In two recent decisions, the Texas Supreme Court defined the limited
parameters in which Texas courts can look beyond the “four corners” of the
complaint against the policyholder and the “four corners” of the insurance
policy (i.e., the “eight-corners rule”) when determining whether an
insurer’s “duty to defend” is triggered.
Permitting exceptions to the “eight-corners rule” and, in limited
instances, allowing the use of extrinsic evidence to determine whether the
duty to defend applies, requires policyholders to pay extra care to whether
their insurers are properly accepting or denying defense of a suit.
Application of fact-intensive tests like the Texas Supreme Court just
announced varies from state to state.
BITCO General Insurance Corp. v. Monroe Guaranty Insurance Co.
, No. 21-0232, 2022 WL 413940 (Tex. Feb. 11, 2022), decided a dispute over
the application of a liability insurance policy’s duty to defend. The Texas
Supreme Court considered whether Monroe Guaranty Insurance Co. was
permitted to introduce extrinsic evidence that allegedly would have shown
that a driller’s (the insured’s) negligent work on an irrigation well for a
farm occurred outside Monroe’s policy period and instead triggered coverage
only under a policy issued by BITCO General Insurance Corp., which provided
coverage for an earlier policy period.
Absent the introduction of extrinsic evidence and as alleged in the
underlying complaint, the negligence that led to the property damage could
have occurred during the policy period in which Monroe provided coverage.
Monroe contended that it had extrinsic evidence — a stipulation between
Monroe and BITCO — that conclusively established that the negligence
leading to the property damage occurred before Monroe’s policy period
In a unanimous decision, that court held that Texas law allows the
consideration of extrinsic evidence when analyzing an insurer’s duty to
defend if the extrinsic evidence: (1) does not overlap with any liability
aspects of the case; (2) does not contradict facts alleged in the pleading;
and (3) definitively establishes whether coverage exists. In this instance,
however, the court held that Monroe could not introduce extrinsic evidence
to avoid its duty-to-defend obligation because the date of the occurrence
(the information Monroe sought to introduce) overlapped with the merits of
the case and could not be considered.
Immediately after deciding Monroe, the Texas Supreme Court applied
the newly adopted eight-corners exception to
Pharr-San Juan-Alamo Independent School District v. Texas Political
Subdivisions Property/Casualty Joint Self-Insurance Fund
, No. 20-0033, 2022 WL 420491 (Tex. Feb. 11, 2022). This coverage dispute
stemmed from a crash involving a golf cart and Texas Political
Subdivision’s refusal to defend the school district in an underlying suit.
The petitioners argued that due to “gaps” in the complaint and the
contract, it was not clear whether golf carts were meant for travel on
public roads, a fact necessary to determine whether coverage existed. The
Texas Supreme Court held that the Monroe exception did not apply
to this case, finding that the ordinary meaning of an undefined term does
not create the type of "gap" Monroe requires to permit the
introduction of extrinsic evidence when determining whether an insurer’s
duty to defend applies.
Each state has the autonomy to develop its own law as to what information a
court may consider when evaluating an insurer’s duty to defend, so this law
develops in state legislatures or, more often, in state courts (as in Monroe) and leads to various approaches across the country. While
most states generally defer to the eight-corners rule, when and under what
circumstances state law permits a party to introduce extrinsic evidence to
prove or negate a duty to defend can vary widely — e.g., whether extrinsic
evidence may be permitted only to establish but not negate coverage or vice
versa, as well as the standard under which a party may introduce extrinsic
evidence. (Monroe addressed this latter point under Texas law.)
Thus, understanding what state law applies to a given policy and how that
state treats extrinsic evidence in the determination of an insurer’s duty
to defend could mean the difference between a policyholder having access to
millions of insurance dollars toward defending a covered lawsuit or getting
stuck paying its own defense out of pocket.