Insurance Duty to Defend: The Supreme Court of Texas Recognizes an Exception to the ‘Eight Corners’ Rule

By: Courtney Ervin and J. Stephen Barrick, Partners, Hicks Thomas LLP

On February 11, 2022, the Supreme Court of Texas issued an opinion recognizing an exception to the “eight corners” rule that allows courts to consider extrinsic evidence under certain circumstances when evaluating whether an insurer has a duty to defend.

The eight corners rule is an analytical tool that Texas courts have long used to evaluate whether a liability insurer has a duty to defend an insured against a claim or lawsuit. The rule generally provides that the insurer’s duty to defend is determined based solely on the allegations in the underlying pleading and the terms of the insurance policy, without considering any “extrinsic” evidence relating to coverage.

In 2004, in Northfield Insurance Company v. Loving Home Care, Inc., the U.S. Court of Appeals for the Fifth Circuit predicted that the Texas Supreme Court would not recognize any exceptions to the eight corners rule, but if it did, the exception would allow courts to consider extrinsic evidence “when it is initially impossible to discern whether coverage is potentially implicated and the extrinsic evidence goes solely to a 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.” A “fundamental” coverage issue was “(1) whether the person sued has been specifically excluded by name or description from any coverage, (2) whether the property in suit is included in or has been expressly excluded from any coverage, and (3) whether the policy exists.”

In the 18 years since Northfield was decided, federal courts in Texas have generally recognized the exception to the eight corners rule described in Northfield, while Texas state courts of appeal have split on the issue and the Supreme Court of Texas has abstained. Indeed, two years ago, in Richards v. State Farm Lloyds, the Court recognized the longstanding split of authority and noted that it had repeatedly “acknowledged” other courts’ application of the Northfield exception in duty-to-defend cases, but it declined to address whether it was valid.

Now, at long last, Texans have an answer. In Monroe Guaranty Insurance Company v. BITCO General Insurance Corporation, No. 21-0232 (Feb. 11, 2022), the Supreme Court of Texas essentially accepted the Northfield exception, but with some modifications. The Court held that extrinsic evidence can be considered in evaluating whether an insurer has a duty to defend if the extrinsic evidence “(1) goes solely to the issue of coverage and does not overlap with the merits of liability, (2) does not contradict facts alleged in the pleading, and (3) conclusively establishes the coverage fact to be proved.”

Gone is the requirement in Northfield that the evidence goes to a “fundamental issue of coverage;” the exception is broadly applicable. However, to be considered, the evidence must be conclusive as to coverage, not merely relevant. And, as in Northfield, the evidence must relate solely to coverage under the policy and cannot overlap with the merits of the underlying claim against the insured.

Applying this new standard, the Court held in Monroe Guaranty that the extrinsic evidence, in that case, could not be considered because it overlapped with the merits of liability. The claim against the insured alleged that the insured’s negligence in drilling an irrigation well on the plaintiff’s land, where a drill bit got stuck in the borehole, caused damage to the plaintiff’s land and underground aquifer. The coverage issue was whether the alleged damage occurred during the policy period, and the parties stipulated that the drill bit got stuck in November 2014. The insurer argued that the stipulation proved that the damage occurred outside the coverage period, so it had no duty to defend the case. But the Court held that the parties’ stipulation could not be considered in evaluating the insurer’s duty to defend because when the damage occurred implicated whether property damage actually occurred on that date or another date, which overlapped with the merits of the underlying claims.