Since 2006, when the Supreme Court of Texas hinted that a narrow exception to the eight-corners rule might exist, debate has raged across state and federal courts in Texas whether the court’s coy statements should be taken as tacit approval of the presumptive exception.  Last Friday, in Monroe Guaranty Ins. Co. v. BITCO Genal Ins. Corp., No. 21-0232, 2022 WL 413940 (Tex. Feb. 11, 2022), the high court finally resolved all doubts, openly declaring its approval of the following exception to the strict eight-corners rule:

“Today, we expressly approve the practice of considering extrinsic evidence in duty-to-defend cases to which Avalos does not apply.  In doing so, we do not abandon the eight-corners rule.  It remains the initial inquiry to be used to determine whether a duty to defend exists, and it will resolve coverage determinations in most cases.  But 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, 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 court made several refinements to the formulation of the exception that has circulated in court opinions since 2006:

  • First, it observed that the threshold for triggering the exception is best stated as, “…does the pleading contain the facts necessary to resolve the question of whether the claim is covered?” In stating this threshold, the court intentionally avoided the concept of “potentially,” to avoid inviting litigants and courts to engage in the long-forbidden practices of reading facts into the pleadings and imagining factual scenarios which might trigger coverage. 
  • Second, the court expressly chose to avoid the murky phrase, “fundamental coverage issue,” used by many federal courts, to prevent battles over which types of coverage issues are “fundamental” and which are not.
  • Third, the court added a new requirement that the proffered evidence must conclusively establish “the coverage fact to be proved.”

The court then went on to apply its newly refined rule to the case at hand.  The extrinsic evidence at issue concerned the question of when the property damage, consisting of an improperly drilled well and a stuck drill bit, occurred and when the insured knew about it. Like many such pleadings filed in Texas courts, the petition was silent as to the dates of any of the acts or omissions alleged, leaving the two consecutive insurers, BITCO and Monroe, in disagreement as to who owed a duty to defend the insured.

Ordinarily, a petition mentioning no dates would be likely to trigger a duty to defend for both insurers, but in this case, both insurers knew and stipulated the date the drill bit became stuck in the well.  However, the court held that this extrinsic evince could not be considered because it improperly overlapped with the merits, stating:

“In cases of continuing damage like the kind alleged here, evidence of the date of property damage overlaps with the merits.  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.”

Thus, although the original exception posited by the Texas Supreme Court in 2006 is now openly enshrined in Texas law with a few refinements, the extrinsic evidence in this case was still disallowed. 

Editor’s Note:  The court’s ruling disallowing the date evidence has potentially far-reaching implications for a wide variety of long-tail claims involving allegations of ongoing damage.  Historically, it has been extremely difficult for insurers to refuse their insureds a defense based on date-related grounds when the pleading is either silent, vague, or all-inclusive on when the coverage-triggering event might have occurred.  This ruling gives with one hand and takes away with the other, openly approving the extrinsic evidence rule, but simultaneously holding that evidence of the date of damage or injury can never be used, at least in continuing-damage cases. 

The silver lining is that situations like this one, where the specific date of the alleged occurrence was known and stipulated, tend to be the minority in continuing-damage cases.  Quite often, under the Texas injury-in-fact rule, the date damage began and continued is extremely difficult, if not impossible, to conclusively prove by any means.

But the court’s ruling begs the question of how many other types of extrinsic evidence will be banned.  Its reasoning for disallowing this evidence could open the door for arguments that any facts about the loss itself must be disallowed because one of the insured’s defenses is to deny that any injury or damage was sustained at all.

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