A recent ruling in Texas has given insurers another arrow in their quiver when determining whether they have a duty to defend in cases where coverage may not exist. In Monroe Guaranty Ins. Co. v. Bitco Gen. Ins. Corp., the Texas Supreme Court recognized an exception to Texas’s “eight corners rule,” granting insurers some potential reprieve from providing a defense in cases where coverage initially appears questionable.
In Texas, the “eight corners rule” governs whether an insurer has a duty to defend an insured. The eight corners rule, under normal circumstances, requires that an insurer’s duty to defend be based only on (1) the “four corners” of pleadings in the underlying lawsuit against the insured and (2) the “four corners” of the contract (i.e., the terms of the insurance policy).
An insurer’s duty to defend historically has been understood to be broad, as the insurer is obligated to defend the entire suit if there is, potentially, a cause under the complaint within the coverage of the policy. The duty to defend does not turn on the truth or falsity of the plaintiff’s allegations. And, if there is doubt as to whether the complaint states a covered cause of action, such doubt is resolved in the insured’s favor.
The eight corners rule has historically been a source of frustration for insurers. Taking advantage of this broad rule, experienced counsel will often file pleadings anticipating review by an insurer with significant factual gaps or omissions that could determine whether a duty to defend exists. For example, in the construction context, the pleadings may omit facts regarding an insured’s actual or constructive notice of a defect, the contract at issue, and the scope of services at issue. Faced with these pleadings, an insurer would often have to agree to defend the insured, subject to a reservation of rights, even if it appears from the insurer’s file or other extrinsic evidence that coverage is questionable or nonexistent.
In 2004, the Fifth Circuit held in Northfield Ins. Co. v. Loving Home Care, Inc., that Texas law recognized a limited exception to the eight corners rule “when it is initially 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.” This became known as the Northfield exception.
From 2004 to 2020, unfortunately, the Texas Supreme Court generally declined to clarify or refine its position on the “Northfield exception” or whether an exception to the eight corners rule exists. In 2020, the Texas Supreme Court in Loya Ins. Co. v. Avalos recognized a separate, limited exception to the eight corners rule, allowing a court to “consider extrinsic evidence that the insured and a third party suing the insured colluded to make false representations of fact to secure a defense and create coverage where it would not otherwise exist.”
Now, in Monroe, the Fifth Circuit sought clarification by certifying two questions to the Texas Supreme Court: (1) whether the Northfield exception to the eight corners rule is permissible under Texas law and (2) whether the date of an occurrence is the type of extrinsic evidence that can be considered by the court.
While the Court acknowledged that the eight corners rule applies, it held that extrinsic evidence may be considered “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” 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.
Following this guidance, the Fifth Circuit ultimately determined that the exception did not apply, because extrinsic evidence indicating the date the property damage occurred overlapped with the merits of the case, which involved damages caused by an insured’s drilling operations on the plaintiffs’ land. Because continuing damages were at issue, the extrinsic evidence could not be used to determine whether the insurer had a duty to defend.
While the court declined to consider the proffered extrinsic evidence, the Monroe decision creates a new standard for insurers assessing potential coverage obligations under Texas law. For insurers determining a potential duty to defend, the Monroe decision permits the insurer to consider new information outside of the “eight corners” of the policy and pleading in certain circumstances. The decision promotes a fair application of an insurance policy’s terms, and should hopefully reduce the frequency of intentionally vague petitions drafted to ensure a defense. The decision will allow the parties to evaluate coverage based on all available evidence, potentially reduce insurer exposure in some scenarios, and avoid the expense of defending claims which are not actually covered.
Insurers and their counsel must take care in evaluating available extrinsic evidence where the duty to defend is in question and ensure that the evidence meets the standards set out in Monroe. Further, lower courts will hopefully provide more guidance and certainty as they apply the Monroe standard to new cases.