The Supreme Court of Texas Establishes Rule for Use of Extrinsic Evidence in Evaluating the Duty to Defend . . . Texas Welcomes the Monroe Exception

February 11, 2022

Today, the Supreme Court of Texas issued Monroe Guaranty Insurance Co. v. BITCO General Insurance Co., [1] which will most likely be one of its most influential opinions as it relates to Texas insurance law. In fact, the Court relied on Monroe and found that extrinsic evidence was inadmissible in another opinion issued today, Pharr-San Juan-Alamo Independent School District v. Texas Political Subdivisions Property/Casualty Joint Self Insurance Fund (“Pharr”). [2]

Monroe Guaranty Insurance Co. v. BITCO General Insurance Co. and the Adoption of the Monroe Exception

The parties involved in the dispute in Monroe were two liability insurers, each who provided commercial general liability (“CGL”) coverage to their common insured, 5D Drilling & Pump Service, Inc. (“5D”). [3] BITCO General Insurance Corporation (“BITCO”) provided two consecutive one-year CGL policies covering the policy periods from October 2013 to October 2015. Monroe Guaranty Insurance Company’s CGL policy covered 5D from October 2015 to October 2016. 5D was named in a lawsuit involving its drilling operations, and in the pleading, the claimant alleged that he contracted with 5D in the summer of 2014 to drill a 3600-foot commercial irrigation well on his farmland, which allegedly resulted in damage to his property and the underlying Edwards aquifer. The pleading did not include allegations as to when 5D’s purportedly negligent acts occurred or when 5D began or stopped work, only that 5D was negligent. The allegations to support the claims for negligence included:

• 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.” [4]

The Supreme Court noted that there were additional allegations that the claimant’s land was damaged, but the pleading was “silent as to when any of the alleged damage occurred.” [5] 5D had demanded a defense from both BITCO and Monroe. BITCO defended under a reservation of rights, but Monroe refused, asserting that any property damage occurred before its policy period began. [6] Subsequently, BITCO sued Monroe, seeking a declaration that Monroe owed a defense to 5D. 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. [7]

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—i.e., during either or both insurers’ policy periods. [8] After Monroe appealed, the Fifth Circuit certified the following questions to the Supreme Court of Texas:

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?

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? [9]

Responding to the certified questions from the Fifth Circuit (discussed in detail in our previous blogs here and here), the Court first stated that it “expressly approve[s] the practice of considering extrinsic evidence in duty-to-defend cases,” but that it is not going to “abandon the eight-corners rule.” [10] Rather, that rule will remain the “initial inquiry” as to whether a duty to defend exists. [11] The Court explained that, “in most cases,” reference to the eight-corners will resolve the question of whether a defense is owed. Continuing:

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. [12]

As the Court notes, this is a standard consistent with that established by the Fifth Circuit in Northfield Insurance Co. v. Loving Home Care, Inc. [13] The Supreme Court’s newly-minted “Monroe Exception,” however, has some “minor refinements.” [14] First, the Northfield Exception 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.” [15] The Supreme Court found that “this standard invites courts to do what our authorities prohibit: ‘read facts into the pleadings’ or ‘imagine factual scenarios which might trigger coverage.’” [16] Consequently, the Court determined that “[t]he 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?” [17]

The second refinement involved the type of extrinsic evidence that is admissible. [18] Pursuant to the NorthfieldException, the extrinsic evidence had to go to a “fundamental” coverage issue. [19] For example, “(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.” [20] Noting the possible inconsistent approach with this principle, the Supreme Court of Texas ruled that “the better approach is to eliminate this requirement altogether.” [21]

Finally, and most importantly, the Supreme Court of Texas found that, “Texas law requires that the proffered extrinsic evidence must conclusively establish the coverage fact at issue.” [22] The fact need not be proven by a stipulation; rather, the Court found that “[o]ther 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.” [23]

In summarizing its ruling, the Court explained:

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. [24]

Having established the Monroe Exception, the Court then moved to the facts at hand. The Court explained that it saw “no sound reason to limit consideration of extrinsic evidence” to consideration of only so-called “fundamental” coverage facts; rather, the Court refused to “categorically limit the types of potentially coverage-determinative facts that may be proven by extrinsic evidence.” [25] The Court specifically noted that “evidence of the date of an occurrence may be considered if it meets the . . . requirements [set forth in the Monroe Exception] described above.” [26]

The stipulation, in this case, however, did not “pass the test.” [27] The Court found that the “use of the stipulation . . . would overlap with the merits of liability,” which reliance upon (now officially) would be prohibited in evaluating the duty to defend. Continuing:

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. [28]

According to the Court, while the insurers stipulated “that the drill bit got stuck in or around November 2014,” at trial 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. [29]

Thus, the Court determined that the stipulation, under these facts, was not admissible extrinsic evidence under the Monroe Exception.

