Monroe Guaranty Insurance Company, a Member of the Fcci Insurance Group v. Bitco General Insurance Corporation, Formerly Known as Bituminous Casualty Corporation

Supreme Court of Texas
══════════
No. 21-0232
══════════
Monroe Guaranty Insurance Company, a Member of the FCCI
Insurance Group,
Appellant,
v.
BITCO General Insurance Corporation, formerly known as
Bituminous Casualty Corporation,
Appellee
═══════════════════════════════════════
On Certified Questions from the
United States Court of Appeals for the Fifth Circuit
═══════════════════════════════════════
Argued September 14, 2021
JUSTICE HUDDLE delivered the opinion of the Court.
This insurance coverage dispute presents two certified questions
from the United States Court of Appeals for the Fifth Circuit. The
ultimate issue in the case is whether Monroe Guaranty Insurance
Company owed its insured a duty to defend a suit in which the plaintiff
alleged that the insured negligently drilled an irrigation well, damaging
the plaintiff’s land. The certified questions relate to a subsidiary issue:
whether Texas law permits consideration of stipulated extrinsic
evidence to determine whether the duty to defend exists when the
plaintiff’s pleading is silent about a potentially dispositive coverage fact.
The Fifth Circuit asks, first, whether the Northfield exception to
the “eight-corners rule” is permissible under Texas law. See Northfield
Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523 (5th Cir. 2004). Some
Texas appellate courts and some federal courts applying Texas law,
relying on Northfield or a similar test, consider extrinsic evidence
bearing solely on coverage facts when the eight-corners analysis, due to
gaps in the plaintiff’s pleading, is not determinative of whether coverage
exists. We hold this practice is permissible under Texas law provided
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 second certified question asks whether the date of an
occurrence is a type of extrinsic evidence that may be considered when
these requirements are satisfied. Because we do not adhere to
Northfield’s requirement that extrinsic evidence may be considered only
to determine “fundamental” coverage issues, we answer “yes” but
conclude that the stipulation offered in this case may not be considered
because it overlaps with the merits of liability.
I. Background
The parties to this dispute are two liability insurers. Each
provided commercial general liability (CGL) coverage to the insured, 5D
Drilling & Pump Service, Inc., albeit at different times. BITCO General
Insurance Corporation provided two consecutive one-year CGL policies
2
covering October 2013 to October 2015. Monroe’s CGL policy covered
5D from October 2015 to October 2016.
David Jones d/b/a J & B Farms of Texas sued 5D in Bexar County
district court in 2016 for breach of contract and negligence, seeking
damages allegedly resulting from 5D’s drilling operations on Jones’s
property. According to Jones’s petition, he contracted with 5D in the
summer of 2014 to drill a 3600-foot commercial irrigation well on his
farmland.
Jones’s pleading does not detail when 5D’s purportedly negligent
acts occurred or even when 5D began or stopped the work. But it does
allege 5D was negligent in various respects:
 5D drilled the well in a way that “deviates in an unacceptable
fashion from vertical”;
 5D “‘stuck’ the drilling bit in the bore hole, rendering the well
practically useless for its intended/contracted for purpose”;
 5D “failed and refused to plug the well, retrieve the drill bit,
and drill a new well”; and
 5D “failed to case the well through the Del Rio clay, allowing
detritus to slough off the clay, falling down the bore and filling
up the well.”
Similarly, the pleading alleges that Jones’s land was damaged in
different ways but is silent as to when any of the alleged damage
occurred. It alleges that 5D “damaged [Jones’s] property by lodging a
drill bit and part of a bottom hole assembly in the aquifer under [his]
property, damaging the aquifer and damaging the free flow of water in
the aquifer.” And while the petition makes clear that 5D’s failure to case
the well allowed detritus to fall down it, the petition does not say when
this occurred or when 5D or Jones learned about it.
3
5D demanded a defense from both insurers. BITCO defended
under a reservation of rights, but Monroe refused to defend, contending
that any property damage occurred before its policy period began.
Monroe acknowledges that its policy requires it to “pay those sums that
the insured becomes legally obligated to pay as damages because of . . .
