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Carl Hemphill asked the Third Circuit to find that his liability insurer, Landmark American Insurance Co., is obligated to defend him in a lawsuit by a former employee. The employee raised a number of claims against Hemphill in his original complaint. No one is covered by Hemphill’s policy with Landmark. IN Carl Hemphill; MJC Labor Solutions, LLC v. Landmark American Insurance CompanyNo. 20-2544, United States Court of Appeals, Third Circuit (April 5, 2023) applied the four corners rule to resolve the dispute.
Carl Hemphill and MJC Labor (together, Hemphill) provide temporary staffing and visa application services to workers from Mexico and Central America. Hemphill is insured by a Miscellaneous Professional Liability (MPL) policy with Landmark, which covers claims “arising out of  negligent act[s]wrong[s] or omission[s]” “in the reproduction or failure to reproduce . . . permanent and/or temporary agency services[.]”
Former MJC client Jose Castillo sued Hemphill (the Castillo lawsuit), alleging violations of federal human trafficking, wage and unfair trade practice laws, as well as claims for breach of contract and unjust enrichment. When Castillo eventually arrived in the United States, Hemphill and his wife confiscated his passport; housed him in conditions he described as “filthy,” overcrowded and vermin-infested; assigned him tasks outside the scope of his employment contract; and significantly underpaid him.
The parties have since settled the Castillo lawsuit, but the award of legal defense costs incurred in the underlying litigation remains in dispute.
Landmark declined to defend Hemphill on the grounds that Castillo’s allegations arose from Hemphill’s intentional acts, which occurred after Castillo had been placed as an employee, rather than from negligent acts in providing brokerage services.
If the underlying complaint alleges facts that may support recovery under the policy, coverage is triggered and the insurer has a duty to defend.
Under Pennsylvania law, the question of whether a claim against an insured is potentially covered is answered by comparing the four corners of the insurance contract with the four corners of the complaint. Courts applying Pennsylvania law may not depart from the operative complaint when deciding questions of duty to defend, even when subsequent proceedings demonstrate that a covered claim exists.
The district court’s conclusion
The District Court stated that:
- Hemphill could not expect Landmark to cover him for any claim not covered by Landmark’s policy, and
- Castillo’s complaint does not state a covered claim.
Insured’s reasonable expectations
An insured’s reasonable expectations may sometimes override the express terms of a contract, but only in very limited circumstances to protect non-commercial insureds from policy terms that are not readily apparent and from insurer fraud.
Hemphill did not allege that Landmark’s policy language is facially unclear or that Landmark engaged in deceptive tactics. Instead, he argues that the mere fact that Landmark defended another lawsuit created a reasonable expectation that it would defend the Castillo suit. Landmark submitted its defense of the earlier lawsuit to a full reservation of rights.
The duty to defend
An insurer’s duty to defend is determined solely based on the language of the complaint against the insured. It is the possibility, rather than the certainty, of a claim falling within the policy that triggers the insurer’s duty to defend.
Castillo’s Unfair Trade Practices alleged that Hemphill is “cheating[ed]” Castillo “about rental housing in which he was to live.” But Castillo does not claim that Hemphill or MJC ever represented to him that his housing conditions would be sanitary or not crowded, or that he would not have accepted Hemphill’s offer of employment if he had known that the housing conditions were substandard.
As to Castillo’s start date, his allegations amount to nothing more than a breach of contract claim: he alleges that his agreed-upon start date was delayed and that he lost money and employment opportunities as a result. Landmark expressly excluded breach of contract claims in its policy with Hemphill. It has no obligation to defend this, or any other claim in Castillo’s case.
The four corners rule allowed the insurer to refuse to defend or indemnify its insured because Castillo’s claim was essentially for breach of contract and did not meet any of the policy’s requirements limiting its coverage and did not promise to defend a breach of contract claim.
(c) 2023 Barry Zalma & ClaimSchool, Inc.
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Barry Zalma, Esq., CFE, now limits his practice to serving as an insurance consultant specializing in insurance coverage, insurance claims management, insurance bad faith and insurance fraud for insurers and policyholders alike. He practiced law in California for more than 44 years as an insurance coverage and claims attorney and more than 54 years in the insurance industry. He can be reached at http://www.zalma.com and email@example.com
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