Connecting the Dots: Determining the Duty to Defend When the Facts Pleaded Fail to State a Compensable Claim Covered Under the Policy
Determining the duty to defend can be a difficult task. Texas follows a “fair notice” standard, in which courts assess the sufficiency of the claims by determining whether an opposing party can ascertain the nature of the case from the pleadings. Tex. R. Civ. P. 45(b). See Low v. Henry, 221 S.W.3d 609 (Tex. 2007). Unless the defendant files special exceptions to challenge the pleadings, the allegations will be liberally construed in favor of the pleading party. Bos v. Smith v. Smith, __ S.W.3d ___, 2016 WL 1317691 (Tex. App. – Corpus Christi, March 10, 2016, pet. filed June 24, 2016). The rub between the fair notice rule and the eight corners rule is that the pleadings may be drafted in a manner designed to trigger coverage, or be intentionally vague for the same purpose. Knowing this, counsel for the insured may not find it to be in the best interest of the client to challenge the pleadings. In those cases, the rules applicable to determining the duty to defend may compete.
As a general premise, when determining the insurer's duty to defend, the insurer must take the factual allegations made as true. Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 490 (Tex. 2008). The pleadings must be liberally construed. King v. Dallas Fire Ins. Co., 85 S.W.3d 185 (Tex. 2002). The insurer must make all “reasonable inferences that naturally flow” from the facts alleged. GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305 (Tex. 2006). Where the petition does not state facts sufficient to bring the case clearly within or outside the insured's coverage – i.e. the pleadings are vague – the insurer is obligated to defend if potentially there is a claim potentially covered under the policy. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d at 141. All doubts must be resolved in favor of the insured. Id.
Despite this, the insurer is not required to read facts into the pleadings, look outside the pleadings, or imagine factual scenarios that might trigger coverage. See National Union Fire Ins., 939 S.W.2d at 142; Allstate Ins. Co. v. Hicks, 134 S.W.3d 304, 311 (Tex. App. – Amarillo 2003, no pet.). See also Gore Design Completions, Limited v. Hartford Fire Insurance Company, 538 F.3d 365, 369 (5th Cir. 2008). The focus must be the petition's factual allegations showing the origin of the damages and not on the legal theories alleged. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139 (Tex.1997) (per curiam). In Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487 (Tex. 2008) the court held:
[W]e have said that the label attached to the cause of action—whether it be tort, contract, or warranty—does not determine the duty to defend. Lamar Homes, Inc. v. Mid–Continent Cas. Co., 242 S.W.3d 1, 13 (Tex.2007); Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 82 (Tex.1997); see also 14 Couch on Insurance § 200:19 (‘It is the factual allegations instead of the legal theories alleged which determine the existence of a duty to defend.’). Thus, in a case in which a plaintiff sought recovery on negligence theories, we held there was no duty to defend because, despite the negligence labels attached to the claims, the plaintiff had ‘alleged facts indicating that the origin of his damages was intentional behavior’ and ‘made no factual contention that could constitute negligent behavior by [the defendant].’ Farmers, 955 S.W.2d at 83.
Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d at 495.
The conflict between the “liberal interpretation” rule, and the “origin of damages” rule comes into play (a) when legal theories are stated as facts; and (b) when the legal theories do not support a compensable claim as a matter of law. Although involving the duty to indemnify and not the duty to defend, the Texas Supreme Court’s decision in Great American Ins. Co. v. Hamel, 444 S.W.3d 780 (Tex. 2014) provides an example of when this might occur.
In Hamel, the court addressed whether claims of mental anguish made in against a general contractor – TMB – in connection with the defective construction of a home were “damages because of property damage”. In the underlying suit, the Hamels asserted claims of breach of implied warranty, negligence, violations of the DTPA and violations of the Texas Residential Construction Liability Act against TMB. Great American refused to defend TMB in the suit filed by the Hamels.
The trial court entered findings of fact and conclusions of law finding that TMB had breached its duties to the Hamels and that TMB’s negligence was the proximate cause of their injuries, including an award of $50,000 for mental anguish and distress. After judgment was entered, TMB assigned “most of its claims” against Great American to the Hamels. 444 S.W.3d at 787. The trial court also ruled in favor of the Hamels in the subsequent coverage litigation. Great American raised several issues on appeal, challenging, among other things, the trial court’s finding that the Hamel’s mental anguish was covered under Great American’s policy. 146 S.W.3d at 809-812.
Acknowledging that their mental anguish claim, standing alone, did not qualify as “bodily injury” under the policy issued by Great American to TMB, the Hamel’s argued that their mental anguish claims were “damages because of ‘property damage’” within the meaning of the policy. 146 S.W.3d at 810. According to the Hamels, their damages were consequential to their property damage claims, and therefore covered under the policy. Id. The court disagreed, holding that under City of Tyler v. Likes, 962 S.W.2d 489 (Tex. 1997), mental anguish based solely on negligence is not compensable. “Under the jurisprudence of Likes,” held the court, “because the property damage was caused by TMB’s negligence rather than its intentional, malicious or grossly negligent conduct, we conclude the Hamel’s mental anguish claim is not compensable as a matter of law.” Id. At 812.
Assuming what the petition filed in Hamel might have alleged illustrates the difficulty applying the eight corners rule in cases where the allegation made are geared towards triggering coverage rather than pleading a viable claim for relief:
Party A sues Insured B for the defective construction of a home. Party A levies allegations against Insured B for negligence and breach of warranty, but adds a separate allegation that “as a result of the Defendant’s conduct” the plaintiff “suffered physical pain and mental anguish”. There are no facts pleaded supporting a mental anguish claim separate and apart from the injuries suffered as a result of the defective construction of the Party A’s home.
Under the “liberal interpretation” rule it is arguable that the allegations that Party A suffered “physical pain and mental anguish” sufficiently state a claim for “bodily injury” potentially covered under the policy. The “fair notice” rule does not require the plaintiff to connect all of the dots to meet the procedural requirements governing the sufficiency of pleadings, and the “liberal interpretation” rule means the insurer must defend any suit that potentially states a claim under the policy. On the other hand, it is arguable under Nokia and Hamel that the pleadings in the given hypothetical are insufficient to trigger a duty to defend because Party A failed to allege facts supporting a mental anguish claim independent of the property damage claim, and the mental anguish claim is not supported by the facts actually plead as a matter of law. Although the eight corners rule requires the insurer to defend claims that are groundless, false, or fraudulent, it does not require the insurer to read facts into the pleadings to support a groundless, yet covered, claim.
More often than not, vague pleadings will invoke the “when in doubt” rule, triggering the insurer’s duty to defend. However, in cases were specific labels and conclusory statement are made in connection with a particular legal theory, it is fair game for the insurer to resolve its duty to defend by determining whether the facts alleged support the legal theory pleaded, and whether the legal theory states a compensable claim covered under the policy on the facts alleged.