There are good reasons to favor the extrinsic evidence approach over the eight corners rule when determining an insurer’s duty to defend. Indeed, numerous courts employ the extrinsic evidence approach as a result. At the same time, the use of extrinsic evidence to find that an insurer owes a duty to defend raises an obvious opposing question: can an insurer rely on extrinsic evidence to disclaim a duty to defend? After all, if an insurer can demonstrate factually that there is no potential for coverage, it can avoid paying for a defense in a case in which it will never have to indemnify the insured. Be that as it may, the answer to the question posed typically is “no.” When it comes to the duty to defend, the use of extrinsic evidence tends to be a one-way street. Yet, some courts that generally prohibit an insurer’s use of extrinsic evidence to disclaim a duty to defend recognize exceptions. The Restatement of the Law of Liability Insurance outlines six exceptions to the rule against insurers’ use of extrinsic evidence to deny a defense. There is also a contrary minority approach that permits insurers to rely on extrinsic evidence to deny coverage.
Insurers’ attempted use of extrinsic evidence to deny a duty to defend surfaced as a prominent insurance law issue in 2020 through two Texas Supreme Court decisions: Richards v. State Farm Lloyds and Loya Insurance Co. v. Avalos. In Richards, the Texas Supreme Court reasoned that the eight corners rule applies regardless of whether a liability insurance policy contains a groundless claims clause. Thus, State Farm Lloyds could not use extrinsic evidence to escape its duty to defend its insureds on the basis that its homeowners’ insurance policy did not contain a groundless claims clause. In Loya, the court held that the eight corners rule does not prohibit courts from considering extrinsic evidence of insureds’ “collusive fraud” when determining insurers’ duty to defend. As the Loya court explained, “an insurer owes no duty to defend when there is conclusive evidence that groundless, false, or fraudulent claims against the insured have been manipulated by the insured’s own hands in order to secure a defense and coverage where they would not otherwise exist.”
As important as the Richards and Loya decisions were, however, both as a matter of Texas law and potentially as persuasive authority in other jurisdictions, neither case addressed a lingering extrinsic evidence test of Texas courts’ historical adherence to the eight corners rule: the so-called Northfield exception. By way of background, the insurer in Northfield Insurance Co. v. Loving Home Care, Inc. argued that extrinsic evidence showed that it had no duty to defend the insureds, but the district court held that extrinsic evidence was irrelevant under the eight corners rule and that Northfield thus owed its insureds a defense. The Fifth Circuit affirmed the district court’s judgment and, in the process, made an “Erie guess” that the sitting Texas Supreme Court “would not recognize any exception to the strict eight corners rule.” The Northfield court then went on and, in what is plainly dicta, speculated that “in the unlikely situation that the Texas Supreme Court were to recognize an exception to the strict eight corners rule,” any such exception would apply only “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.” That dicta became the Northfield exception to the eight corners rule in Texas state and federal courts.
The Texas Supreme Court acknowledged the Northfield exception in GuideOne Elite Insurance Co. v. Fielder Road Baptist Church but held that it did not apply on the facts of that case. The court rejected the Northfield exception again a few years later for fact-specific reasons in Pine Oak Builders, Inc. v. Great American Lloyds Insurance Co. Around the same time as Pine Oak, however, the Fifth Circuit recalibrated its position and concluded that, based on GuideOne, the Texas Supreme Court would permit consideration of extrinsic evidence when evaluating an insurer’s duty to defend so long as the case fit within the Northfield exception. Then, in 2021, the Fifth Circuit was presented with BITCO General Insurance Corp. v. Monroe Guaranty Insurance Co.
The question in that case was which of the insured drilling company’s successive liability insurers owed it a duty to defend after a farmer sued the drilling company for its allegedly negligent performance in drilling an irrigation well that left the drill bit stuck in the bore hole, among other problems. The perceived key to deciding the case was whether the court could “consider extrinsic evidence— the stipulated date the drill bit became stuck—when deciding whether a duty to defend exist[ed].” Recognizing that this was “an important and determinative question of Texas law as to which there [was] no controlling Texas Supreme Court precedent,” the Fifth Circuit certified two questions to the Texas Supreme Court:
- Is the exception to the eight-corners rule articulated in Northfield . . . permissible under Texas law?
