Beyond the Eight Corners: Determining Whether a Liability Insurer’s Duty to Defend Is Triggered

March 1, 2022

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 commenced.

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.