Beyond the Eight Corners: The Supreme Court of Texas Significantly Expands the Role of Extrinsic Evidence for Determining an Insurer’s Duty to Defend
Often as important as an insurance policyholder’s rights for reimbursement under an insurance policy for a judgment or settlement of claims against it by another party, liability policies usually also require the insurer to fund the policyholder’s defense when a lawsuit asserts claims against it that are potentially covered by the policy. Under Texas’s “Eight-Corners Rule,” a keystone tenet of Texas insurance law, courts determine the insurer’s duty to fund its policyholder’s defense by comparing the written allegations in the four corners of the lawsuit to the terms within the four corners of the policy, regardless of whether the facts stated in the lawsuit are true and without looking at facts and evidence outside of what the lawsuit alleges.
In turn, the Eight-Corners Rule often has vexed both policyholders and insurers where the underlying document that alleges what the insured did wrong omits facts that would determine whether the policy potentially provides coverage for the claims and therefore whether the insurer must pay for the policyholder’s defense. The Eight-Corners Rule generally does not allow the court to consider even undisputed facts that are not included in the lawsuit. Consider, for example, a situation in which the lawsuit does not specifically state the date of the alleged loss (for example, when the accident happened). Under a strict application of the Eight-Corners Rule, the court may not consider even undisputed evidence of the date of the loss to determine whether it falls within the policy period because it was not included in the allegations in the lawsuit.
On February 11, 2022, however, the Texas Supreme Court recognized a major exception to the Eight-Corners Rule to allow consideration of outside evidence to determine the insurer’s duty to pay for the insured’s defense in certain circumstances. In Monroe v. BITCO, the Court held that Texas courts may consider extrinsic evidence, “if the underlying petition states a claim that could trigger the duty to defend, and the application of the eight-corners rule, due to a gap in the plaintiff’s pleading, is not determinative of whether coverage exists, . . . 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.” Cause No. 21-0232, — S.W.3d —, 2022 WL —, at *— (Tex. Feb. 11, 2022).
In summary, the Monroe exception is a major development that up-ends more than a half-century of Texas insurance jurisprudence. Expect both insurers and policyholders to look to the Monroe exception with frequency because, on its face, it may be used to both create or avoid the insurer’s duty to fund its policyholder’s defense. Policyholders and insurers will want to look at whether the lawsuit itself is clear as to potential coverage or, if not, what facts are out there that Texas law would allow them to use either to get or avoid payment for defense of claims against the policyholder. For policyholders, this development may materially impact their bottom line, because the cost to pay lawyers to defend a claim can exceed the value of the claim itself.
For a deeper dive into the legal issues related to Monroe, click here.
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