- When applying such an exception, may a court consider extrinsic evidence of the date of an occurrence when (1) it is initially impossible to discern whether a duty to defend potentially exists from the eight-corners of the policy and pleadings alone; (2) the date goes solely to the issue of coverage and does not overlap with the merits of liability; and (3) the date does not engage the truth or falsity of any facts alleged in the third party pleadings?
In early 2022, the Texas Supreme Court answered the certified questions in Monroe Guaranty Insurance Co. v. BITCO General Insurance Corp. There is now a Monroe exception to the eight corners rule under Texas law with which courts must reckon. The broader question is whether courts in other states that have traditionally adhered to the eight corners rule will adjust their approaches and follow Monroe. As will be explained later, they ought not.
Monroe in the Texas Supreme Court
Background and Facts
The parties in Monroe were liability insurers that provided commercial general liability (CGL) coverage to 5D Drilling & Pump Service, Inc. (5D) in consecutive annual policy periods. BITCO insured 5D from October 2013 to October 2015. Monroe insured 5D from October 2015 to October 2016. In 2016, David Jones sued 5D for breach of contract and negligence, seeking damages caused by 5D’s alleged blunders while drilling an irrigation well on his farm. In particular, Jones alleged in his petition that 5D drilled the well at an unacceptable angle; stuck the drill bit in the bore hole, thereby rendering the well useless; failed to plug the well, retrieve the drill bit, and drill a new well; and failed to case the well, causing material to slough into it. Oddly, though, Jones’s petition did not state when 5D’s alleged negligence occurred or even when 5D started or halted work on the well. Similarly, Jones alleged in his petition that 5D’s negligent acts variously damaged his land, but he did not articulate when the damage occurred.
5D tendered its defense to both BITCO and Monroe. BITCO defended 5D under a reservation of rights, but Monroe refused to defend on the basis that any property damage occurred before its policy took effect. Indeed, as Monroe pointed out, its policy “limited the scope of the duty to defend to cover property damage only if it ‘occur[red] during the policy period.’” Furthermore, under Monroe’s policy, coverage applied only if, prior to the policy period, no insured knew that the property damage had occurred in whole or in part. Continuing, if 5D knew, prior to the policy period, that the property damage had occurred, then, under the Monroe policy, any continuation, change, or resumption of such property damage during the policy period would be deemed to have been known prior to the policy period.
BITCO sued Monroe in federal court, seeking a declaration that Monroe had a duty to defend 5D. BITCO and Monroe stipulated that 5D’s drill bit stuck in the bore hole “in or around November 2014,” or around ten months before BITCO’s policy would expire and Monroe’s policy would take effect. Both insurers moved for summary judgment. Monroe insisted that it had no duty to defend 5D because the stipulation confirmed that property damage occurred during BITCO’s policy period and, therefore, Monroe’s policy “deemed all property damage to have been known during BITCO’s policy period, long before Monroe’s policy became effective in October 2015.”
The district court concluded that it could not consider the parties’ stipulation as to when 5D’s drill bit lodged in the well because the stipulation was extrinsic evidence. Heeding the eight corners rule, the district court determined that Monroe owed a duty to defend 5D because the alleged damage to Jones’s property could have occurred anytime between the 2014 execution of the drilling contract and Jones’s initiation of his lawsuit in 2016 (during either or both insurers’ policy periods). Monroe appealed to the Fifth Circuit, which, as outlined earlier, certified two questions to the Texas Supreme Court.