‘property damage’ to which this insurance applies.” It also
acknowledges a duty to defend under the policy: Monroe “will have the
right and duty to defend the insured against any ‘suit’ seeking those
damages.” But, as Monroe points out, the policy limits the scope of the
duty to defend to cover property damage only if it “occurs during the
policy period.” It also provides that Monroe will have no duty to defend
5D against any suit “to which this insurance does not apply.” There is
a further limitation: coverage applies only if, “[p]rior to the policy period,
no insured . . . knew that the . . . ‘property damage’ had occurred, in
whole or in part.” Thus, if 5D “knew, prior to the policy period, that the
. . . ‘property damage’ occurred, then any continuation, change or
resumption of such . . . ‘property damage’ during or after the policy
period will be deemed to have been known prior to the policy period.”
BITCO sued Monroe in federal district court, seeking a
declaration that Monroe owed a defense to 5D.1 BITCO and Monroe
stipulated that 5D’s drill bit stuck in the bore hole during 5D’s drilling
“in or around November 2014,” or about ten months before BITCO’s
policy would end and Monroe’s would begin. Both parties sought
1 BITCO paid to settle the underlying lawsuit and does not seek
contribution from Monroe for the settlement. BITCO seeks contribution from
Monroe only for defense costs incurred in the underlying suit.
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summary judgment on the issue of whether Monroe owed a duty to
defend. Monroe argued it had none because the stipulation proved 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 determined it could not consider the stipulated
extrinsic evidence of when 5D’s drill bit stuck. It applied the eight-
corners rule and concluded 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 Jones’s lawsuit in 2016
(during either or both insurers’ policy periods).
Monroe appealed. The Fifth Circuit concluded that the question
whether the court could consider extrinsic evidence—“the stipulated
date the drill bit became stuck”—was “[k]ey to deciding this case.” 846
F. App’x 248, 248 (5th Cir. 2021). It noted the answer to the question
was an important and determinative question of Texas law as to which
there is no controlling Texas Supreme Court precedent, id., and certified
two questions to us:
1. 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?
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2. 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?
II. Discussion
A. Answer to the First Certified Question: Texas law
permits consideration of extrinsic evidence under a
standard similar to that articulated in Northfield.
Insurance policies are interpreted under the rules of construction
that apply to contracts in general. Richards v. State Farm Lloyds, 597
S.W.3d 492, 497 (Tex. 2020). The primary goal of contract construction
is to effectuate the parties’ intent as expressed in the contract. Don’s
Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20, 23 (Tex. 2008).
Our Court adopted the eight-corners rule more than fifty years
ago. Heyden Newport Chem. Corp. v. S. Gen. Ins. Co., 387 S.W.2d 22, 24
(Tex. 1965). The rule directs Texas courts to determine an insurer’s duty
to defend its insured based on (1) the pleadings against the insured and
(2) the terms of the insurance policy. Loya Ins. Co. v. Avalos, 610 S.W.3d
878, 879 (Tex. 2020). Under the eight-corners rule, the insurer’s duty to
defend is determined by comparing the allegations in the plaintiff’s
petition to the policy provisions, without regard to the truth or falsity of
those allegations and without reference to facts otherwise known or
ultimately proven. GuideOne Elite Ins. Co. v. Fielder Rd. Baptist
Church, 197 S.W.3d 305, 308 (Tex. 2006). The rule’s name derives from
the fact that only two documents are ordinarily relevant to the
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determination of the duty to defend: the policy and the plaintiff’s
pleading. Id. Extrinsic evidence or facts outside the pleadings are
generally not considered. Id.2
As we explained in Richards, the eight-corners rule is not a
judicial amendment to an insurance policy. 597 S.W.3d at 499–500. It
does not arise merely from the courts’ say-so but is designed to enforce
the parties’ agreement as set forth in the policy. Id. The eight-corners
rule merely acknowledges that, under many common duty-to-defend
clauses, only the petition and the policy are relevant to the initial
inquiry into whether the petition’s claim fits within the policy’s
coverage. Id. at 500.
