On Friday, February 12, 2022, the Texas Supreme Court gave the insurance industry an early Valentine’s Day gift, or so it seems, when it decided that extrinsic evidence may be considered for determining the duty to defend in appropriate circumstances. In Monroe Guar. Ins. Co. v. BITCO Gen. Ins. Co., 2022 WL 413940 (Tex. 2022), the Texas Supreme Court adopted the Monroe exception in a case certified to the Court by the Fifth Circuit. The Fifth Circuit certified two questions to the Court: (1) whether the Northfield exception to the eight-corners rule is permissible under Texas law; and (2) whether the date of an occurrence is a type of extrinsic evidence that may be considered when those requirements are met. As a brief aside, the Northfield exception was adopted by the Fifth Circuit in a case where it determined that if the Texas Supreme Court were ever to consider the use of extrinsic evidence as an exception to the eight corners rule, it would apply only when it was initially impossible to discern whether coverage is potentially implicated and where 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. The Texas Supreme Court had previously noted the existence of Northfield but had refused to apply it.

In Monroe, a dispute arose between two liability carriers over which one of them owed a duty to defend. Their insured was sued for damages allegedly resulting from drilling operations on the plaintiff’s property in 2014. Suit was filed in 2016, but the petition, as is true in many cases, did not detail when the purported negligence acts occurred or even when the insured began or stopped the work. The pleading alleged various acts of negligence and that the plaintiff’s property was damaged in different ways but was silent as to when the damage occurred. The insured demanded a defense from both carriers (BITCO provided two consecutive policies covering the insured from 2013 to 2015 and Monroe provided coverage from 2015 to 2016). BITCO defended under a reservation of rights, but Monroe refused to defend, contending that any damage occurred before its policy period began. BITCO filed suit against Monroe seeking a declaration that Monroe owed a defense. The two carriers stipulated that the insured’s drill bit stuck in the bore hole during drilling operations in or around November 2014. The district court determined it could not consider the extrinsic evidence and held that Monroe had a duty to defend. The Fifth Circuit decided the question needed to go to the Texas Supreme Court.

The Texas Supreme Court answered the first certified question with a yes: Texas law permits consideration of extrinsic evidence, but under a standard different than the one articulated in Northfield. The Texas Supreme Court noted, however, that it was not abandoning the eight-corners rule and that rule remained the initial inquiry to be used in determining whether a duty to defend exists and further noted that the rule would resolve coverage determinations in most cases. The court adopted the Monroe exception which states that extrinsic evidence may be considered 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 exception will be applied only 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 pleading, is not determinative of whether coverage exists.

The Court rejected the Northfield element dealing with whether coverage is potentially implicated, finding that this standard invited courts to read facts into the pleadings and imagine factual scenarios which might trigger coverage, both matters that Texas law does not permit. The Court determined that the better threshold inquiry was whether the pleading contains the facts necessary to resolve the question of whether the claim is covered. The Court also refined the Fifth Circuit test because that test required that the extrinsic evidence go to a fundamental issue of coverage. The Texas Supreme Court simply eliminated the fundamental issue requirement. Finally, unlike Northfield, the Court found that the proffered evidence must conclusively establish the coverage fact at issue. The Court did note that the evidence need not be in the form of a stipulation and that other forms of proof may suffice, without identifying what that proof might be. But the evidence will not be considered if there would remain a genuine issue of material fact as to the coverage fact to be proved.

Having answered Yes to the first certified question, the court turned to the question of whether a court may consider evidence of the date of an occurrence. The Court concluded that evidence of the date of an occurrence can be considered if it otherwise meets the requirements of the Monroe exception. However, the Court concluded that the stipulation as issue did not pass the test, noting that in cases of continuing damage like the kind alleged in the underlying lawsuit, evidence of the date of property damage overlaps with the merits of the lawsuit. “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.” Finding that the coverage issue overlapped with liability, the Court refused to consider the extrinsic evidence under the Monroe exception.