The Texas Supreme Court Opinion
In answering the first certified question—that is, whether under Texas law the Northfield exception was a valid exception to the eight corners rule—the Texas Supreme Court noted that in Loya Insurance Co. v. Avalos, it had held that courts could consider extrinsic evidence that the insured had colluded with a plaintiff to obtain a defense. Now, the court was ready to go further and approve courts’ consideration of extrinsic evidence when evaluating insurers’ duty to defend in cases in which the Avalos exception did not apply. In recognizing another exception to the eight corners rule, however, the Monroe court was careful to clarify that it was not thereby discarding or diminishing the eight corners rule. Rather, under Texas law, the eight corners rule remains the starting point in any duty to defend analysis, and it usually will resolve the question of whether the insurer owes a defense. But if the allegations in a plaintiff’s complaint or petition 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 a court to consider extrinsic evidence that “(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.”
After articulating this new exception to the eight corners rule, the Monroe court explained how it was different from the Northfield exception. According to the Monroe court, its new exception tracked the Northfield exception with minor refinements:
First, Northfield states that extrinsic evidence may be considered only if it is initially impossible to discern from the pleadings and policy “whether coverage is potentially implicated.” . . . We think this standard invites courts to do what our authorities prohibit: “read facts into the pleadings” or “imagine factual scenarios which might trigger coverage.” . . . The better threshold inquiry, . . . is: does the pleading contain the facts necessary to resolve the question of whether the claim is covered? . . . .
The second refinement relates to the types of extrinsic evidence that may be considered. Northfield required that the extrinsic evidence go to a “fundamental” coverage issue: (1) whether the person sued has been excluded by name or description from any coverage, (2) whether the property in suit is included in or has been expressly excluded from any coverage, and (3) whether the policy exists.
BITCO argued that, if a court is permitted to consider extrinsic evidence, that evidence should have to relate to a “fundamental” coverage issue listed in Northfield. Monroe countered that there were fundamental coverage issues beyond those identified by the Northfield court. In fact, the Monroe court considered the rationale for considering extrinsic evidence to be sound regardless of whether the disputed coverage issue qualified as fundamental. So, rather than charging courts with deciding which coverage issues are or are not fundamental, the court simply dropped the requirement.
Next, the court noted that its new exception to the eight corners rule refined the Northfield exception in yet a third way by requiring the proffered extrinsic evidence to “conclusively establish the coverage fact at issue.” The coverage fact need not be stipulated, but a court may not consider extrinsic evidence if, after doing so, “there would remain a genuine issue of material fact as to the coverage fact to be proved.” In sum:
[T]he eight-corners rule remains the initial inquiry to be used to determine whether a duty to defend exists. 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 consideration of extrinsic evidence under these standards advances our dual goals of effectuating the parties’ agreement as written, while protecting the insured’s interests in defending against the third party’s claims. A contrary rule that ignores conclusively proven facts showing the absence of coverage would create a windfall for the insured, requiring coverage for which the insured neither bargained nor paid. Such a windfall would come at the expense of all consumers of insurance, who ultimately shoulder the expense of the insurer’s increased defense costs through higher premiums.
The Fifth Circuit’s second certified question asked whether a court permitted to consider extrinsic evidence could do so regarding the date of an occurrence. Given the court’s answer to the first certified question, this one came easily. Briefly, because the court had declined to limit the types of potentially coverage-determinative facts provable by extrinsic evidence, evidence of the date of an occurrence was fair game if it otherwise met the court’s multipart test.
In this case, however, the extrinsic evidence did not meet the test. In cases of continuing damage like that alleged here, the Monroe court explained, evidence of the date of property damage overlaps with the merits. According to the court, “[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.”
Monroe argued that its stipulation with BITCO that the drill bit got stuck in the well’s bore hole in November 2014 eliminated its duty to defend because it established that property damage occurred long before its policy took effect. The court was not persuaded. As the court saw things, in the underlying case, 5D surely would have tried to prove that sticking the drill bit did not cause any damage. And to obtain coverage from Monroe, 5D would necessarily argue that some of Jones’s alleged damages occurred after November 2014. That argument would, of course, undermine its liability defense, which was best served by arguing that there was never any property damage attributable to its conduct. Long story short, because using the stipulation as Monroe advocated would overlap with the merits of liability in these ways, it could not be considered in determining whether Monroe owed 5D a defense.
