- A minority of states have wrestled with the application of the rule.
- One of the few deviations permitted in Texas is in the instance of fraud.
- Parties should research the applicable state law on additional evidence.
As a general matter, to determine an insurer’s duty to defend, courts follow the “four corners rule,” which provides that an insurer’s duty to defend must be determined by comparing the allegations in the complaint with the policy’s provisions, without regard to extrinsic evidence or facts. Sometimes the rule is referred to as the “eight corners” rule. Under this analysis, the allegations of the complaint control, and if the allegations are ambiguous, any ambiguities are construed in favor of the insured to establish the duty to defend. A minority of states, however, have wrestled with the application of the rule, resulting in exceptions over the years, slowly eroding or expanding the simple concept of the four corners.
Texas is among the minority of states that permit few, if any, deviations from the eight corners rule. In Bitco General Insurance Corp. v. Monroe Guaranty Insurance Co.the Fifth Circuit Court of Appeals declined to consider extrinsic evidence in determining Bitco’s duty to defend and outlined when a court applying Texas law can deviate from the state’s strict eight corners rule under what is now referred to as the Monroe exception.
Bitco and Monroe issued commercial general liability policies to 5D Drilling & Pump Services, Inc., for the years 2013–2014 and 2015–2016, respectively. 5D was sued after it allegedly failed to properly drill a well in the summer of 2014. Both insurers were put on notice. Bitco agreed to defend 5D and Monroe refused, citing two business risk exclusions and asserting that the damage occurred outside the policy period. Bitco filed suit seeking a declaration that Monroe also owed a duty to defend and seeking to recover Monroe’s share of the defense costs. The district court granted summary judgment in Bitco’s favor based on the allegations of the underlying complaint. Monroe appealed.
On appeal, Monroe relied on a stipulation between the parties that the loss occurred in November 2014, outside its policy period. However, because the stipulation was extrinsic to the policy and underlying complaint, an issue arose as to whether the extrinsic stipulation could be considered in determining the duty to defend.
The appellate court noted that in Northfield Insurance Co. v. Loving Home Care, Inc.the Fifth Circuit previously predicted that Texas law would recognize a limited exception to the eight corners rule where the extrinsic evidence goes solely to the question of coverage and does not overlap with the facts of the underlying case. Citing Northfield, the Fifth Circuit in Bitco certified two questions to the Texas Supreme Court:
In response, the Texas Supreme Court in Monroe laid out what is now referred to as “the Monroe exception”:
[I]f 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 Monroe court cited its earlier decision in Richards v. State Farm Lloydsin which the court had addressed the use of extrinsic evidence and declined to permit a deviation from the eight corners rule. In Richards, the policy required a defense if “a claim is made or a suit is brought against an insured for damages because of bodily injury . . . to which this coverage The court noted that while some liability policies agree to defend an insured even if the allegations of the lawsuit are groundless, false, or fraudulent, the policy at issue did not contain that Nevertheless, the insurer sought to rely on extrinsic evidence to prove that the allegations of the underlying complaint were false. The court rejected the insurer’s attempts to rely on a “policy-language exception” to avoid the eight corners rule, noting that the “presence or absence of a groundless-claims clause has rarely, if ever, been important to Texas courts’ analysis of the contractual duty to defend,” and reiterated that the court has “never held or suggested that the eight-corners rule is contingent on a groundless-claims
After the matter was returned to the Fifth Circuit, the court declined to consider the stipulation and apply the newly established Monroe exception. It explained that the stipulation would impermissibly overlap with determining the merits of liability because 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
Bitco demonstrates that courts applying Texas law are still bound by strict standards as to when they may permit extrinsic evidence in determining the duty to defend. To date, Texas permits extrinsic evidence in very few instances.
Another of the few deviations permitted in Texas is in the instance of fraud. The Texas Supreme Court, in Loya Insurance Co. v. Avalosissued an opinion that strayed from its standard strict eight corners analysis. In Loya, the insurer issued an automobile insurance policy to Karla Guevara. The policy specifically excluded Guevara’s husband, Rodolfo Flores, from coverage under the policy. While moving Guevara’s car, Flores collided with another car occupied by the Hurtado family. Guevara, Flores, and the Hurtados agreed to tell the police that Guevara was driving the car, not Flores.
The Hurtados thereafter filed suit against Guevara alleging that Guevara was driving at the time of the accident, and Loya provided a defense. Guevara eventually disclosed the misrepresentation to her attorney and he provided that information to the insurer. The information caused the insurer to withdraw its defense and, subsequently, a judgment was entered against Guevara. Guevara then assigned her rights under the policy to the Hurtados, who filed suit against Loya for breach of contract for failing to defend Guevara. When Guevara was deposed in the coverage action, she testified that Flores was driving the vehicle. Based on that testimony, Loya moved for summary judgment, seeking a ruling that it need not defend the suit against Guevara.
The trial court granted the insurer’s motion for summary judgment, remarking on the record that the Hurtados were “asking this Court to ignore every rule of justice and help [them] perpetuate aThe Hurtados appealed, arguing summary judgment was improper under the eight corners rule because the insurer had a duty to defend as a matter of law based on the pleadings in the underlying suit, which alleged Guevara was driving at the time of the accident. The court of appeals agreed with the Hurtados and reversed, holding that “as logically contrary as it may seem,” the insurer had a duty to defend under the eight corners Loya then appealed to the Texas Supreme Court.
