In BITCO General Insurance Corp. v. Monroe Guaranty Insurance Co., the Texas Supreme Court recently announced a new rule that applies to insurance coverage disputes and an insurer’s duty to defend. The Court’s ruling allowed for extrinsic evidence to be used in a dispute about the duty to defend, provided that it met certain strict conditions. The rule applied by the Court is known as the “eight corners rule” because it allows a court to look beyond the four corners of the legal complaint against the policyholder and the four corners of the insurance policy at the center of the dispute. This case provided important clarifications about the use of the “eight corners rule.”
Can Extrinsic Evidence Be Used to Determine the Duty to Defend?
The BITCO case involved a dispute between two insurers that both provided coverage to a commercial drilling company. The driller was contracted to drill a commercial irrigation ditch on a property. Although the property owner’s complaint was missing several key facts, it detailed in several ways how the driller was allegedly negligent. The owner alleged his land was damaged, and he filed a legal action against the driller.
Citing the duty to defend, the driller demanded a legal defense from both of the insurance companies involved in this case. One company agreed to defend, but the other insurance company, Monroe, refused, claiming the damage occurred before its policy with the driller began. The insurer pointed to language in the policy about the duty to defend, claiming it only applies to actions that happened when the policy was in effect. As a result, one insurer sued the other, seeking to enforce a duty to defend. Here, the question was whether the duty existed and what evidence could be used to prove the duty.
Both insurers stipulated that the cause of the damage, a drill bit getting stuck in a borehole, occurred ten months before Monroe’s policy began. Each party then moved for summary judgment in federal district court. Monroe argued the stipulation proved that the damage occurred before the policy began, and thus, it had no obligation to defend. The federal district court refused to consider the stipulation because it was extrinsic evidence, and therefore it was beyond the “eight corners.”
The court found the damages could have occurred any time over a two-year period, including the time the driller was insured by Monroe. Accordingly, the district court denied the motion for summary judgment. On appeal to the U.S. Court of Appeals for the Fifth Circuit, the appellate court certified two questions of law to the Texas Supreme Court, since the matter involved issues of state law.
The Court Was Asked to Clarify Exceptions to the Eight Corners Rule
The two questions certified to the Court were:
- Is an exception to the “eight corners rule” that the Fifth Circuit instituted in 2005 permitted under Texas law?
- May a court consider extrinsic evidence if it is impossible to discover whether there is a duty to defend in the eight corners, and the evidence does not overlap with the merits of liability and does attempt to prove or disprove a fact in the pleadings?
In its decision, the Court discussed the reason for the “eight corners rule,” namely that the complaint and the policy alone should determine whether there is a duty to defend. The Court also discussed the rule’s exceptions. When discussing the exceptions, the Court did not believe courts should rewrite these policies, which should be given primacy. The Court simply believed courts should step in to consider extrinsic evidence only if the duty to defend is not clear from the policy itself.
Northfield Is the Law, Subject to Conditions
Here, the Texas Supreme Court stepped into the breach because state courts were not consistently and uniformly looking at extrinsic evidence. Some courts were allowing extrinsic evidence in accordance with a test laid out by the Fifth Circuit in Northfield Ins. Co. v. Loving Home Care, Inc., while others were not allowing it at all.
In Northfield, the Fifth Circuit held extrinsic evidence “may be considered only if it is initially impossible to discern from the pleadings and policy ‘whether coverage is potentially implicated.’”
Accordingly, the Court felt the need to determine whether Northfield was consistent with Texas law. The Court held Northfield was consistent with Texas law, which allows extrinsic evidence to be considered, provided that it is:
- Solely related to an issue of coverage and does not overlap with the merits of liability;
- Not contradicting facts alleged in the pleading; and
- Conclusively establishing the fact to be proved.
In the Monroe case before it, the Court did not allow consideration of the extrinsic evidence of the stipulation regarding when the damage to the property owner’s land occurred. The reason was not because a date could not be considered; instead, the stipulation violated one of the prongs of the above test because it went to the merits of the case. Had the Court considered the date when a drill bit got stuck in the ground, it would have undermined Monroe’s liability defense.
Subsequent Applications of Monroe
The Texas Supreme Court did not have to wait long to apply its Monroe decision to a new case. In Pharr-San Juan-Alamo Independent School District v. Texas Political Subdivisions Property/Casualty Joint Self-Insurance Fund, the Court did not allow the use of extrinsic evidence when the petitioners argued there was an undefined term that led to a “gap” in coverage. The Court questioned whether there was a “gap” such that extrinsic evidence should be considered.
The takeaway is that, while Texas courts will consider extrinsic evidence to determine whether an insurer has a duty to defend in some circumstances, those circumstances are limited. Unless the carrier can make a compelling case to the contrary, litigants should expect Texas courts to apply the “eight corners rule” with limited exceptions.
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