A Rh(I)-catalyzed formal carbene insertion into C-C bond of benzocyclobutenols has been realized by employing diazoesters as carbene precursors. The product indanol derivatives were obtained in good yields and in diastereoselective manner under mild reaction conditions. All-carbon quaternary center is constructed at the carbenic carbon. This catalytic reaction involves selective cleavage of C-C bond, Rh(I) carbene insertion, and intramolecular aldol reaction.