While the eight-corners rule is a settled feature of Texas law, id.
at 499, it is not absolute. We recently adopted an exception: courts may
consider extrinsic evidence that the insured and a third party suing the
insured colluded to make false representations of fact to secure a defense
and create coverage where it would not otherwise exist. Avalos, 610
S.W.3d at 879. Avalos reasons that an insurer does not agree to
undertake, and the insured has not paid for, a duty to defend the insured
against fraudulent allegations brought about by the insured itself. Id.
at 882. And because the purpose of the eight-corners rule is to enforce
and not rewrite the parties’ agreement, it does not bar consideration of
extrinsic evidence of collusion to establish the absence of a duty to
2 In contrast, whether a liability insurer owes a duty to indemnify its
insured is determined based on the facts actually established in the underlying
suit. Burlington N. & Santa Fe Ry. Co. v. Nat’l Union Fire Ins. Co. of
Pittsburgh, PA, 334 S.W.3d 217, 219 (Tex. 2011). Here, the duty to indemnify
is not at issue.
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defend. Id. Allowing such proof advances our primary goal of
effectuating the written agreement.
Yet even before Avalos, the goal of effectuating the terms of the
policy led some courts to consider extrinsic evidence in determining
whether a duty to defend exists. Richards, 597 S.W.3d at 500 (noting
some courts allow extrinsic evidence on coverage issues that do not
overlap with the merits where “the petition states a claim that could
trigger the duty to defend, but the petition is silent on facts necessary to
determine coverage”). At least two Texas courts of appeals adopted the
practice shortly after Heyden Newport.3 And, following the later
decision in State Farm Fire & Casualty Co. v. Wade,4 the practice
expanded among federal courts in the Fifth Circuit.5 In general, these
courts reasoned that when the underlying pleading states a claim that
3See Cook v. Ohio Cas. Ins. Co., 418 S.W.2d 712, 715–16 (Tex. App.—
Texarkana 1967, no writ) (considering extrinsic evidence that the car involved
in an accident was owned by the insured’s mother to determine that an
exclusion barred coverage); Int’l Serv. Ins. Co. v. Boll, 392 S.W.2d 158, 160–61
(Tex. App.—Houston 1965, writ ref’d n.r.e.) (considering extrinsic evidence
regarding the identity of the defendant driver to determine that the driver was
not covered).
4 827 S.W.2d 448, 453 (Tex. App.—Corpus Christi–Edinburg 1992, writ
denied) (allowing court to consider extrinsic evidence regarding how a boat was
being used to determine whether a business-pursuit exclusion barred
coverage).
5See John Deere Ins. Co. v. Truckin’ U.S.A., 122 F.3d 270, 272–73 (5th
Cir. 1997) (considering extrinsic evidence regarding the ownership of the truck
involved in an accident to determine the truck was not a covered auto); W.
Heritage Ins. Co. v. River Ent., 998 F.2d 311, 314–15 (5th Cir. 1993)
(considering extrinsic evidence that alcohol consumption caused the insured’s
customer to become impaired to determine that a liquor-liability exclusion
barred coverage).
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could trigger the duty to defend but is silent on a coverage-determinative
fact, extrinsic evidence should be considered to fill the informational gap
and determine whether the policy gives rise to a duty to defend.6
But the principles governing when (and what) extrinsic evidence
could be considered have not been uniform. One federal district court
observed:
Texas intermediate courts of appeal do not agree on the
breadth of extrinsic evidence that can be properly
interjected into the duty to defend analysis. Add to that
the many federal district courts and Fifth Circuit opinions
relying on these disparate state cases, and one faces a
cacophonous set of rulings indeed.
Westport Ins. Corp. v. Atchley, Russell, Waldrop & Hlavinka, L.L.P., 267
F. Supp. 2d 601, 614 (E.D. Tex. 2003).
The Fifth Circuit articulated a detailed standard in Northfield.
363 F.3d at 531. There, the insured provided in-home nannies and was
sued when a child died while in an employee’s care. Id. at 525. The
insurer argued there was no coverage based on policy exclusions for
criminal acts and physical abuse, but the underlying petition had been
amended to remove allegations of criminal or intentional conduct. Id.
at 526. The court ultimately refused to consider extrinsic evidence of
the nanny’s criminal conviction based on its Erie guess that our Court
would not recognize any exception to the eight-corners rule. Id. at 531,
535. But the Fifth Circuit also opined that if this Court were to
recognize an exception to the eight-corners rule, it would apply only
6 See, e.g., Boll, 392 S.W.2d at 160 (noting that the plaintiff’s petition
did not identify the driver by name, but the parties stipulated that it was the
insured’s only son, who was expressly excluded from coverage).
