In a significant ruling issued less than one week ago, the Supreme Court of Texas adopted a modified form of the “Northfield exception” to the “eight-corners rule” previously set out by the U.S. Court of Appeals for the Fifth Circuit in Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523 (5th Cir. 2004).
The court in Monroe Guaranty Ins. Co. v. BITCO General Ins. Co., Case No. 21-0232, explained that the practice of looking at extrinsic evidence outside of the four corners of the complaint and four corners of the insurance policy is permissible, in certain circumstances. As explained by the court, those circumstances require that the extrinsic 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; and (3) conclusively establishes the coverage fact to be proved.”
The coverage dispute arose out of underlying litigation claiming that an irrigation well was negligently drilled and damaged the underlying plaintiff’s (Jones) land. The two parties in the coverage dispute—Monroe Guaranty Ins. Co. and BITCO General Ins. Co.—each provided commercial general liability insurance to the insured, 5D Drilling & Pump Service, Inc. (“5D”). 5D performed the allegedly negligent drilling on Jones’s land. Monroe and BITCO’s policies covered 5D over different time periods. Monroe’s policy covered October 2015 to October 2016; BITCO’s policy covered October 2013 to October 2015.
In the underlying litigation, Jones filed suit against 5D claiming that 5D performed several purportedly negligent acts. But, as the court noted, “the pleading alleges that Jones’s land was damaged in different ways but is silent as to when any of the alleged damage occurred.” 5D, in turn, demanded a defense from both its insurers. BITCO agreed to defend 5D, under a reservation of rights, but Monroe refused.
BITCO ultimately sued Monroe in federal district court, seeking a declaration that Monroe owed a duty to defend 5D. During that litigation, BITCO and Monroe stipulated that 5D stuck the drilling bit in the bore hole (allegedly rendering the well “practically useless” according to Jones), “in or around November 2014,” or about ten months before BITCO’s policy would end and Monroe’s would begin.
Both BITCO and Monroe moved for summary judgment. Monroe argued it had no duty to defend because the stipulation proved that any property damage occurred before its policy period. The district court determined it could not consider the stipulated extrinsic evidence because of the eight-corners rule. Monroe appealed. On appeal, the Fifth Circuit concluded that the question whether the court consider extrinsic evidence—“the stipulated date the drill bit became stuck”—was “[k]ey to deciding” the case. It then certified two questions to the Texas Supreme Court:
- Is the exception to the eight-corners rule articulated in Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523 (5th Cir. 2004), 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?
Answering those two questions, the court noted its prior opinions that identified exceptions to the eight-corners rule, including in Loya Ins. Co. v. Avalos, 610 S.W.3d 878 (Tex. 2020).
Ultimately, the court adopted and “expressly approve[d] the practice of considering extrinsic evidence in duty-to-defend cases” but noted that the eight-corners rule “remains the initial inquiry” and “will resolve coverage determinations in most cases.” As explained above, that practice is limited to situations where the extrinsic 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; and (3) conclusively establishes the coverage fact to be proved.”
Thereafter, the court applied this “refinement” of the Northfield exception, and answered the second certified question. The court held that “while there is no categorical prohibition against extrinsic evidence of the date of an occurrence, the stipulation in this case overlaps with the merits of liability and cannot be considered.”