The Texas Supreme Court, in Bitco Gen. Ins. Corp. v. Monroe Guar. Ins. Co., recently solidified an exception to the longstanding “eight-corners” rule, granting insurance carriers some potential reprieve to the detriment of policy holders. Texas has long abided by the “eight-corners” rule, requiring that insurance carriers look only to the four corners of the policy and the four corners of the complaint in determining if there is a duty to defend. That has now changed.
In this recent Texas case, Monroe Guaranty Insurance Company (“Monroe”) and BITCO General Insurance Corporation (“BITCO”) issued a general liability policy to 5D Drilling & Pump Service Inc. (“5D”). BITCO’s policies were effective between October 2013 to October 2015 and Monroe’s policies were effective between October 2015 and October 2016.
5D was sued in 2016 by a property owner for breach of contract and negligence causing damage to the owner’s property. Specifically, the petition alleged that 5D entered into a contract with the property owner in 2014 to drill a commercial irrigation well and improperly drilled the well, causing the drilling bit to become stuck in a bore hole, thus rendering the well useless and causing damage to the land. The petition was silent on when this damage allegedly occurred or was discovered.
Monroe refused to defend 5D in the lawsuit on the basis that any property damage occurred before its policy coverage began in October 2015. Monroe relied on a stipulation that the insured’s drill bit became lodged in the bore hole in or around November 2014, about ten months before the Monroe policy took effect.
Generally, the eight-corners rule prevents an insurance carrier from considering any extrinsic evidence when determining if a duty to defend exists. However, in the 2004 case of Northfield Ins. Co. v. Loving Home Care, Inc., the Fifth Circuit held that Texas law recognized a limited exception to the eight-corners rule “when it is initially impossible to discern whether coverage is potentially implicated and when 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.”
In an effort to seek clarity, the Fifth Circuit in Monroe certified two question to the Texas Supreme Court. First, whether the Northfield exception to the “eight-corners” rule is permissible under Texas law; and second, whether the date of an occurrence is the type of extrinsic evidence that can be considered by the Court. The Texas Supreme Court held that Texas law permits consideration of extrinsic evidence provided the evidence (1) goes solely to an 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.
The Fifth Circuit, however, used the Texas Supreme Court’s guidance to find that the exception did not apply here. Specifically, Monroe could not satisfy the first prong of the analysis because “[a] dispute as to whenproperty damage occurs also implicates whetherproperty damage occurred on that date, forcing the insured to confess damages at a particular date to invoke coverage, when its position may very well be that no damage was sustained at all.”
Although not applicable in Monroe, the newly confirmed exception to the “eight-corners” rule provides insurance carriers with some clarification on when extrinsic evidence can be considered in making a determination on their duty to defend under Texas law.