9
“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.” Id. at
531.
This Court, citing Northfield, acknowledged this “narrow
exception” to the eight-corners rule in GuideOne. See 197 S.W.3d at
308–09. GuideOne did not expressly adopt the Northfield test, but
neither did it reject it. Instead, we held the proffered extrinsic evidence
could not be considered because it contradicted a fact alleged in the
pleading. Id. at 310 (noting that the proffered extrinsic evidence
contradicted an allegation regarding the defendant’s dates of
employment); see also id. at 311 (rejecting an invitation by amicus to
adopt a “true-facts” exception to the eight-corners rule). We rejected the
use of extrinsic evidence that contradicts the pleadings again a few years
later. See Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., 279
S.W.3d 650, 655 (Tex. 2009) (“In deciding the duty to defend, the court
should not consider extrinsic evidence from either the insurer or the
insured that contradicts the allegations of the underlying petition.”).
The Fifth Circuit revisited the subject a few years after GuideOne
and determined that, despite its prior Erie guess, this Court would
permit consideration of extrinsic evidence under Northfield’s
parameters. See Ooida Risk Retention Grp., Inc. v. Williams, 579 F.3d
469, 475–76 (5th Cir. 2009) (considering extrinsic evidence of whether
individual was an employee of the insured). Our courts of appeals
10
remain divided on the issue. Some reject extrinsic evidence altogether.7
But other courts of appeals8 and federal courts9 have continued to
7See AIX Specialty Ins. Co. v. Shiwach, No. 05-18-01050-CV, 2019 WL
6888515, at *7 (Tex. App.—Dallas Dec. 18, 2019, pet. denied) (“Although the
Fifth Circuit and multiple intermediate appellate courts have expressly
recognized a limited exception to [the eight-corners] rule . . . , the Texas
Supreme Court and this Court have not yet done so.”); Burlington N. & Santa
Fe Ry. Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 394 S.W.3d 228, 236–
38 (Tex. App.—El Paso 2012, pet. denied) (refusing to consider extrinsic
evidence about whether a subcontractor’s work met the policy’s definition of
“completed,” which would exclude the claim from coverage, because “we are not
permitted to refer to extrinsic evidence in determining the duty to defend”).
8 See Tex. Pol. Subdivs. Prop./Cas. Joint Self Ins. Fund v. Pharr-San
Juan-Alamo ISD, 628 S.W.3d 486, 494 (Tex. App.—Corpus Christi–Edinburg
2019) (holding that “extrinsic evidence is admissible ‘when doing so does not
question the truth or falsity of any facts alleged in the underlying petition’”
(quoting Wade, 827 S.W.2d at 453)), aff’d on other grounds, ___ S.W.3d ___
(Tex. Feb. 11, 2022); Weingarten Realty Mgmt. Co. v. Liberty Mut. Fire Ins. Co.,
343 S.W.3d 859, 865 (Tex. App.—Houston [14th Dist.] 2011, pet. denied)
(adopting an exception to the eight-corners rule that is limited to extrinsic
evidence that (1) shows the party seeking coverage is a stranger to the policy
and (2) goes strictly to an issue of coverage without contradicting any
allegation that is material to the merits of the underlying claim).
9 See, e.g., Star-Tex Res., L.L.C. v. Granite State Ins. Co., 553 F. App’x
366, 372–73 (5th Cir. 2014) (considering extrinsic evidence that the insured’s
employee was operating the car that caused the plaintiff’s injuries and
concluding an auto-exclusion exception barred coverage); Nabors Drilling
Techs. USA Inc. v. Deepwell Energy Servs. LLC, ___ F. Supp. 3d ___, 2021 WL
4924758, at *15–16 (S.D. Tex. Oct. 21, 2021) (considering extrinsic evidence
regarding the terms of a master service agreement to determine whether that
agreement was an “insured contract” as defined under the policy); Hallmark
Cnty. Mut. Ins. Co. v. Ace Am. Ins. Co., 283 F. Supp. 3d 559, 567–68 (W.D. Tex.
