By: Fred Shuchart
Over fifty years ago, in Heyden Newport Chem. Corp. v. S. Gen. Ins. Co., 387 S.W.2d 22 (Tex. 1965), the Texas Supreme Court established the “eight corners” rule to determine an insurer’s duty to defend under liability coverage. Under the eight corners rule, an insurer’s duty to defend was determined solely by comparing the allegations contained in the live pleading with the terms and conditions of the policy of insurance. Neither the insurer nor the insured could rely on any extrinsic evidence or facts outside the pleading to determine the duty to defend. Although lower courts and federal courts had adopted a general exception to the rule, the Texas Supreme Court had never adopted one until Monroe Guaranty Insurance Co. v. BITCO General Insurance Corp., No. 21-0232, 2022 WL 413940 (Tex., Feb, 11, 2022).
In Monroe, the underlying pleading failed to contain any allegations as to when the insured’s alleged negligent acts occurred or even when it began or stopped the work made the basis of the claim. BITCO defended the insured and sought a declaration that Monroe owed a duty to defend. Monroe had declined coverage based on the argument that the events and/or damages did not occur within its policy period.
During the coverage lawsuit, Monroe and BITCO stipulated that the event occurred prior to the inception of the Monroe policy. The trial court refused to consider the stipulation based on the eight corners rule and granted summary judgment in favor of BITCO. Monroe appealed to the federal Fifth Circuit Court of Appeals, which then certified two questions to the Texas Supreme Court: 1) Is the exception to the eight corners rule, as set forth in Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523 (5th Cir. 2004), permissible under Texas law, and 2) if yes, does it apply in the instant case?
The Texas Supreme Court accepted the certified questions. In response to the first question, the Court acknowledged that, although it had adopted a limited exception to the rule in the past, it had never adopted a general exception. The Court then broke with 50 years of tradition and concluded that a general exception to the rule was permissible under Texas law.
While reiterating that the eight corners rule remains the initial inquiry, the Court adopted a variation of the Northfield exception. If the underlying petition states a claim that could trigger the duty to defend, and the application of the eight corners rule, due to a gap in the plaintiff’s pleading, is not determinative of whether coverage exists, Texas law permits consideration of extrinsic evidence provided the evidence (1) goes solely to an issue of coverage and does not overlap with the merits of liability, (2) does not contradict facts alleged in the pleading, and (3) conclusively establishes the coverage fact to be proved.
With respect to the first prong, the Court explained that it is satisfied where the pleading does not contain the facts necessary to determine whether there is coverage. In adopting the second prong, the Court rejected the Northfield requirement that the evidence relate to a fundamental issue of coverage. With respect to the fourth prong, the Court explained that, if there still is a genuine issue of material fact after the evidence is considered, the evidence cannot be relied upon. The Court reasoned that, without the exception, the insured would receive a windfall because it would be receiving coverage for which the insured neither bargained nor paid and the windfall would come at the expense of all insurance customers through higher premiums.
Because it answered “Yes” to the first question, the Court answered the second question. The Court concluded that the extrinsic evidence was not solely related to coverage and, therefore, could not be considered. The Court reasoned that, in a continuing injury case (like this one), evidence of the date of damage always overlaps with liability.
The Monroe decision certainly represents a change in Texas law in that Texas now recognizes a general exception to the eight corners rule. It still remains to be seen how frequently the exception actually will apply. As with the Northfield exception, the issue of whether the evidence overlaps with liability provides a court with wide latitude to reject the exception.
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