On February 11, 2022, the Supreme Court of Texas articulated an exception to the eight-corners rule governing whether an insurer owes a duty to defend. Monroe Guaranty Insurance Company v. BITCO General Insurance Corporation, No. 21-0232, 2022 Tex. LEXIS 148 (Tex. Feb. 11, 2022). As indicated by the rule’s name, courts typically determine whether an insurer has a duty to defend its insured by comparing only two documents: the plaintiff’s complaint and the insured’s policy. In doing so, courts ordinarily do not consider whether the allegations in the plaintiff’s complaint are true, nor do they reference facts otherwise known outside of the pleadings or ultimately established in the underlying litigation.
In Monroe, the Supreme Court of Texas noted that although the eight-corners rule “is a settled feature Texas law” adopted “more than fifty years ago,” it “is not absolute.” Some Texas appellate courts would consider extrinsic evidence where a petition stated a claim that could trigger the duty to defend but was silent on facts necessary to determine coverage—a practice that eventually trickled into Texas federal courts after the Fifth Circuit issued Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523, 531 (5th Cir. 2004). Later known as the Northfield exception, the Fifth Circuit held that extrinsic evidence is admissible “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.”
Because principles governing reference to extrinsic evidence in duty-to defend cases lacked uniformity, the Monroe Court undertook to standardize Texas law on the issue. The court ruled:
[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 court then proceeded to apply this new test to the dispute before it.
The underlying lawsuit alleged the insured negligently drilled an irrigation well, but it did not provide any detail regarding when the allegedly negligent acts or resulting damage occurred. The insured had commercial general liability (CGL) coverage from two carriers spanning three years, namely, two consecutive one-year CGL policies covering October 2013 to October 2015 purchased from BITCO General Insurance Corporation, and one CGL policy covering October 2015 to 2016 purchased from Monroe Guaranty Insurance Company. After receiving the insured’s tender of the underlying lawsuit, BITCO agreed to provide a defense under a reservation of rights, but Monroe refused to defend on the basis that the alleged damage fell outside of its policy period. In a subsequent lawsuit BITCO filed against Monroe seeking a declaratory judgment that Monroe owed a duty to defend, the insurers stipulated that negligent acts and resulting damage alleged in the complaint occurred “in or around November 2014”—i.e., 10 months before BITCO’s CGL coverage ended and Monroe’s began. Monroe therefore maintained it had no duty to defend because the alleged damage occurred during BITCO’s policy period.
Against this backdrop, the Monroe court held that under the right circumstances courts may consider extrinsic evidence of the date of an occurrence, but the facts of Monroe did not fit within its newly articulated exception. Specifically, the parties’ stipulation that the allegedly negligent acts occurred “in or around November 2014” failed to satisfy the first prong of the Monroe test because the stipulation overlapped with the merits of the underlying lawsuit. The court explained 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.” Consideration of the stipulation was therefore impermissible, and because the underlying complaint was silent regarding when the property damage allegedly occurred, there was a potential for coverage under Monroe’s policy, triggering Monroe’s duty to defend.
The same day the court issued Monroe, it issued another opinion further illustrating application of the Monroe exception. Pharr-San Juan-Alamo Indep. Sch. Dist. v. Tex. Pol. Subdivisions Property/Casualty Joint Self Ins. Fund, No. 20-0033, 2022 Tex. LEXIS 149 (Tex. Feb. 11, 2022). In Pharr-San Juan-Alamo, the plaintiff filed suit against a school district seeking damages for injuries she suffered after allegedly being thrown from a golf cart driven by an employee. The school district had automobile-liability insurance that provided coverage for damages “caused by an accident and result[ing] from the ownership, maintenance or use of a covered auto.” The policy defined “auto” as “a land motor vehicle . . . designed for travel on public roads.” However, “auto” did “not include mobile equipment,” i.e., certain types of “land vehicles,” including “[b]ulldozers, farm machinery, forklifts and other vehicles designed for use principally off public roads.” The issue, therefore, was whether the golf cart was a covered auto designed for travel on public roads or a non-covered vehicle designed for use principally off public roads, and the parties disagreed as to whether extrinsic evidence was admissible to resolve this dispute.