Return to the Fifth Circuit
Upon the case’s return to the Fifth Circuit, that court found that Monroe’s duty to defend was triggered by the allegations in Jones’s petition. In doing so, the court understandably adhered to the Texas Supreme Court’s reasoning. The Fifth Circuit also rejected Monroe’s arguments that two exclusions in its policy absolved it of any duty to defend. The Fifth Circuit therefore affirmed BITCO’s win in the district court.
The Monroe Exception Does Not Reach Pharr
Although the focus of the insurance law community in Texas and elsewhere has in many instances been on Monroe, another extrinsic evidence case reached the Texas Supreme Court around the same time. Monroe’s companion case, Pharr-San Juan-Alamo Independent School District v. Texas Political Subdivisions Property/Casualty Joint Self Insurance Fund, came to the court on a petition for review from a lower Texas appellate court. The Texas Supreme Court decided Pharr the same day it decided Monroe.
The Court of Appeals Decision
Pharr was a declaratory judgment action occasioned by Lorena Flores’s lawsuit against the Pharr-San Juan-Alamo Independent School District (PSJA) for damages sustained by her daughter Alexis, who, she alleged, was injured after being thrown from a golf cart driven by a PSJA employee. When PSJA demanded that the Texas Political Subdivisions Property/Casualty Joint Self Insurance Fund (TPS) defend and indemnify it under an auto liability policy, TPS denied coverage. The TPS policy defined an “auto” as “‘a land motor vehicle, trailer or semitrailer designed for travel on public roads but does not include mobile equipment.’” The policy defined “mobile equipment” in part as “‘vehicles designed for use principally off public roads.’” TPS asserted that golf carts necessarily were “mobile equipment” because the Texas Transportation Code defined a “golf cart” as “‘a motor vehicle designed by the manufacturer primarily for use on a golf course.’” According to TPS, the statutory definition established that a golf cart can never be designed for travel on public roads and therefore could never be an “auto” within the meaning of its policy. That being so, TPS argued, the allegations in Flores’s petition nullified its duties to defend and indemnify PSJA.
The parties filed cross-motions for summary judgment. In that exchange, PSJA conceded that golf carts were originally designed for golf course use but argued that the term has a broader meaning today because manufacturers now design and promote some golf carts primarily for use on public roads. In support of its position, PSJA submitted copies of advertisements from a golf cart manufacturer’s website that depicted people using several models of golf carts to run routine errands on public roads. PSJA contended that because Flores’s petition failed to describe the golf cart involved in the accident, a reasonable interpretation of the petition included a golf cart designed for use on public roads like those in the ads, thus triggering TPS’s duty to defend.
Not to be outmaneuvered, TPS submitted a variety of evidence that the golf cart involved in the accident was, in fact, intended to principally be used off public roads. That evidence was not enough, however, and the trial court awarded summary judgment to PSJA on both TPS’s duty to defend and duty to indemnify. TPS then appealed.
The court of appeals noted that PSJA submitted extrinsic evidence to support its summary judgment motion on the duty to defend and TPS responded with its own extrinsic evidence, neither effort respecting the eight corners rule. While acknowledging that the Texas Supreme Court had yet to expressly recognize an exception to the eight-corners rule (this case preceded Loya), the court of appeals explained that several Texas appellate courts had blessed the introduction of extrinsic evidence that was “relevant to coverage but did not touch upon the merits of the underlying suit.” Here, the court of appeals said, the parties’ extrinsic evidence—(1) whether all golf carts are designed for use principally off public roads and (2) if not, whether the golf cart in the underlying case was so designed—was properly before it “because it was immaterial to the merits of the underlying lawsuit, which sought to establish PSJA’s liability through its employee’s negligent operation of the golf cart.” (The Texas Supreme Court would later characterize the court of appeals’ approach as applying the Northfield exception.)
Flores’s petition alleged only that her daughter “‘was severely injured after being thrown from a golf cart.’” The court concluded that “a liberal interpretation of this threadbare accusation” potentially encompassed a golf cart designed for use on public roads like those depicted in PSJA’s extrinsic evidence. Consequently, TPS was not entitled to summary judgment on its purely legal argument that all golf carts are designed for use principally on, well, golf courses. At the same time, TPS’s extrinsic evidence created a genuine issue of material fact as to whether the golf cart in this case was a typical golf cart intended to be driven on cart paths at a golf course as compared to a model designed for use on public roads, such that PSJA was not entitled to summary judgment on the duty to defend question.