Application of the Monroe Exception in Pharr

Wasting no time, the Supreme Court analyzed whether the Monroe Exception was implicated in Pharr. In that case, the parties disputed whether an automobile-liability insurance policy required an insurer to defend and indemnify the insured against claims for damages arising from an accident involving the negligent use of a “golf cart.” [30] The policy applied only to liability that the insured had for damages caused by an accident and resulting from the use of a covered auto. [31] The insurer had refused to provide coverage, asserting that a “golf cart” was not an “auto” under the policy because a “golf cart” is not designed for travel on public roads. [32]

In evaluating the issue, the Court explained that it must first start—as outlined in Monroe, with whether the pleading states a claim that implicated the duty to defend. [33] The Court explained that it would evaluate the term “golf cart” in the context of its use within the pleading and consistent with its common, ordinary meaning. [34] In doing so, the Court ruled that a “golf cart” is not understood to be a “vehicle designed for travel on public roads,” and, as such, the insuring agreement was not met to implicate the duty to defend. [35]

The Court refused to look to extrinsic evidence. Pursuant to the Monroe Exception, the extrinsic evidence would only be admissible to fill a “gap” in the pleading that would otherwise leave the court unable to determine whether coverage applied. [36] Because the pleading asserted that the injured person was thrown from a “golf cart,” and because the Court determined that a “golf cart” is not a “vehicle designed for travel on public roads,” there was no “gap” to prevent the court from determining if the duty to defend was triggered. Continuing: “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 [the injured person] was actually thrown from something other than a ‘golf cart’ would contradict the facts alleged in [the] petition.” [37] The Court commented that if the pleading had simply referred to a “vehicle” being involved, without any indication of the type of vehicle or whether it was designed for travel on public roads, this would potentially create the “gap” referenced in the Monroe Exception.

Commentary

Pleadings that omit dates often lead to coverage disputes between insurers and insureds. In fact, in certifying the issues to the Supreme Court of Texas, the Fifth Circuit recognized that an omitted date of occurrence or omitted date of damage/injury creates a “gap” in third-party pleadings. In the past, some courts had held that, if a pleading is silent regarding when property damage occurred, an insurer must generally provide a defense unless it can establish from the pleadings that there is no potential for coverage under its policies. [38] While the Monroe Exception provides additional guidance on this issue, there undoubtedly will be continuing disputes when an insured tenders a pleading devoid of detailed factual allegations.

In both Monroe and Pharr, the Court made it very clear that introduction of any extrinsic evidence that contradicts the factual allegations is prohibited. Rather, the only time that the Monroe Exception potentially comes into play is to fill the “gap” created by vague pleadings. Moreover, the Court did not adopt a “true facts” exception, so extrinsic evidence cannot be used to contradict allegations in a pleading absent collusive fraud. In writing the opinion, the Court felt obligated to drop a footnote encouraging those that are “dissatisfied with the common-law rule” adopted by the Court “remain free to provide, by contract, for additional or different rules governing the scope of the duty to defend.” Perhaps this is a not-so-subtle nudge to the insurance bar that the Supreme Court may not be willing to explore this issue soon, given the recent blast of rulings dating back to 2020. Regardless, it remains unknown whether insurers will begin to modify the duty-to-defend language in hopes of avoiding situations where there is a question as to whether reliance on extrinsic evidence is permissible.

