In a decision issued on February 11, 2022, the Texas Supreme Court opened the door a little wider (or a lot wider, depending upon whom you ask) for allowing use of extrinsic evidence in determining whether an insurer owes a duty to defend.  The decision marks a significant deviation from the strict eight corners analysis the Court has espoused for many years and will have significant implications on the construction industry in the coming years.

In Monroe Guaranty Ins. Co. v. BITCO General Insurance Corp., David Jones (Jones) retained 5D Drilling & Pump Service (5D) in 2014 to drill a 3600 foot commercial irrigation well.  Jones filed suit against 5D alleging that 5D was negligent in drilling the well in several aspects, including leaving the drill bit in the bore hole, and damaging Jones’ land in several ways, including damaging an aquifer under the property.  The petition was silent as to when 5D began or stopped the drilling, when any of the alleged property damage occurred, or when Jones learned of any of the damage.

BITCO issued commercial general liability (CGL) policies to 5D with terms from October 2013 to October 2015. Monroe issued a CGL policy to 5D with a policy term of October 2015 to October 2016.  BITCO agreed to defend 5D against Jones’ claims under reservation of rights. Monroe refused to defend, contending that any property damage occurred before its policy period began.  Monroe relied on language in the policy that limits coverage to property damage that occurred during the policy period and excluded coverage for property damage that the insured knew about prior to the policy incepting.   BITCO sued Monroe seeking a declaration that Monroe owed a duty to defend 5D.

At the trial court level, BITCO and Monroe stipulated that 5D’s drill bit stuck in the well in or around November 2014, before Monroe’s policy incepted.  Monroe argued to the trial court that 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.  The district court ruled that Monroe owed a duty to defend, finding that the stipulation was inadmissible because it violated the eight corners rule.

The appellate court sent two certified questions to the Texas Supreme Court, which the Court answered in the Monroe decision.  The first of the two questions was whether extrinsic evidence may be considered in determining the duty to defend as articulated in an older federal court opinion of Northfield Ins. Co. v. Loving Home Care, Inc.  The second question was, if the Court allowed the use of extrinsic evidence, what limitations would apply to that evidence.

The Monroe Court held extrinsic evidence may be considered in determining whether a duty to defend is owed, as follows.

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.

Applying this holding to the facts, the Court held that the extrinsic evidence Monroe sought to introduce “did not pass the test”.  Of particular significance in cases involving water intrusion to completed projects or other claims involving continuing damage, the Court stated:

In cases of continuing damage like the kind alleged here, evidence of the date of property damage overlaps with the 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.

As the court explained, 5D would likely have argued in the lawsuit Jones brought that the stuck drill bit was not the cause of any property damage.  But, to obtain coverage in the face of Monroe’s declination, 5D would have had to have argued that Jones’ damages occurred after November 2014, conceding that Jones suffered property damage and undermining 5D’s defense that Jones suffered no damage, at all.

The Monroe will have profound implications on the breadth of insurers’ duty to defend under Texas law.  As the opening widens for introduction of extrinsic evidence, the breadth of the duty to defend under Texas law may be concurrently getting narrower.  The spate of coverage cases that Monroe will undoubtedly spawn will shape the width or narrowness of those openings.

The attorneys in our Austin and Dallas office are available to answer any questions you may have.  Please contact us at info@gstexlaw.com.

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