Wrapping up, the court concluded that both parties failed to carry their burdens in their respective summary judgment motions. It therefore reversed the trial court’s judgment and remanded the case to the trial court for further proceedings. Instead of returning to the trial court, PSJA appealed the decision to the Texas Supreme Court.
The Texas Supreme Court Decision
The Texas Supreme Court first determined that Flores’s petition did not contain allegations that implicated TPS’s duty to defend. Flores pleaded that her daughter’s injuries resulted from the negligent use of a “golf cart,” which was not a term that appeared in the TPS auto policy. Accordingly, the court looked to dictionaries and Texas statutes to determine the term’s common meaning. Both the dictionaries the court consulted and the Texas Transportation Code uniformly indicated that a golf cart was a motor vehicle designed for use on golf courses. The court’s research additionally revealed that courts in other jurisdictions had consistently interpreted the term “golf cart” to describe a vehicle designed for use on golf courses, rather than to a vehicle designed for travel on public thoroughfares. The court agreed with the sources that it consulted: “the common, ordinary meaning of the term ‘golf cart’ necessarily refers to a cart designed for use on a golf course, not for travel on public roads.” The court’s adoption of that definition necessarily led it to conclude that TPS had no duty to defend PSJA because Flores’s allegation that her daughter “was ‘thrown from a golf cart’ did not include an allegation that she was thrown from a ‘vehicle designed for travel on public roads.’”
The court next considered the possible application of the Monroe exception to the facts of this case. The court explained that under Monroe, it could not consider extrinsic evidence in evaluating TPS’s duty to defend unless:
(1) Flores’s petition alleged “a claim that could trigger the duty to defend,” (2) a “gap” in her petition leaves us unable to determine whether coverage exists by applying the eight-corners rule, (3) the facts the extrinsic evidence would relate to solely concern the coverage issue and do not overlap with the liability merits, (4) those facts would not contradict facts alleged in Flores’s petition, and (5) the extrinsic evidence “conclusively establishes the coverage fact to be proved.”
The “fact” in question here was whether the golf cart involved in the accident was designed for use on public roads, which the court of appeals had correctly concluded related solely to coverage and did not overlap with the merits of Flores’s claims. That is, PSJA was liable if its employee negligently operated the golf cart regardless of whether the golf cart was designed for use on public roads. The other Monroe factors, however, did not support the consideration of extrinsic evidence:
By alleging that Alexis was thrown from a “golf cart,” Flores’s petition left no “gap” that would prevent us from determining whether the duty [to defend] exists. Mere disagreements about the common, ordinary meaning of an undefined term do not create the type of “gap” Monroe requires. And in the absence of such a gap, any extrinsic evidence that Alexis was actually thrown from something other than a “golf cart” would contradict the facts alleged in Flores’s petition. . . . If Flores had alleged only that Alexis was thrown from a “vehicle,” without any indication of the type of vehicle or whether it was designed for travel on public roads, a gap would exist that prevents us from determining the duty to defend based solely on the petition’s allegations and the policy’s provisions, and extrinsic evidence proving that the vehicle was or was not designed for use on public roads would not contradict the general allegation that the accident involved a “vehicle.” But by pleading that the vehicle was a “golf cart,” the petition provided all the information necessary to determine the duty to defend. As a result, the Monroe exception does not apply, and the eight-corners rule governs the duty to defend in this case.
At bottom, TPS had no duty to defend PSJA because Flores’s petition did not allege a claim that could fall within the policy’s coverage for liabilities resulting from the use of an auto. The court of appeals correctly reversed the summary judgment for PSJA on TPS’s duty to defend even though it did so for different reasons than those offered by the supreme court.