As we previously explained, the adoption of the “collusive fraud” exception in Avalos was not a shock, especially given the facts and circumstances of that case. The very narrow exception to the eight-corners rule carved out in that case requires conclusive proof of collusion and insurance fraud by the insured and the third-party claimant. Even with the rulings from Monroe and Avalos, what seems certain is that litigation over the extrinsic-evidence/duty-to-defend issue will not cease now that the Supreme Court has weighed in definitively on the subject. In fact, the new MonroeException leaves certain questions on the type of evidence that may be admissible. If a stipulation as to an actual fact was not something the Court was willing to evaluate in Monroe, what exactly can be considered? It is clear that the contours of the opinion will be the subject of litigation as both policyholders and insurers test the boundaries of whatextrinsic evidence is permissible and when it is permissible. This will be particularly true when it comes to “date-deprived” pleadings as the Supreme Court rejected the use of a stipulation.

Stay tuned…

Sincerely,

Lee Shidlofsky
Member

Douglas P. Skelley
Member

Rebecca DiMasi
Member

Blake Crawford
Senior Counsel

[1] No. 21-0232, --- S.W.3d ---, 2022 WL __ (Tex. Feb. 11, 2022).

[2] No. 20-0033, --- S.W.3d ---, 2022 WL __ (Tex. Feb. 11, 2022).

[3] Monroe at pp. 1–2.

[4] Id. at p. 3.

[5] Id.

[6] Id. at p. 4.

[7] Id.

[8] Id. at p. 5.

[9] Id. at pp. 5–6.

[10] Id. at p. 12.

[11] Id.

[12] Id.

[13] 363 F.3d 523, 531 (5th Cir. 2004).

[14] Monroe, p. 12.

[15] 363 F.3d at 531 (emphasis in original).

[16] Monroe, p. 12 (quoting Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 142 (Tex. 1997)).

[17] Id. at 12–13 (citing Richards v. State Farm Lloyds, 597 S.W.3d 492, 499–500 (Tex. 2020); Ooida Risk Retention Grp., Inc. v. Williams, 579 F.3d 469, 475–76 (5th Cir. 2009)).

[18] Id. at 13.

[19] Id. (citing Northfield, 363 F.3d at 530).

[20] Id. (citing Northfield, 363 F.3d at 530).

[21] Id. at 14.

[22] Id.

[23] Id. at 15 (citing Loya Ins. Co. v. Avalos, 610 S.W.3d 878, 879 (Tex. 2020); Heyden Newport Chem. Corp. v. S. Gen. Ins. Co., 387 S.W.2d 22, 24 (Tex. 1965)).

[24] Id. at 15–16.

[25] Id. at 16.

[26] Id.

[27] Id.

[28] Id. at 16–17 (emphasis in original).

[29] Id. at 17.

[30] Pharr–San Juan–Alamo Indep. Sch. Dist. v. Tex. Pol. Subdivisions Prop./Cas. Joint Self Ins. Fund, No. 20-0033, --- S.W.3d ---, 2022 WL __ (Tex. Feb. 11, 2022), at p. 1.

[31] Id. at p. 2.

[32] Id. at p. 3.

[33] Id. at p. 13.

[34] Id.

[35] Id. at 19–20.

[36] Id. at 20.

[37] Id. at 20–21.

[38] See, e.g., Allstate County Mut. Ins. Co. v. Wootton, 494 S.W.3d 825, 832 (Tex. App.—Houston [14th Dist.] 2016, pet. denied) (rejecting insurer’s argument to introduce extrinsic evidence to establish facts omitted from the pleading); GEICO Gen. Ins. Co. v. Austin Power Inc., 357 S.W.3d 821, 825 (Tex. App.—Houston [14th Dist.] 2012, pet. denied) (finding duty to defend existed based on omission of dates of injury because of the possibility that the damage could have occurred during the policy period); Gehan Homes, Ltd. v. Employers Mut. Cas. Co., 146 S.W.3d 833, 845–46 (Tex. App.—Dallas 2004, pet. denied) (court of appeals liberally construed pleadings in favor of coverage and concluded that the insurers had failed to establish as a matter of law that there was no possibility of potential damage during the insurers’ policy periods; thus, insurers had a duty to defend); Summit Custom Homes, Inc. v. Great American Lloyds Ins. Co., 202 S.W.3d 823, 828 (Tex. App.—Dallas 2006, pet. withdrawn), abrogated on other grounds, Don's Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20 (Tex. 2008) (noting that the insurer failed to establish as a matter of law that the damages did not manifest between 1996 and 2000, and holding that the insurer had a duty to defend the lawsuit).