2017) (considering extrinsic evidence regarding the length of a lease agreement
to determine that an automobile was not a covered auto under a policy
endorsement); Sentry Select Ins. Co. v. Home State Cnty. Mut. Ins. Co., 994 F.
Supp. 2d 789, 810 (E.D. Tex. 2013) (considering extrinsic evidence about the
purpose for which the insured had given permission for an employee to drive
the insured’s car to determine whether the driver was an employee or a
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consider extrinsic evidence under Northfield or similarly worded
standards.
Today, we expressly approve the practice of considering extrinsic
evidence in duty-to-defend cases to which Avalos does not apply. In
doing so, we do not abandon the eight-corners rule. It remains the initial
inquiry to be used to determine whether a duty to defend exists,
Richards, 597 S.W.3d at 500, and it will resolve coverage determinations
in most cases. 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.
This standard coheres with Northfield, 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.” 363 F.3d at 531 (emphasis
added). 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.” Nat’l Union Fire Ins. Co. of Pittsburgh,
PA v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 142 (Tex. 1997).
customer under the policy); Millis Dev. & Constr., Inc. v. Am. First Lloyd’s Ins.
Co., 809 F. Supp. 2d 616, 631 (S.D. Tex. 2011) (allowing extrinsic evidence
regarding the timing of various subcontracts to determine when a worker
would have been covered as an additional insured).
12
The better threshold inquiry, reflected in more recent authorities, is:
does the pleading contain the facts necessary to resolve the question of
whether the claim is covered? See Ooida, 579 F.3d at 476 (“Because the
pleadings do not contain the facts necessary to resolve the question, we
hold that the exception employed by Northfield applies and that
extrinsic evidence can be considered.”); Richards, 597 S.W.3d at 500
(noting extrinsic evidence is considered by courts where “the petition
states a claim that could trigger the duty to defend, but the petition is
silent on facts necessary to determine coverage”).
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. 363 F.3d at 530 (citing
Westport, 267 F. Supp. 2d at 621).10
10 The limitation to “fundamental” coverage issues seemingly originated
in Tri-Coastal Contractors, Inc. v. Hartford Underwriters Insurance Co., 981
S.W.2d 861 (Tex. App.—Houston [1st Dist.] 1998, pet. denied). In rejecting the
trial court’s consideration of extrinsic evidence in that case, the court stated:
In Texas, extrinsic evidence is permitted to show no duty to
defend only in very limited circumstances, for example where
the evidence is used to disprove the fundamentals of insurance
coverage, such as whether the person sued is excluded from the
policy, whether a policy contract exists, or whether the property
in question is insured under the policy.
Id. at 863 n.1 (citing Cook, 418 S.W.2d at 715–16; Boll, 392 S.W.2d at 161).
But neither Cook nor Boll limited its holding to any particular type of coverage
issue, and Wade and cases following it likewise contain no such limitation. See,
13
BITCO argues that, if consideration of any extrinsic evidence is
allowed, it should be limited accordingly. Monroe responds that
Northfield’s list is not exhaustive and that other issues, including the
date on which property damage occurred, are also fundamental to
determining coverage. Several courts, including those applying the
Northfield exception, have considered extrinsic evidence bearing on
facts that may not qualify as “fundamental” under Northfield.11 This is
unsurprising, as the rationale for considering extrinsic evidence is sound
regardless of whether the coverage issue in dispute meets Northfield’s
“fundamental” qualifier. Rather than task courts with determining
which coverage issues are—or are not—fundamental, we think the
better approach is to eliminate this requirement altogether.
Third, unlike Northfield, Texas law requires that the proffered
extrinsic evidence must conclusively establish the coverage fact at issue.
e.g., W. Heritage Ins. Co., 998 F.2d at 314–15 (following Wade and concluding
that extrinsic evidence to determine why an insured’s customer was impaired
could be considered to determine if a liquor-liability exclusion barred
coverage).
