Eight (Corners) May Not Be Enough After All
The Texas Supreme Court recently ruled that the “eight corners” rule, under which the duty to defend is assessed, permits consideration of evidence extrinsic to the allegations of the pleadings. Monroe Guar. Ins. Co. v. BITCO Gen. Ins. Corp., 2022 WL 413940 (Tex. Feb. 11, 2022). The Court held that extrinsic evidence may be considered under some circumstances where there is a “gap in pleadings” – where a petition is silent – on a coverage question that does not overlap with liability issues. Id. at *6.
In Monroe, Plaintiff David Jones sued 5D Drilling for damages resulting from 5D’s negligence while drilling an irrigation well. Jones alleged that he contracted with 5D in 2014 and that 5D stuck a drilling bit in the bore hole, rendering the well useless. The petition alleged this caused property damage, but it was silent on when the damage occurred.
5D demanded coverage from both Monroe Guaranty and BITCO General, which insured 5D for different policy periods. Monroe refused to defend, contending that any covered property damage occurred prior to policy inception. BITCO then sued Monroe seeking contribution for defense costs. The carriers stipulated the bit became stuck “in or around November 2014,” before Monroe’s policy began in October 2015. The district court held Monroe owed a duty to defend because the property damage could have occurred any time from inception of the contract in 2014 to the filing of the underlying suit in 2016. Monroe appealed, and the Fifth Circuit certified the following questions to the Texas Supreme Court: (1) whether the exception to the eight-corners rule articulated in Northfield Insurance Co. v. Loving Home Care, Inc., was permissible under Texas law; and (2) when applying such an exception, whether a court may consider extrinsic evidence of the date of an occurrence. Bitco Gen. Ins. Corp. v. Monroe Guar. Ins. Co., 846 Fed. Appx. 248, 252 (5th Cir. 2021).
The Supreme Court held extrinsic evidence may be considered in duty-to-defend cases under certain circumstances. Id. at 6. The Court held the eight-corners rule remains the initial inquiry, but:
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.
The Court noted this rule is in line with but refines Northfield. Permitting extrinsic evidence to be considered if it is initially impossible to determine from the pleadings and policy “whether coverage is potentially implicated,” as Northfield does, invites courts to “read facts into the pleadings” Id. (citing Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523, 531 (5th Cir. 2004) (emphasis added)). Under Monroe, the threshold inquiry is: “does the pleading contain the facts necessary to resolve the question of whether the claim is covered?” Id. Second, the Court eliminated the Northfield requirement that the extrinsic evidence go to a “fundamental” coverage issue. Id. Third, the Court added the requirement that the extrinsic evidence must “conclusively establish the coverage fact at issue.” Id. at 7.
Applying the new standard to the case before it, the Court held evidence of the occurrence date may be considered if it satisfies the standards, but the evidence in that case “would overlap with the merits of liability” since the case involved allegations of “continuing damage.” Id. The Court noted that “[a] dispute as to when property damage occurs also implicates whether property damage occurred on that date, forcing the insured to confess damages at a particular date to invoke coverage, when its position may very well be that no damage was sustained at all.” Id. (emphasis in original). The parties stipulated the date on which the drill bit got stuck and the Court noted that “the insured likely would have sought to prove the sticking of the drill bit was not the cause of any damage.” Id. at 8.