The courtd declined to apply the Monroe exception, instead applying the eight-corners rule without consideration of extrinsic evidence. The term “golf cart” did not appear in the insured’s policy, so the court turned to various authorities—dictionaries, statutes, court decisions, etc.—to determine its common, ordinary meaning, and concluded that it refers to a vehicle designed “primarily for use on a golf course,” meaning it does not refer to a vehicle “designed for travel on public roads” and thus was not a covered auto. Under the eight-corners rule, the insurer did not have a duty to defend.
The takeaway from Pharr-San Juan-Alamo is that the Monroe exception was irrelevant because there was no “gap” in the pleadings that prevented the court from determining whether a duty to defend existed. This was a result of the court’s conclusion that the common, ordinary meaning of the term “golf cart” is a vehicle “designed for travel on a golf course and not on public roads.” The court reasoned that “[m]ere disagreements about the common, ordinary meaning of an undefined term do not create the type of ‘gap’” necessary to permit application of the Monroe exception, and moreover, in the absence of such a gap, any extrinsic evidence that the plaintiff was thrown from something other than a “golf cart” would have contradicted facts alleged in the underlying complaint, meaning the second prong of the Monroe exception could not be satisfied.
Since the Supreme Court of Texas issued Monroe and Pharr-San Juan-Alamo earlier this year, a handful of courts have had occasion to consider whether the Monroe exception applies, with mixed results. See, e.g., Certain Underwriters at Lloyd’s v. Keystone Dev., LLC, No. 3:21-CV-336-L, 2022 U.S. Dist. LEXIS 183910 (N.D. Tex. Oct. 7, 2022) (holding that where policy excluded coverage for injuries arising out of work performed on a structure in excess of three stories, and the insured sought duty to defend coverage for a lawsuit alleging injuries arising out of work performed on three-story condominiums, Monroe did “not support the consideration of extrinsic evidence . . . because the allegations regarding the building being three-stories tall [did] not create a gap that would permit the court to consider extrinsic evidence”); Progressive Commer. Cas. Ins. Co. v. Xpress Transp. Logistics, LLC, No. H-21-2683, 2022 U.S. Dist. LEXIS 187391 (S.D. Tex. Oct. 11, 2022) (holding that where policy covered only “insured auto[s] listed on the policy’s declarations page, and the insured sought duty to defend coverage for a lawsuit alleging injuries involving a truck that the insurer established was not listed on the policy’s declarations page, Monroe allowed for consideration of extrinsic evidence because “[t]he underlying litigation turn[ed] on the negligence of [the insured]” and “[t]he identification of the truck [did] not contradict facts alleged in the underlying pleadings and establishe[d] [the insurer’s] coverage obligations”).
Based on a review of post-Monroe case law, it appears that only insurers, not policyholders, have sought to utilize the Monroe exception to demonstrate duty to defend coverage does not exist. There are certain factual circumstances, however, in which Monroe may assist policyholders seeking defense coverage. For instance, policyholder contractual arrangements, which are often extrinsic to underlying complaints, may affect whether coverage exists. A general contractor sued for personal injury may be entitled to liability coverage as an additional insured if it had a written contract with the subcontractor that employed the injured plaintiff. The same may be true for a general contractor sued for property damage to its “work” but which engaged subcontractors, not identified in the plaintiff’s lawsuit, to perform that work. Similarly, an employer sued by an employee for wrongful acts may be entitled to employment practices liability coverage if the allegedly wrongful acts constitute a breach of an employment contract. In these situations, the Monroe exception may prove to be a helpful tool for policyholders
In any event, the Monroe court’s formalization of the extrinsic evidence exception to the eight-corners rule creates an important factor for both policyholders and insurers to consider in duty-to-defend disputes moving forward, and the exact scope of the exception will continue to be litigated for years to come. Insurance attorneys litigating duty to defend coverage in Texas courts should be sure to pay attention as courts continue to analyze the Monroe exception and determine under what circumstances it applies.