Interestingly, the Court dropped a footnote stating that if the parties were dissatisfied with the common-law rule adopted in the case, they remained free to provide, by contract, for additional or different rules governing the scope of the duty to defend.

The Court discussed the Monroe exception in a case decided the same day. In Pharr-San Juan-Alamo I.S.D. v. Texas Political Subdivisions Prop./Cas. Joint Self Ins. Fund, 2022 WL 420491 (Tex. 2022), the issue before the Court was whether the liability policy imposed a duty to defend and indemnify the insured for damages arising from an accident involving the use of a golf cart. Finding that the term golf cart does not refer to a vehicle designed for travel on public roads, the court held that there was no duty to defend or indemnify.  The Texas Supreme Court rejected the argument that the Monroe exception would apply to the facts of the case given that the ordinary meaning of the term “golf cart” did not refer to a vehicle designed for use on a public road (a requirement for coverage under the term “mobile equipment” in the policy at issue). The Court found that applying the eight corners rule, the carrier had no duty to defend because the plaintiff’s allegations that the girl was thrown from a golf cart did not allege that she was thrown from a vehicle designed for travel on public roads. Interestingly, the Court agreed that the fact of whether the vehicle was designed for travel on public roads was one that related solely to coverage and did not overlap with the merits of the plaintiffs’ case. However, the remaining elements of the Monroe exception were not met. The Court found that the petition left no gap that would prevent a court from determining whether a duty to defend exists. “Mere disagreements about the common, ordinary meaning of an undefined term to no create the type of ‘gap’ Monroe requires.” The Court noted that if the petition had only alleged the girl was thrown from a vehicle, without identifying the type, a gap would exist.

So, what does all this mean? Well, first, litigation over the extrinsic evidence/duty to defend issue will not cease. The Court left open a number of questions, especially given that it found that the Monroe exception was not applicable in either case. Both policyholders and carriers will have to test the boundaries of the new exception. This may be especially true in cases involving the absence of date allegations. Second, while the insurance industry has fought to have the courts consider extrinsic evidence, this may well be an example of why you should be careful what you ask for. What is good for the goose is good for the gander. Carriers will now have to consider extrinsic evidence in determining whether a duty to defend exists under the Monroe exception, which will, as the foregoing cases illustrate, require adjusters to carefully consider both the pleadings and the extrinsic evidence to determine whether the exception even applies. There will likely be more Chapter 541 claims brought when a carrier denies a defense in light of extrinsic evidence for failure to properly investigate. Finally, the Fifth Circuit and the federal courts are going to have to learn to apply a new test.

Stay tuned for lots of cases involving application of the Monroe exception.

Craig Reese leads the Firm's appellate and coverage practice group. He has over 25 years of practice experience including appeals at the federal and state level, insurance coverage/defense, and commercial litigation. Craig has represented clients in a wide variety of litigation including insurance coverage, general insurance defense, bad faith litigation, and commercial matters. His appellate experience includes cases before every level of the state courts of appeals and appeals to the Fifth Circuit Court of Appeals. In addition, he is a former briefing attorney to the Honorable H.M. Lattimore for the Second Court of Appeals in Fort Worth.

Fletcher, Farley, Shipman & Salinas LLP is a dedicated business defense firm with offices in Dallas and Austin. The firm's attorneys leverage their extensive experience and skills as trial and appellate attorneys to achieve resolution both inside and outside of the courthouse in matters including the defense of tort litigation, business and commercial litigation, construction, insurance, employment and dispute resolution. The firm’s unique Rapid Response Team™ provides a legal forensic service that can be deployed nationwide around the clock, within moments, to assist clients in responding to catastrophic losses. 
Information presented in this article is accurate as of date of publication. The information provided is not legal advice and use of this information does not create an attorney-client relationship. You should always consult an attorney for more current information, changes in the law or any other information specific to your situation.
Fletcher Farley Shipman & Salinas LLP