The Pharr court next analyzed TPS’s duty to indemnify PSJA, which required it to determine whether the golf cart from which Alexis Flores was thrown was, in fact, designed for travel on public roads. The court reasoned that the extrinsic evidence TPS submitted conclusively established that the golf cart was not designed for use on public roads. So, again, the court of appeals correctly reversed summary judgment for PSJA, albeit for different reasons on which the supreme court based its decision.
Under the Pharr court’s reasoning, TPS was entitled to summary judgment on its duty to defend and its duty to indemnify PSJA. Because TPS had not petitioned the court for review (PSJA did), as a matter of Texas appellate procedure, the supreme court could not simply reverse the court of appeals and enter judgment for TPS. The supreme court therefore remanded the case to the trial court for further proceedings in accordance with the court of appeals’ judgment, which it affirmed.
Summary
Many observers likely believed that Pharr was a textbook case for application of the Monroe exception based on the parties’ opposing views of whether the golf cart involved in the underlying accident was an auto or mobile equipment under the TPS policy and the extrinsic evidence that each party mustered to support its position. Instead, by announcing that parties’ simple disagreements about the common, ordinary meaning of undefined terms in complaints or petitions do not create the type of pleading “gap” required to admit extrinsic evidence, the Texas Supreme Court clearly signaled how narrowly courts should construe the Monroe exception.
Analysis
The Monroe exception provides an avenue for insurers to offer extrinsic evidence to avoid owing a duty to defend. Again, an insurer must be able to pass a five-part test if it wants to offer extrinsic evidence for this purpose. The elements of that test are the following: (1) the underlying complaint or petition must state a claim that could trigger the duty to defend; (2) the application of the eight corners rule, due to a gap in the complaint or petition, is not determinative of whether coverage exists; (3) the extrinsic evidence must go solely to an issue of coverage and not overlap with the merits of liability; (4) the extrinsic evidence does not contradict facts alleged in the plaintiff’s complaint or petition; and (5) the extrinsic evidence must conclusively establish the coverage fact to be proved.
When considering application of the Monroe exception going forward, the first element will likely not be controversial. The second element—the existence of a gap in the underlying complaint or petition that prevents disposition under the eight corners rule—is also unlikely to create many disputes. This is due in significant part to the Texas Supreme Court’s declaration that “[m]ere disagreements about the common, ordinary meaning of an undefined term do not create the type of ‘gap’ Monroe requires.” The fourth element—the extrinsic evidence cannot contradict facts alleged in the plaintiff’s pleading—should rarely come into play as well. That leaves the third and fifth elements as the most probable battlegrounds.
The third element—the requirement that extrinsic evidence must go solely to an issue of coverage and not overlap with the merits of liability—will be difficult for an insurer to satisfy in many cases because of the expected frequency with which coverage and liability issues will overlap. Recall that in Monroe, for example, the parties’ stipulation as to the date that the drill bit became stuck in the bore hole for the well—which was intended simply to establish the date of the “occurrence” for coverage purposes—was held to overlap with the merits of liability in the underlying case. In cases involving additional insureds, where responsibility for providing a defense is commonly at issue and generally cannot be determined by applying the eight corners rule, the contractual provisions that might be expected to aid in the resolution of that question will often not make their way into evidence because the contracts in which they are contained will blend coverage issues with the merits of liability.
Finally, it is easy to foresee repeated disputes over the fifth element, that is, whether the extrinsic evidence in question conclusively establishes the coverage facts to be proved. For instance, beyond the type or nature of the proffered extrinsic evidence, what level of certainty is required for “conclusive” proof? According to the Monroe court, for extrinsic evidence to conclusively establish the coverage fact to be proved there must be no genuine issue of material fact remaining after its admission—effectively the same standard required for summary judgment—but that still leaves ample room for dispute in many cases.
