Century Surety Company v. Club Adventure Learning Center, LLC, puts to rest the argument that artful pleading is an exception to Texas’s well-established eight-corners rule. 2023 WL 3575647 (W.D. Tex. May 22, 2023).

In Century Surety, Aguero filed negligence claims in Texas state court against Club Adventure, and three of their employees, in connection with allegations that a Club Adventure employee “violently grabbed” Aguero’s child’s leg and “dragged him across the carpeted floor…causing injuries.” Id. at 1. Century issued Club Adventure a general liability insurance policy containing an endorsement which reduced coverage from $2,000,000 to $100,000 for “bodily injury arising out of actual, threatened, or alleged physical abuse.” Id. Century filed a complaint against Club Adventure in United States District Court for the Western District of Texas, El Paso Division, and requested a judgment declaring that the physical abuse endorsement applied, resulting in Century being absolved of any duty to defend or indemnify Club Adventure. Aguero subsequently amended her petition in the state court case to omit any allegations of abuse and replaced them with vague allegations of negligence. Id. at 2. Century then filed a motion seeking summary judgment and a declaration that it had no additional duty to defend or indemnify due to the application of the endorsement. Id.

In evaluating the summary judgment issue, the court first analyzed whether it was proper to consider the original petition containing the allegations of abuse, or the amended petition, which omitted such allegations, presumably on purpose.

Texas’s eight-corners rule prohibits the introduction of extrinsic evidence when a matter is clear from the four-corners of the policy and the four-corners of the petition. The Texas Supreme Court in Monroe Guaranty Insurance Company v. BITCO General Insurance Corporation, established an exception to the eight-corners rule to allow for the introduction of extrinsic evidence when 1) the extrinsic evidence goes solely to coverage; 2) the extrinsic evidence does not contradict facts in the pleading; and 3) the extrinsic evidence conclusively establishes the coverage fact to be proven. 640 S.W.3d 195, 199 (Tex. 2022). The Texas Supreme Court in Loya Insurance Company v. Avalos, also established a “colluding exception” to the eight-corners rule, which allows the court to consider extrinsic evidence that the insured and a third-party suing the insured colluded to make a false representation of fact to secure a defense and create coverage where it would not otherwise exist. 610 S.W.3d 878, 879 (Tex. 2020). Additionally, though not a formal exception, the court in Century Surety discussed the permissibility of introducing extrinsic evidence when a pleading was too vague, and thus a matter was not clear from the eight-corners of the policy and pleading. Century Surety, 2023 WL 3575647 at 4.

In Century Surety Judge Kathleen Cardone held though a few cases had allowed for a so-called “artful pleading” exception where extrinsic evidence could be admitted when a party had clearly drafted pleadings to circumvent exclusions or endorsements which would deny coverage, those few cases instead fell under established exceptions, and did not create an “artful pleading” exception in its own right. Id. Because the court found the established exceptions did not apply to the facts, it refused to consider the original petition which contained the abuse allegations and instead stuck to the four-corners of the live pleading and the four-corners of the policy. Id.

The court next considered whether it may look beyond the eight-corners of the amended petition and the policy to extrinsic evidence because the allegations contained in the amended petition were too vague to determine if the endorsement applied. Id. at 6. Since the scope of the endorsement was not immediately obvious (i.e. whether abuse included negligence as pled in the amended petition) and its definition in the context of the policy was ambiguous, the court resolved the question in favor of the insured. Id. at 9. Coverage favored the insured, thus the court found the endorsement to not apply to the amended pleading. Id. With this, the court denied summary judgment and found Century still had a duty to defend Club Adventure. Id. at 10.

 

This case is important as it clarifies there is no artful pleading exception, even in the face of a blatant attempt to bypass clear policy language which denies coverage. So, pick up those paint brushes and get to work on that canvas – artful pleading remains an effective way to enforce a duty to defend where it otherwise would not exist.