The court began its opinion by explaining that under Texas law, generally “only the four corners of the policy and the four corners of the petition against the insured are relevant in deciding whether the dutyUnder this eight corners rule, a “court should not consider extrinsic evidence from either the insurer or the insured that contradicts the allegations of the underlying petition.” The court noted that it has “not recognized any exceptions to the rule . . . [but] left open the question whether to do so in an appropriate The court found that Loya was such a case, and given “the contractual foundations of the eight corners rule, we conclude it does not bar courts from considering such extrinsic evidence regarding collusive fraud by the insured in determining the insurer’s duty to
Another variation to the four-corners duty-to-defend rule concerns unpled or known facts. This variation involves consideration of factual admissions by the insured that do not appear in the underlying complaint. In Nationwide Mutual Fire Insurance Co. v. Keenafter a boating accident, the insured admitted to the carrier that he was operating a boat with an engine more powerful than permitted under the policy. The complaint filed against the insured by the third-party claimant was silent as to the power of the engine, and the claimant argued that the complaint’s silence as to the engine’s power created at least a potential that the claim was not beyond the scope of coverage and, thus, required the insurer to The Florida appellate court disagreed, holding “if uncontroverted evidence places the claim outside of coverage, and the claimant makes no attempt to plead the fact creating coverage or suggest the existence of evidence establishing coverage, we think the carrier is relieved of
This exception was recently applied by the Eleventh Circuit Court of Appeals in BBG Design Build, LLC v. Southern Owners Insurance Co. In BBG, the third-party claimant, Patricia Armor, sent a demand letter to BBG’s insurer that alleged she suffered a bodily injury after being exposed to fumes and dust from fiberglass at BBG’s constructionArmor later filed a complaint alleging that BBG was negligent in managing a construction site, describing in detail the debris of dust and fiberglass left at the site, causing her respiratory
BBG’s policy contained a pollution exclusion that barred coverage for bodily injury arising out of a pollutant, which was in turn defined as any contaminant, includingArmor subsequently amended her complaint, omitting any allegations describing the injury-causing debris or of an illness or bodily injury. In refusing to find that a duty to defend had been triggered, the Eleventh Circuit looked to information outside the complaint that was known to the insurer, such as the original complaint, a pre-suit demand letter sent by Armor’s attorney, and Armor’s deposition testimony in the underlying case. The court noted that Florida courts recognize an “equitable exception” that allows for the consideration of undisputed, unpled facts that would place claims outside of coverage. The court held that the amended complaint “attempts to plead into coverage by not describing the ‘construction debris’ or her ‘bodily injury,’ [but] it was undisputed that Armor’s alleged injuries included bronchitis resulting from fiberglass exposure, as was made clear by Armor’s demand letter, initial complaint, and medical
Another variation on the four corners rule, this time in favor of policyholders, involves the use of extrinsic evidence to establish the insurer’s duty to defend. Some states allow for the introduction of extrinsic evidence to prove the existence of coverage, while prohibiting the insurer from introducing extrinsic evidence to disprove coverage. For example, in Aetna Casualty & Surety Co. v. Cochran, the Maryland Court of Appeals explained that “an insurer may not use extrinsic evidence to contest coverage under an insurance policy if the tort suit complaint established a potentiality ofHowever, it went on to hold that “an insured may establish a potentiality of coverage under an insurance policy through the use of extrinsic evidence,” because doing so comports with public policy concerns that the “promise to defend the insured, as well as the promise to indemnify, is the consideration received by the insured for payment of the policy The court explained:
[I]n the instant case, allowing [the insured] to present facts which establish a potentiality of coverage under the Aetna policies is the only way to establish that the Beyer action is potentially covered under those policies. It also ensures that [the insured] is not foreclosed from receiving the defense to which he is entitled merely because the complaint fails to plead allegations that establish a potentiality of coverage under the insurance
Similarly, New York courts have said that an insurer must also defend if it has knowledge of facts that potentially bring the claim within the policy’s indemnityOn the other hand, and even more favorable to insureds, New York courts require that an insurer defend a suit if the pleadings allege a covered occurrence, even though facts outside the four corners of those pleadings indicate that the claim may be meritless or not
In a similar vein, some states that permit the introduction of evidence to establish the duty to defend require the insurer to look beyond the underlying complaint or accusatory instrument and conduct a reasonable investigation to determine whether there are facts that might prove the existence of coverage. For instance, Kansas courts have applied a rule that an “insurer must undertake a good-faith analysis of all information known to it or reasonably ascertainable by inquiry and investigation in order to determine the possibility ofKansas courts thus require that “[a]n insurer must look beyond the effect of the pleadings and consider any facts brought to its attention or which it could reasonably discover; if such facts give rise to a ‘potential of liability’ under its policy, the insurer bears a duty to
These various judicial approaches to determining whether a duty to defend exists demonstrate that the four corners rule is not always applied strictly. Courts have found exceptions that permit the introduction of extrinsic evidence to determine the duty to defend. Thus, parties should research the applicable state law to determine whether any additional evidence can be considered in deciding whether a duty to defend exists.