11See Nat’l Liab. & Fire Ins. Co. v. Los Chavez Autobuses Inc., No. 4:20-
CV-01302, 2021 WL 920138, at *4 (S.D. Tex. Mar. 10, 2021) (concluding that
extrinsic evidence regarding the location of an auto accident, to determine
whether the accident occurred within the policy’s coverage territory, goes to a
fundamental issue of coverage); Hudson Ins. Co. v. Alamo Crude Oil, LLC, No.
SA-19-CV-137-XR, 2019 WL 3322867, at *5–6 (W.D. Tex. July 24, 2019)
(concluding that extrinsic evidence that a truck driver was hauling a load for
a customer at the time of the accident, to determine whether coverage was
barred by a business-use exclusion, goes to a fundamental issue of coverage);
Evanston Ins. Co. v. Kinsale Ins. Co., No. 7:17-CV-327, 2018 WL 4103031, at
*10–11 (S.D. Tex. July 12, 2018) (concluding that extrinsic evidence regarding
dates the insured’s construction projects were completed, to determine that the
alleged property damage occurred before the inception of the policy, goes to a
fundamental issue of coverage).
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The coverage fact need not be the subject of a stipulation. Other forms
of proof may suffice. But extrinsic evidence may not be considered if
there would remain a genuine issue of material fact as to the coverage
fact to be proved. See Avalos, 610 S.W.3d at 879 (requiring conclusive
proof of collusive fraud to show no duty to defend); Heyden Newport, 387
S.W.2d at 26 (when ultimately deciding whether an insurer owes a duty
to defend, doubts should be resolved in the insured’s favor).
To sum up, the 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,
15
who ultimately shoulder the expense of the insurer’s increased defense
costs through higher premiums.12
B. Answer to the Second Certified Question: Under the
standard we adopt today, a court may consider
extrinsic evidence of the date of an occurrence.
The second certified question asks whether, when applying such
an exception, a court may consider extrinsic evidence of the date of an
occurrence. As discussed above, courts considering extrinsic evidence
have not limited the practice to circumstances in which the coverage
question is one of those identified as “fundamental” by Northfield. Like
those courts, we see no sound reason to limit consideration of extrinsic
evidence in that manner. Because we do not categorically limit the types
of potentially coverage-determinative facts that may be proven by
extrinsic evidence, evidence of the date of an occurrence may be
considered if it meets the other requirements described above.
Here, however, the extrinsic evidence does not pass the test. As
GuideOne made clear and we have explained above, extrinsic evidence
may be considered only if it goes solely to the issue of coverage and does
not overlap with the merits of liability. 197 S.W.3d at 309 (rejecting use
of extrinsic evidence that overlaps with the merits because it “poses a
significant risk of undermining the insured’s ability to defend itself in
the underlying litigation”). In cases of continuing damage like the kind
alleged here, evidence of the date of property damage overlaps with the
12As always, parties dissatisfied with the common-law rule we adopt
today remain free to provide, by contract, for additional or different rules
governing the scope of the duty to defend. See Richards, 597 S.W.3d at 497
(“As with any contract, the parties may displace default rules of construction
by agreement.”) (citing Wenske v. Ealy, 521 S.W.3d 791, 792, 796 (Tex. 2017)).
16
merits. 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.
The stipulation here proves that the drill bit got stuck in or
around November 2014. Monroe argues this relieves it of a duty to
defend because it demonstrates property damage occurred at that time,
which was months before its policy took effect. Yet in the underlying
case, the insured likely would have sought to prove the sticking of the
drill bit was not the cause of any damage. And to obtain coverage in the
face of Monroe’s refusal, the insured would necessarily argue that some
of plaintiff’s alleged damages (e.g., the sloughing of material into the
well) occurred after November 2014. This would undermine its liability
defense, which is best served by asserting there was no damage either
in November or anytime thereafter.
Because the use of the stipulation in the manner urged by Monroe
would overlap with the merits of liability in these ways, it cannot be
considered in determining whether Monroe owes a duty to defend.
* * *
We answer the first certified question “yes,” subject to our minor
refinements to the so-called “Northfield exception.” It remains true that
in most cases, whether a duty to defend exists is determined under
Texas’s longstanding eight-corners rule. 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 coverage, Texas law permits consideration of extrinsic
17
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.
As for the second certified question, we conclude 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.
Rebeca A. Huddle
Justice
OPINION DELIVERED: February 11, 2022
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