In an opinion authored by Justice Huddle, the Texas Supreme Court has held that courts may consider extrinsic evidence of coverage facts when the “eight-corners rule” cannot determine coverage because of gaps in the plaintiff’s pleading. Monroe Guaranty Insurance Company v. BITCO General Insurance Corporation (No. 21-0232) came before the Court on certification from the U.S. Fifth Circuit Court of Appeals. The Fifth Circuit certified two questions:
- Is the exception to the eight-corners rule articulated in Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523 (5th 2004) permissible under Texas law?
- When applying such an exception, may a court consider extrinsic evidence of the date of occurrence when (1) it is initially impossible to discern whether a duty to defend potentially exists from the eight-corners of the policy and pleadings alone; (2) the date goes solely to the issue of coverage and does not overlap with the merits of liability; and (3) the date does not engage the truth or falsity of any facts alleged in the third party pleadings?
The eight-corners rule, which SCOTX adopted more than a half-century ago in Heyden Newport Chem. Corp. v. S. Gen. Ins. Co., 387 S.W.2d 22, 24 (Tex. 1965), holds that that courts must determine an insurer’s duty to defend its insured based on (1) the pleadings against the insured (regardless of their truth or falsity) and (2) the terms of the insurance policy. In general, courts may not look to extrinsic evidence beyond the eight-corners of those documents even if facts in the face of facts known from other sources. SCOTX has recently recognized exceptions to the rule, however. In Loya Ins. Co. v. Avalos, 610 S.W.3d 878, 879 (Tex. 2020), the Court ruled that “courts may consider extrinsic evidence that the insured and a third party suing the insured colluded to make false representations of act to secure a defense and create coverage where it would not otherwise exist.”
Both federal and intermediate state appellate courts, Justice Huddle observed, have reached different conclusions regarding the scope of the Heyden Newport holding. The Fifth Circuit itself made an Erie guess in Northfield, which involved a coverage dispute between an insurer and the insured, a provider of in-home nanny services, arising from the death of a child in the nanny’s care, and decided that SCOTX would not recognize an exception to the eight-corners rule. The Fifth Circuit went on to opine that if SCOTX didrecognize an exception, it would only do so “when it is initially impossible to discern whether coverage is potentially implicated and when the extrinsic evidence goes solely to the 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.” Subsequent to two SCOTX decisions applying Heyden Ne
wport to exclude extrinsic evidence that contradicted the plaintiff’s pleadings, the Fifth Circuit changed its mind, deciding that SCOTX would follow Northfield after all.
In view of the confusion and split in the courts, SCOTX decided to adopt Northfield, but with a difference. Where Avalos does not apply (i.e., collusion between insured and third party), a court may consider extrinsic evidence “provided that the evidence (1) goes solely to an issue of coverage and does not overlap with the merits of liability, (2) does not contract facts alleged in the pleading, and (2) conclusively establishes the coverage fact to be proved. The distinction vis-à-vis Northfield is the Fifth Circuit’s phrase “whether coverage is potentially implicated.” As Justice Huddle put it, “We think this standard invites courts to do what our authorities prohibit: ‘read facts into the pleadings’ or ‘imagine factual scenarios which might trigger coverage’” (citations omitted). The pertinent question is whether the pleadings contain the necessary facts to determine coverage; if not, extrinsic evidence may come in. But not just any evidence. Northfield referred to evidence going “solely to the fundamental issue of coverage.” Justice Huddle, however, opined that the Court did not want lower courts to become embroiled in creating a list of “fundamental issues of coverage.”
Instead, SCOTX shifted the analysis to whether the proffered extrinsic evidence goes solely to an issue of coverage but does not overlap the merits of liability. With the new Monroe rule in hand, Justice Huddle moved to the second question: date of occurrence. First, she opined that extrinsic evidence of date of occurrence could be considered if that information is missing from the plaintiff’s pleading, as it was in Monroe. But in Monroe, the dispute over whose policy had a duty to defend claims under a CGL policy issued to a driller of irrigation wells involved continuing damages that could have occurred under either or both policies, thus overlapping the merits of liability. “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,” Justice Huddle reasoned, “when its position may very well be that no damage was sustained at all.” Thus, even though the insurers stipulated here that the drill bit got stuck in the well around November 2014, the insured—the drilling company—would likely assert in the underlying litigation that the stuck drill bit didn’t cause the damage. Thus, the exception did not apply.
This decision will undoubtedly bring much-needed consistency to Texas law regarding the application of the eight-corners rule when four of the eight corners—the plaintiff’s pleading—have an informational gap. Courts will have to take care that they don’t run afoul of SCOTX’s mandate against “judicial amendments” to an insurance policy when applying the Monroe rule on extrinsic evidence. SCOTX has been crystal clear that it will enforce contracts, including insurance policies, to effectuate the intent of the parties as expressed in their agreements. When two parties bargain for insurance, the insured should get what it paid for and the insurer should provide what it got paid for—nobody gets a windfall by judicially revising the terms of the contract.