Montville Township Board of Education v. Zurich American Insurance Company

Although the law of the State of New Jersey, which applies to this diversity action, removed from State Court on that basis, imposes a broad duty on an insurer to defend a claim against its insured, the District Court and the Circuit Court of Appeals erroneously determined that coverage was preclude by a “prior known acts” exclusion in the insurance policy. In reaching that conclusion, both courts applied the so-called “four corners” rule, evaluating coverage only based on the disputed allegations of the Complaint, without reference to their truth or accuracy. This is contrary to the law of New Jersey, as articulated in SL Indus. v. Am. Motorists Ins. Co., 128 N.J. 188, 198 (1992), a State Supreme Court case which rejected the “four corners” rule and has been cited with approval by the Third Circuit. Courts throughout the country are split on this very issue. Therefore, the question presented is: Has the Third Circuit correctly applied the law as set forth in SL Industries, and should this Court now establish a uniform standard of coverage evaluation which rejects the “four corners” rule?