Assuming it generally wanted to preserve the eight corners rule, the Monroe court could have provided much clearer guidance for policyholders and insurers when it comes to the use of extrinsic evidence to extinguish an insurer’s duty to defend. In addition to recognizing collusive fraud as an exception to the eight corners rule, which the court previously did in Loya Insurance Co. v. Avalos, the court could have adopted the approach outlined in section 13(3) of the Restatement of the Law of Liability Insurance. Under the Restatement approach, an insurer may rely on extrinsic evidence to extinguish its duty to defend where “facts not at issue in the legal action for which coverage is sought and as to which there is no genuine dispute” establish that (a) the defendant in the third-party action is not an insured under the insurance policy that allegedly furnishes a duty to defend; (b) the vehicle or other property involved in the underlying accident is not covered property under the liability insurance policy in question and the defendant is not otherwise owed a defense; (c) the claim was reported late under a claims-made-and-reported policy; (d) the policy in question is a claims-made policy and the underlying action is subject to a prior-and-pending-litigation exclusion or a related-claims exclusion in that policy; and (e) the policy at issue was properly cancelled.
The Restatement approach clearly identifies specific situations in which an insurer may use extrinsic evidence to escape a duty to defend. To be sure, the Restatement approach allows the use of extrinsic evidence in potentially fewer cases than Monroe does. Yet, that can hardly be viewed as a negative from policyholders’ standpoint considering the importance and breadth of the duty to defend. Nor is that narrower scope much of a drawback from insurers’ perspective, given that the clarity of the Restatement approach would likely chill some otherwise expensive and unsuccessful litigation that the Monroe exception arguably may invite. Although the Restatement approach would not have yielded a different result in Monroe because none of the exceptions it proposes applied, nothing prevented the court from adopting it and, besides, the exception the Monroe court settled on did not apply on the facts presented either. As for why the Texas Supreme Court apparently did not consider the Restatement approach, one possibility is that section 13(3) of the Restatement applies only to an insurer’s denial of a duty to defend, while the Monroe exception applies equally where an insured is attempting to establish that it is owed a defense. The Texas Supreme Court has historically declined to consider different extrinsic evidence tests depending on whether an insured is seeking a defense or an insurer is attempting to refuse a defense.
It is also conceivable that the court was reluctant to take the Restatement approach in light of the Texas legislature’s 2019 enactment of Texas Civil Practice & Remedies Code section 5.001(b), which provides that “[i]n any action governed by the laws of this state concerning rights and obligations under the law, the American Law Institute’s Restatements of the Law are not controlling.” The Texas statute was one result of a multi-state lobbying effort by insurance companies to undermine the persuasive value of the Restatement because they did not consider some of its provisions to be suitably pro-insurer. If that effort played any role in the outcome in Monroe, then the insurance industry’s relentless attacks on the Restatement had the perverse effect of producing a more confusing and less satisfying test for using extrinsic evidence to escape the duty to defend than reliance on the Restatement would have yielded.
Finally, the Monroe court, in a footnote, reminded policyholders and insurance carriers that if they were dissatisfied with the court’s new common law rule, they could “provide, by contract, for additional or different rules governing the scope of the duty to defend.” The obvious problem with that invitation is its practical impossibility. Even if such language broadly acceptable to insurers could be crafted, it would then have to become the industry standard. Otherwise, insurers whose policies did not include such language would soon gain a competitive market advantage as brokers placed business with those insurers in efforts to best secure their clients’ defenses should they ever be sued.
Conclusion
Under the eight corners rule that many courts follow when deciding whether an insurer owes a duty to defend, insurers have historically been restrained in their ability to use extrinsic evidence to excuse their duty to defend where the plaintiff’s complaint or petition alleges facts that suggest the potential for coverage. In recent years, the Texas Supreme Court has been front and center in the extrinsic evidence debate. In its much-anticipated decision in Monroe Guaranty Insurance Co. v. BITCO General Insurance Corp., the court articulated a new exception to the eight corners rule that permits the use of extrinsic evidence to extinguish an insurer’s duty to defend. Unfortunately, the Monroe exception is flawed in key respects. Accordingly, rather than following Monroe, courts that are considering the circumstances in which insurers should be permitted to use extrinsic evidence to escape their duty to defend should either adopt the approach outlined in section 13(3) of the Restatement of the Law of Liability Insurance or craft their own approaches that differ from the Monroe exception.
