workers’ compensation

benefits when Custom Installations submitted a claim. American contends it would not

have done so but for Ebensburg’s alleged errors, and brings claims for breach of contract,

professional negligence, negligent misrepresentation, and fraudulent misrepresentation.

When American commenced its suit, Ebensburg and Keystone were insured under

a professional liability policy issued by Republic. That policy was not in effect at the time

of the alleged misconduct, but it provided coverage for past “wrongful acts” so long as an

insured “had no knowledge that such ‘wrongful act’ was likely to give rise to a ‘claim’

[t]hereunder.” Appx. 96. An additional-insured endorsement, which added Keystone to

the policy, further excluded claims “arising out of a ‘wrongful act’ which any insured knew

of before the effective date of th[e] endorsement.” Appx. 71. The policy defined “wrongful

act” as any “negligent act, negligent error, [or] negligent omission . . . .” Appx. 95.

2 Republic initially defended Ebensburg and Keystone in American’s lawsuit, subject

to a reservation of rights. But soon thereafter it filed this declaratory judgment action to

terminate representation, arguing it was not required to defend or indemnify either party.

Specifically, Republic claimed Ebensburg knew the insurance application it submitted on

behalf of Custom Installations to American contained false information, and thus knew

before the professional liability policy’s effective date that the submission was a “wrongful

act” likely to result in a claim. Republic offered two facts in support: (1) an Ebensburg

employee received in 2015 a reservation-of-rights letter from American to Custom

Installations asserting that its Ebensburg-prepared insurance application was inaccurate;

and (2) two Ebensburg employees were deposed in 2017 as part of the lawsuit brought by

American against Custom Installations based on the insurance application.

The District Court dismissed Republic’s duty-to-defend claims 1 with prejudice,

holding that Pennsylvania law (which governs this action) barred it from introducing

extrinsic evidence to terminate its defense duties. Republic appeals. 2

II.

In assessing an insurer’s duty to defend its insured, Pennsylvania courts apply the

“four corners” approach. This means defense disputes are “answered by comparing the

four corners of the insurance contract to the four corners of the complaint” in the underlying

1 Republic’s duty-to-indemnify claims were dismissed without prejudice and are not a subject of this appeal. 2 The District Court had jurisdiction under

(a)(1). It entered final judgment on the duty-to-defend claims. Appx. 34. We thus have jurisdiction under

. Our review is de novo. Green Mach. Corp. v. Zurich-Am. Ins. Grp.,

(3d Cir. 2002). 3 action. Erie Ins. Exch. v. Moore,

, 268 (Pa. 2020). If the factual allegations

assert an injury potentially within the insurance policy’s scope, the insurer must undertake

a defense. Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co.,

, 896–97 (Pa. 2006); Vitamin Energy, LLC v. Evanston Ins. Co.,

(3d Cir. 2022).

But that doesn’t mean an insurer’s defense duties cannot terminate prior to the end

of the litigation. The Pennsylvania Supreme Court has acknowledged as much, noting that

“to the extent there are undetermined facts that might impact on coverage, the insurer has

a duty to defend until the ‘claim is narrowed to one patently outside the policy coverage.’”

Moore, 228 A.3d at 268 (quoting Mace v. Atl. Refining Mktg. Corp.,

(Pa. 2001) (Saylor, J., dissenting)). Unfortunately for our purposes, the Court has yet to

clarify what it means to narrow a claim so.

Republic seizes on this lack of clarity to argue that an insured may, after its defense

duty is triggered, offer evidence outside the complaint to litigate a coverage issue so long

as that issue is independent of the underlying claims. But it cites no authority supporting

this broad proposition. And we hesitate to recognize a rule that bars an insurer from relying

on extrinsic evidence prior to undertaking its representation but allows it to present that

evidence as soon as its defense is ongoing.

What Republic really asks us is to find an exception to Pennsylvania’s four corners

rule that would allow it to introduce extrinsic evidence. Granted, not all states apply the

rule strictly. The Florida Supreme Court, for instance, has identified “some natural

exceptions” to the four corners doctrine “where an insurer’s claim that there is no duty to

4 defend is based on factual issues that would not normally be alleged in the complaint.”

