Monroe Guaranty Ins. Co. v. Bitco Gen. Ins. Corp.

• Decision Date: 11 February 2022
• Docket Number: 21-0232
• Citation: 640 S.W.3d 195
• Parties: MONROE GUARANTY INSURANCE COMPANY, a Member of the FCCI Insurance Group, Appellant, v. BITCO GENERAL INSURANCE CORPORATION, formerly known as Bituminous Casualty Corporation, Appellee
• Court: Texas Supreme Court

640 S.W.3d 195

MONROE GUARANTY INSURANCE COMPANY, a Member of the FCCI Insurance Group, Appellant,

v.BITCO GENERAL INSURANCE CORPORATION, formerly known as Bituminous Casualty Corporation, Appellee

No. 21-0232

Supreme Court of Texas.

Argued September 14, 2021

OPINION DELIVERED: February 11, 2022

Laura A. Foggan, Danica Lynn Milios, Austin, for Amicus Curiae Complex Insurance Claims Litigation Association.

Nicholas Arthur Parma, William David Farmer, for Appellee.

Wade C. Crosnoe, Austin, Jo Allison Stasney, J. Richard Harmon, Dallas, for Appellant.

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 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.

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 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?

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 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...