Texas Supreme Court Clarifies “Eight-Corners” Rule Exception for Insurers
In a pair of recent cases, the Texas Supreme Court announced that the duty-to-defend “eight-corners” rule is not absolute and set a new standard on when extrinsic evidence can be considered.
For years, courts have diverged on whether Texas law permits one to look beyond the “eight corners” of the underlying petition and policy to determine whether an insurer owes a duty to defend an insured. Federal courts, guided by the Fifth Circuit’s “Erie guess” on how the Texas Supreme Court would rule, have considered extrinsic evidence “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.” Many courts, including some Texas state courts, have adopted this exception, known as the “Northfield exception.” However, many others have rejected it on the basis that the Texas Supreme Court has had several opportunities to adopt the Northfield exception, but declined to do so every time (albeit each time based on the reasoning that the exception did not apply to the facts before the Court).
The Texas Supreme Court’s Feb. 11th rulings provide some needed clarity on this issue. In Monroe, the Court explained that it was adopting a modified version of the Northfield exception as a second exception to the eight-corners rule (the first coming from the Court’s 2020 Avalos case, in which one can consider extrinsic evidence on the duty to defend when the plaintiff and insured collude to plead the claim into coverage). Under this modified version, the eight-corners rule remains the “initial inquiry to be used to determine whether a duty to defend exists.” However, if, due to a “gap in the plaintiff’s pleading,” the eight-corners rule does not determine whether coverage exists, Texas law permits extrinsic evidence when that 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
3. Conclusively establishes the coverage facts to be proved
The Court clarified that it was making “minor refinements” to the Northfield exception by announcing this rule.
First, the Court jettisoned the Northfield requirement that extrinsic evidence only be considered if it is initially impossible to discern from the pleadings and policy “whether coverage is potentially implicated.” The Court held that the “potentially” requirement invited courts to “read facts into pleadings.” Instead, the threshold inquiry should be “does the pleading contain the facts necessary to resolve the question of whether the claim is covered?”
Second, the Court expanded the types of extrinsic evidence one may consider, abandoning the oft-litigated Northfield requirement that the extrinsic evidence go to certain delineated fundamental coverage issues:
1. Whether the person sued has been excluded by name or description from any coverage
2. Whether the property in suit is included in or has been expressly excluded from coverage
3. Whether the policy exists
The Court held that rather than task courts with determining what coverage issues were fundamental, the better approach was to eliminate the “fundamental” requirement altogether.
Third, the Court held that the proffered extrinsic evidence would need to “conclusively establish the coverage fact at issue,” further holding that while the evidence did not need to be a stipulation and could include “other forms of proof,” the evidence could not be considered “if there would remain a genuine issue of material fact as to the coverage fact to be proved.”
Applying these rules, the Monroe Court held that extrinsic evidence before it (a stipulation on when property damage to a well occurred) did not fit this extrinsic evidence exception because it overlapped with the merits of liability. The Court concluded that “a dispute as to when property damage occurs also implicates whether property 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.”
In the second case, Pharr-San Juan, the issue was whether an auto liability carrier would provide a defense to an insured school district for an underlying personal injury action in which a student alleged injuries from being thrown from a golf cart. The crux of the dispute was whether the golf cart was a vehicle “designed for public roads” (which would make the claim covered) or not (which would eliminate coverage). The Court, referencing the new Monroe extrinsic-evidence exception, held that the exception did not apply to the facts before it, since it was clear from the pleading that the plaintiff was alleging an injury from a golf cart, and a golf cart was plainly not a vehicle designed for public roads. Thus, the Court declined to consider extrinsic evidence showing that the specific golf cart could have been used on public roads.
The Court’s rulings provide some needed clarity on the often contentious issue of when, and whether, the Northfield exception applies. Most importantly, the rulings clarify that Texas is not a pure eight-corners state. The articulated exception also eliminates some of the ambiguity from the prior Fifth Circuit Northfield standard, by eliminating the inquiry of whether coverage is “potentially implicated” in favor of an inquiry on whether the pleading is silent on the coverage issue. The exception also expands the instances in which extrinsic evidence can be used, moving away from the requirement that the evidence only apply to certain delineated—and very narrow—fundamental coverage questions. Finally, the exception provides some clarity on the types of extrinsic evidence one can use, requiring summary judgment-type evidence that is not subject to fact issues.
Nonetheless, this ruling may present new challenges. As the Texas Supreme Court announced a new rule in Monroe, parties may have trouble applying the rule retroactively to cases in which courts have already held that there is a duty to defend based on the eight-corners rule in spite of extrinsic evidence to the contrary. This new exception may also generate new disputes between insureds and insurers, as the inquiries will turn to what type of evidence overlaps with the merits of liability, and what types of evidence, short of a stipulation, will pass muster under the newly announced standard. At any rate, since the exception can be utilized to either create or eliminate a duty to defend, it remains to be seen whether this new exception will expand or contract the broad duty to defend afforded to insureds under the traditional eight-corners rule.
Please contact Sara Nau or any member of Phelps’ Insurance team if you have questions or need compliance advice and guidance.
