Extrinsic Evidence and the Duty to Defend

The insurer’s duty to defend its insured is broad and is generally triggered whenever a complaint against an insured potentially implicates coverage under the policy. Jurisdictions vary as to how they approach the duty to defend. While some states have allowed the insurer and insured to reference prior knowledge and extrinsic facts to determine if the insurer’s duty is triggered, other states have restricted the inquiry to the allegations contained in the underlying complaint.

A recent decision from the Fifth Circuit Court of Appeals further defined the court’s approach to identifying when an insurer’s duty to defend is triggered, and follows a recent trend to allow the use of extrinsic evidence in limited circumstances to determine the insurer’s defense obligations. In Star-Tex Resources, LLC v. Granite State Ins. Co., 2014 U.S. App. LEXIS 365, the court softened Texas’ strict application of the “eight corners” rule and held that where the pleadings contain insufficient information to determine if coverage exists, courts may look to evidence beyond the pleadings to determine if an insurer has a duty to defend.

Texas has utilized an “eight corners” rule in determining whether an insurer’s duty to defend is triggered, looking only at the terms contained within the “four corners” of the insurance policy and the allegations contained within the “four corners” of the complaint to determine if there is a potential for coverage and thus a duty to defend. “Facts outside the pleadings, even those easily ascertained, are ordinarily not material to the determination and allegations against the insured are liberally construed in favor of coverage.” GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305 (Tex. 2005). The Texas Supreme Court held that “where the complaint does not state facts sufficient to clearly bring the case within or without coverage… the general rule is that the insurer is obligated to defend if there is, potentially, a case under the complaint within the coverage of the policy.” Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487 (Tex. 2008). Texas courts have generally applied this rule strictly and the state’s highest court has refused to adopt an exception to its eight-corners rule. But the court seemingly left the door open for an exception under the right circumstances by referencing an exception recognized in other states.

The Fifth Circuit capitalized on the loose references from the Texas Supreme Court and decided that Texas law supported a limited exception to the eight-corners rule and that the facts in Star-Tex were ripe for applying that exception. The court recognized the general rule in Texas, and despite direction from the Texas Supreme Court to “resolve all doubts regarding the duty to defend in favor of the duty… and to construe pleadings liberally,” the Fifth Circuit departed from this directive, finding that in this case the factual allegations in the pleadings were so limited that it could not determine if the claim would be covered.

According to the court, the pleadings triggered a potential exclusion in the policy but contained no further details and lacked crucial facts relating to causation. The court reasoned that the circumstances favored application of the narrow exception previously referenced by the Texas Supreme Court, though never adopted. The exception permits the use of extrinsic evidence but “only 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.” Within these limited parameters, the court added some flexibility to the rule and rounded out the facts, enabling it to better analyze the policy exclusion at issue and ultimately relieve the insurer of its duty to defend.

While courts appear to be favoring certain reasonable exceptions, those exceptions remain limited and some courts are working to prevent the complete erosion of the eight-corners rule. In Bresee Homes v. Farmers Ins. Exchange, 293 P.3d 1036 (Ore. 2012), the Oregon Supreme Court refused to acknowledge an exception to its eight-corners rule on the basis of ambiguity in the complaint and stated that the analysis should focus solely on the “policy and the underlying complaint” with “any ambiguity concerning potential coverage [being] resolved in favor of the insured.”

As courts continue to refine their analyses regarding extrinsic evidence and an insurer’s duty to defend, insurers should understand the limited exceptions that may be available for otherwise strictly applied rules. While many jurisdictions continue to look primarily at the pleadings, the recognized exceptions can be beneficial to defining the parties’ obligations, particularly as courts become more receptive to reasonably tailored exceptions.