The Houston Fourteenth Court of Appeals tackled the issues of whether extrinsic evidence could be used to establish duty to defend and whether the insured established a sufficient conflict to be entitled to independent counsel paid for by the insurer, in Allstate County Mutual Insurance Co. v. Wootton, __ S.W.3d __, No. 14-14-00657-CV, 2016 WL 1237872 (Tex. App.—Houston [14th Dist.], Mar. 29, 2016, no pet. h.). The coverage lawsuit arose out of an auto collision lawsuit filed by a father against his son and the Woottons, who loaned the son the vehicle involved in the accident. Allstate insured the Woottons’ vehicle.
The trial court granted summary judgment to the Woottons and denied Allstate’s motion for summary judgment (both on duty to defend). The trial court held Allstate owed the duty to defend and also ruled that the Woottons proved they were entitled to choose independent counsel to defend them, to be paid for by Allstate. Allstate argued that an exception to the eight corners rules applied to permit consideration of extrinsic evidence to determine duty to defend. If applied, Allstate argued, three possible policy exclusions would preclude a duty to defend.
On appeal, the Houston Fourteenth Court of Appeals upheld the duty to defend ruling. The court quoted the standard auto policy insuring agreement, and noted the three exclusions upon which Allstate relied, which did not provide coverage for:
Any obligation for which the insured or the insured’s insurer may be held liable under any workers compensation, disability benefits or unemployment compensation law or any similar law.
Bodily Injury to ... [a]n employee of the insured arising out of and in the course of employment by the insured....
Bodily injury to any fellow employee of the insured arising out of and in the course of the fellow employee’s employment.
In the underlying suit, the father made the following allegations against the Woottons:
The court of appeals recognized that the father’s petition did not address whether he or his son were employees of the Woottons or whether the father’s injuries arose out of or in the course of his employment. Nor did the father include in his pleading any facts that would trigger any exclusion under the policy, and no inferences logically flowed from the facts alleged in the petition that would trigger any exclusion under the policy.
The court noted that, if the eight corners rule applied for purposes of deciding the duty to defend, it could not consider extrinsic evidence submitted by Allstate in its MSJ in an effort to establish that the accident occurred while the father and son were acting in the course and scope of their employment with the Woottons. It held that, unless an exception to the eight corners rule applied, the father’s petition potentially included a claim that fell within the policy’s coverage and Allstate had a duty to defend.
The court next examined whether an exception to the eight corners rule applied. Allstate had proposed two different formulations of the proposed exception:
a. Extrinsic evidence may be considered under a broad exception to the eight-corners rule if (1) the pleading in the underlying case does not contain sufficient facts to determine whether coverage exists, and (2) the extrinsic evidence goes solely to a fundamental issue of coverage that does not overlap with the merits of, or engage the truth or falsity of, any facts alleged in the underlying case (the “Broad Exception”); or
b. Extrinsic evidence may be considered under a narrower exception to the eight-corners rule if (1) it is impossible to discern whether coverage is potentially implicated by the pleading in the underlying case, and (2) the extrinsic evidence goes solely to a fundamental issue of coverage that does not overlap with the merits of, or engage the truth or falsity of, any facts alleged in the underlying case (the “Narrow Exception”).
Analyzing the Broad Exception first, the court of appeals noted that, although the Texas Supreme Court had been asked to recognize an exception to the extrinsic evidence rule many times, it had never done so. The high court in GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305 (Tex. 2006), discussed the possibility of recognizing an exception to this rule; but it did not do so, and it has continued to emphasize the importance of adherence to the eight-corners rule. See Ewing Const. Co. v. Amerisure Ins. Co., 420 S.W.3d 30, 33 (Tex. 2014); Evanston Ins. Co. v. Legacy of Life, Inc., 370 S.W.3d 377, 380 (Tex. 2012); Burlington N. & Santa Fe Ry. Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 334 S.W.3d 217, 219 (Tex. 2011); and D.R. Horton–Texas Ltd. v. Markel Int’l Ins. Co., 300 S.W.3d 740, 744 (Tex. 2009). Although GuideOne did not recognize an exception, the court of appeals noted from the case several “deliberate statements for future guidance in the conduct of litigation,” which it determined were judicial dicta binding on the court.
In a later opinion, Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487 (Tex. 2008), the Texas Supreme Court looked back to GuideOne and indicated that, if it were to recognize an exception, it would do so only in the narrow circumstance in which it is impossible to discern whether coverage is potentially implicated and when the extrinsic evidence goes solely to a fundamental issue of coverage which does not overlap with the merits of or engage the truth or falsity of any facts alleged in the underlying case. Id. at 497. The Nokia court then concluded that, even if the extrinsic evidence in Nokia pertained solely to coverage, the circumstances in Nokia did not fit within the narrow scenario in which an exception might be granted because it was not “‘initially impossible to discern whether coverage is potentially implicated.’” Id. at 498.
Therefore, the court of appeals concluded, if the Texas Supreme Court were to recognize an exception, it would be the Narrow Exception, not the Broad Exception. Analyzing the Narrow Exception under the facts of its case, the court of appeals determined that the Narrow Exception would not apply in Wootton because, based on the father’s allegations in the underlying suit, it is not impossible to discern whether coverage is potentially implicated.
Because the facts of the case did not support application of the Narrow Exception, the Wootton court declined to recognize an exception to the eight corners rule. As a result, the trial court properly granted summary judgment to the Woottons on duty to defend.
However, as to the independent counsel ruling, the court of appeals reversed. The court of appeals looked to N. Cnty. Mut. Ins. Co. v. Davalos, 140 S.W.3d 685 (Tex. 2004), which addressed the issue of independent counsel. In a policy imposing a duty to defend, the court noted, the carrier has the right to control the defense. Under certain circumstances (discussed in Davalos), however, an insurer may not insist upon its contractual right to control the defense, such as in the situation where the insurer actually is burdened by a conflict of interest.
A carrier that issues a reservation of rights letter raises only a potential conflict of interest. The potential conflict of interest becomes an actual conflict of interest, thereby preventing the insurer from insisting on its contractual right to conduct the defense, when “the facts to be adjudicated in the liability lawsuit are the same facts upon which coverage depends.”
In Wootton, the insureds were not entitled to independent counsel just because Allstate issued a reservation of rights letter. This raised only a potential conflict of interest. For various procedural reasons (such as waiver), the court of appeals recognized that the Woottons did not establish through their summary judgment motion and evidence that, as a matter of law, the facts to be adjudicated in the underlying suit were the same facts upon which coverage depended. Therefore, the trial court erred in concluding that the Woottons established an actual conflict of interest and were entitled to hire independent counsel to be paid for by Allstate.