By: Fred Shuchart
Texas uses the “Complaint-Allegation Rule” or “Eight Corners Doctrine” to determine the duty to defend. The duty to defend is determined by considering and comparing only the terms and conditions of the policy of insurance to the allegations contained in the live pleading. Although carriers and insureds alike have repeatedly attempted to use extrinsic evidence to determine the duty to defend, the Texas Supreme Court has repeatedly refused to change the test until recently in Loya Ins. Co. v. Avalos, 610 S.W.3d 878, 882(Tex. 2020). In Loya, the Texas Supreme Court opened the door for use of extrinsic evidence when the evidence conclusively proves that groundless, false or fraudulent claims have been manipulated by the insured’s own hands to secure a defense.
In contrast to the Texas Supreme Court, the federal courts in Texas and some state lower courts have adopted an exception to the “Complaint-Allegation Rule” or “Eight Corners Doctrine,” when it is initially impossible to determine the duty to defend and the extrinsic evidence goes solely to the coverage issue and does not contradict the allegations contained in the live pleading. Northfield Ins. Co, v. Loving Home Care, Inc., 363 F.3d 523 (5th Cir. 2004).
The Texas Supreme Court will have another opportunity to address the Northfield exception as a result of Bitco Gen. Ins. Corp. v. Monroe Guaranty Ins. Co., Cause No. 19-51012 (5th Cir. March 12, 2021). In Monroe, the insured was hired to drill a commercial irrigation well. The well allegedly was drilled with an unacceptable deviation and was abandoned when the drill bit got stuck in the hole. The insured got sued and tendered its defense to two carriers.
One of the carriers refused to defend on grounds that the damage did not occur within its policy period. In the coverage lawsuit, the parties stipulated that the bit got stuck prior to the policy period in question. The district court granted summary judgment, which was appealed to the Fifth Circuit. The Fifth Circuit certified two questions to the Texas Supreme Court, including whether the Northfield exception was permissible under Texas law. The Texas Supreme Court does not have to accept the certified questions. Thus, we will wait and see if the Court accepts the questions and finally determines the scope of any exception to the general rule.
Interestingly, two days before the Order in Bitco, another Texas federal district court adopted the Northfield exception. See National Liability & Fire Ins. Co.v. Los Chavez Autobuses, Inc., No. 4:20-CV-01302, 2021 WL 920138 (S.D. Tex., March 10, 2021). In Los Chavez, the insured was sued as a result of an injury suffered on a bus trip from Matehuala, Mexico to Houston. The coverage territory for the policy of insurance did not include Mexico. The insurer took the position that the accident occurred in Mexico and, therefore, the policy did not provide coverage for the accident and it had no duty to defend.
The district court granted summary judgment, concluding that, based on extrinsic evidence, the accident occurred in Mexico and the policy provided no coverage. However, the parties did not contest the use of extrinsic evidence and, therefore, the district court’s reliance on extrinsic evidence may carry no real weight with respect to future decisions.
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