Texas Supreme Court Validates Exception to 8-Corners Rule

For more than 50 years, insurers have known that their duty to defend a Texas policyholder from a lawsuit must be decided based only on the language of the insurance contract and the allegations made by the plaintiff.

The so-called “eight corners rule” refers to the four corners of the policy and the four corners of the civil complaint.

But even though that maxim was handed down in a 1965 ruling, courts continue to struggle with situations in which the duty to defend cannot be determined without considering facts that are outside of the eight corners, known as extrinsic evidence.

The Texas Supreme Court cleared up some of the confusion in a ruling Friday that lays out the circumstances under which there is an exception to the eight-corners rule. The court held that extrinsic evidence can be considered 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 fact to be proved.

The US 5th Circuit Court of Appeals asked for the clarification in connection with an insurance coverage dispute between two liability insurers, Monroe Guaranty Insurance Co. and Bitco General Insurance Corp. Both carriers insured 5D Drilling & Pump Service at different times, and both were called upon to defend the company after it was sued for allegedly botching an irrigation well that it drilled for J & B Farms in Bexar County, causing a drill bit to get stuck inside the well.

The lawsuit does not say when the damage occurred, which means there is not way to say whether Monroe of Bitco should pay for 5D’s defense. A US District Court judge decided that the eight-corners rule prohibits consideration of any evidence about when the drill bit got stuck. The district court ruled that Monroe has a duty to defend because the damage could have occurred anytime between the drilling contract being formed in 2014 to the date the lawsuit was filed in 2016.

Monroe appealed. The 5th Circuit decided that only the Texas Supreme Court could decided if there is any valid exception to the eight corners rule. The circuit court sent certified questions, seeking to learn if there are valid exceptions and in which circumstances they apply.

The 5th Circuit had actually created its own exception to the eight-corners rule in a 2004 decision, deciding that extrinsic evidence bearing solely on coverage facts can be considered in situations where the duty cannot be determined otherwise. But federal courts do not have final say over interpretations of state law. The 5th Circuit asked in its certified questions whether the exception it created in Northfield Ins. Co. v. Loving Home Care is proper.

Jared De Jong, a policyholder attorney for the Payne & Fears law firm in Irvine, California, said in an email that insurers will likely be excited that the Texas Supreme Court has validated the exception, but they shouldn’t be.

“Monroe suggests that an insurer hoping to avoid a defense based on extrinsic evidence will have an uphill battle,” he said.

He explained that the decision creates very narrow circumstances in which extrinsic evidence can be considered.

“We think Monroe will help insureds in construction disputes where establishing a duty to defend turns on undisputed extrinsic documents such as a subcontract that satisfies the terms of an additional-insured endorsement, but there will be only limited instances where an insurance carrier can successful rely on extrinsic evidence in a way that does not overlap with liability issues,” De Jong said.