Higgins v. State Farm Fire & Cas. Co.,

, 10 n.2 (Fla. 2004). But Republic

offers nothing to indicate the Pennsylvania Supreme Court would adopt a similar exception

or that it would apply such an exception to the circumstances here. To the contrary,

Pennsylvania’s case law suggests an exacting adherence to the four corners rule. See

Kvaerner,

(noting the “well-established precedent . . . requiring that an

insurer’s duty to defend and indemnify be determined solely from the language of the

complaint against the insured” (emphasis added)). 3

We recognize the language from Moore relied on by Republic—that an insurer must

defend its insured until the claim “is narrowed to one patently outside the policy

coverage”—must mean something. 228 A.3d at 268. But there are ways to interpret the

phrase that do not require crafting a currently unrecognized exception to Pennsylvania’s

four corners rule; for example, narrowing could occur if the plaintiff drops or the court

dismisses the only claims that would trigger coverage under a policy. See, e.g., Palmer v.

3 Republic cites an unpublished case holding that extrinsic evidence may be considered to determine whether a claim was “first made” prior to an insurance policy’s effective date. LA Weight Loss Ctrs., Inc. v. Lexington Ins. Co.,

, at *3-5 (Phila. Ct. Com. Pl. Mar. 1, 2006). It argues the insurer could introduce the evidence because it sought to show a condition precedent to the policy’s effectiveness was unsatisfied, not that an exclusion was triggered. But even assuming extrinsic evidence can always be introduced to determine the status of a condition precedent, we agree with the District Court that the relevant clauses here are exclusions, not conditions precedent. And to the extent LA Weight Loss—along with other cases Republic cites like State Farm Fire & Cas. Co. v. Bellina,

(E.D. Pa. 2003)—stand for the broader proposition that it may be appropriate to rely on certain dispositive and undisputed facts not alleged in the complaint when deciding duty-to-defend disputes (though the Pennsylvania Supreme Court has yet to say as much), this case does not involve such a circumstance. 5 Twin City Fire Ins. Co,

, at *3 (E.D. Pa. Nov. 20, 2017) (collecting cases

where the underlying litigation established “absolutely clear” facts showing claims had

been confined to those not covered).

In any event, we need not decide whether Pennsylvania would recognize the

exception Republic advocates: to repeat, that an insurer, in a declaratory judgment action,

can introduce extrinsic evidence relevant to a dispositive coverage issue when that issue is

unrelated to the merits of the underlying liability case. That’s because such an exception

would not apply here.

Under the professional liability policy, Republic is relieved from coverage only if

an insured had knowledge that “[a] ‘wrongful act’ was likely to give rise to a ‘claim.’”

Appx. 96. Under the endorsement, only claims “arising out of a ‘wrongful act’ which any

insured knew of” are excluded. Appx. 71. Thus, each provision requires Republic to show

there was a “negligent act, negligent error, [or] negligent omission” (emphases added).

Appx. 95. It must establish not that Ebensburg or Keystone “may have committed a

wrongful act,” Appellant Br. 29 (emphasis added), but that one or both were actually at

fault. Cf. Med. Protective Co. of Fort Wayne v. Am Int’l Specialty Lines. Ins. Co.,

(7th Cir. 2018) (rejecting an insurer’s argument that it need only show a

possible or alleged “Wrongful Act” occurred to trigger a policy exclusion for “any claim

arising out of any Wrongful Act” that happened prior to a cut-off date). As this is what

American seeks to establish in the underlying litigation, any extrinsic evidence on and

adjudication of the question here would overlap with the issues in those proceedings.

6 We thus affirm. 4

4 Republic contends that, in dismissing its duty-to-defend claims with prejudice, the District Court “froze [its] duty to defend, regardless of events in the underlying case.” Appellant Br. 9. We do not read the Court’s order so broadly. Just because Republic is barred from relitigating the claims in this action does not mean it cannot rely on new developments to challenge its defense duties in a future action. 7