In a decision issued on February 11, 2022, the Texas Supreme Court, responding to a certified question from the United States Court of Appeals for the Fifth Circuit, held that extrinsic evidence can be considered in determining an insurer’s duty to defend in limited circumstances.
In Monroe Guar. Ins. Co. v. BITCO Gen. Ins. Corp., the United States Court of Appeals for the Fifth Circuit certified a question to the Texas Supreme Court concerning whether extrinsic evidence was permissible in evaluating an insurer’s duty to defend. No. 21-0232, 2022 Tex. LEXIS 148 (Tex. Feb. 11, 2022). Underlying the dispute was an action brought by an owner of farmland who contracted with the drilling company insured to install a 3600-foot commercial irrigation well on his farmland. Id. at *2–3. Although the owner’s complaint asserted claims for breach of contract and negligence, contending that the improper installation damaged his land, it did not specify as to when the alleged damage occurred. Id. The drilling company subsequently demanded a defense from two of its commercial general liability carriers, BITCO and Monroe. Id. at 4. Although BITCO agreed to provide a defense under a reservation of rights, Monroe refused, contending that it had no duty to defend on the basis that any property damage occurred before its policy period began. Id.
As a result, BITCO filed an action against Monroe in federal district court seeking a declaration that Monroe also owed a defense to the drilling company. Id. The parties, while cross-moving for summary judgment, stipulated that the property damage occurred roughly ten months prior to the inception of Monroe’s policy. Id. Declining to consider the stipulation and applying Texas’ eight-corners rule, the court concluded that Monroe owed a duty to defend because the property damage could have occurred anytime between the formation of the drilling contract in 2014 and the filing of the owner’s suit, thereby potentially triggering coverage under either or both of the insurer’s policy periods. Id. at *5. Monroe appealed, and the United States Court of Appeals for the Fifth Circuit certified questions to the Texas Supreme Court related to whether extrinsic evidence is admissible when considering an insurer’s duty to defend. Id.
The Texas Supreme Court, answering in the affirmative, clarified the Fifth Circuit’s decision in Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523 (5th Cir. 2004), which set forth a narrow extrinsic evidence exception to the eight-corners rule for fundamental issues of coverage. Id. at *9–10. The Texas Supreme Court therefore held that extrinsic evidence can be considered when evaluating an insurer’s duty to defend when 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.” Id. at *12. Applying this test to the coverage dispute between BITCO and Monroe, the Texas Supreme Court determined that extrinsic evidence was not permissible. The Court reasoned 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.” Id. at *16–17.
Although Monroe provides some clarity to the decidedly-narrow extrinsic evidence exception in Texas, duty to defend coverage disputes will likely now center on whether the extrinsic evidence speaks solely to an issue of coverage, contradicts the facts alleged in the pleadings, or conclusively establishes the coverage fact at issue.