As I mentioned in the introduction, the Texas Supreme Court’s decision in Monroe Guaranty Insurance Company v. BITCO General Insurance Company is a classic not-a-top-10 case. It involves the rules for determining an insurer’s duty to defend – “eight corners” vs. extrinsic evidence.  Pretty much every other state in the country has a large body of case law for courts to turn to when addressing such issue.  So there is no reason whatsoever why any other courts would look to Monroe when addressing the test for determining an insurer’s duty to defend. 

Nonetheless, I included it here because Texas has a significant amount of coverage litigation, application of duty to defend rules arise with great frequency and are relevant to all manner of liability policies and, most importantly, the duty to defend issue in Texas has long wanted for high court clarification.  The debate whether Texas law allows for the consideration of extrinsic evidence, for determining an insurer’s duty to defend, has been raging in Texas for a long time.  And not just between lawyers.  Courts too.  For Texas lawyers, clarification was desperately needed.  To demonstrate this, in less than a year, Monroe has already had a significant impact on numerous Texas coverage decisions.    

When Monroe was handed down, I didn’t address the case myself in Coverage Opinions.  Instead, I turned to the lawyers from Shidlofsky Law Firm, in Austin, and published its lengthy and detailed blog post discussing it.  I have long maintained that Shidlofsky Law Firm is the premier policyholder-side firm in Texas.  And they had been living with this issue for years.  Why would I try to write my own summary?

After deciding to include Monroe in the 2022 list of ten most significant coverage decisions, I went back to the firm and asked Lee Shidlofsky and Doug Skelley to prepare another summary of the decision.  What follows is Lee and Doug’s brief summary of Monroe.  For a much fuller discussion of the case, you can check out the firm’s original blog post.  Then, following the summary, they discuss the impact that Monroe has already had in just the ten months since it was decided.  
 

Find The Gap: Texas High Court Addresses Extrinsic Evidence And An Insurer’s Duty To Defend

Lee Shidlofsky and Doug Skelley
Shidlofsky Law Firm
Austin, Texas

The debate in Texas on whether it is a “true” “eight corners” state—i.e., one that limits insurers, insureds, and courts alike to the allegations within a pleading to determine an insurer’s duty to defend—has been a long and winding road. It has seen waypoints in state appellate courts, federal district courts, the U.S. Court of Appeals for the Fifth Circuit, and, of course, the Supreme Court of Texas. On that journey, there have been guesses and prognostications, and there has even been recognition by the Supreme Court of Texas itself of exceptions to the “eight corners” rule.

Recently, Texas’s high court has been faced with cases in which the existence of an exception—or not—has been crucial to any ultimate determination of the duty to defend. Ultimately, on February 11, 2022, the court answered the question squarely in Monroe Guaranty Insurance Co. v. BITCO General Insurance Co., adopting the so-called “Monroe Exception” to the longstanding “eight corners” rule. Therein, the Court agreed that, while the “eight corners” rule remains the “go to” test for determining the duty to defend, when a pleading leaves a “gap” making it impossible to determine whether a duty to defend exists, extrinsic evidence can be utilized if the 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.

While the excitement of finally having an answer was palpable in Texas, application of the exception itself has been quiet yet still important. In Monroe, the court ruled that the extrinsic evidence before it—a stipulation between insurers as to the timing of a key event—overlapped with the merits of liability and, therefore, did not pass the new test. And, on the same day, the same court also found extrinsic evidence inadmissible in Pharr-San Juan-Alamo Independent School District v. Texas Political Subdivisions Property/Casualty Joint Self Insurance Fund because there was no “gap” in the pleadings to be filled by extrinsic evidence.

Since February 2022, fifteen other Texas decisions cited to Monroe. One was not an insurance case at all. Of the remaining fourteen decisions, five courts allowed the consideration of extrinsic evidence (one without objection by the parties), and the remainder noted that there was not extrinsic evidence at issue, or the extrinsic evidence did not meet the strict standards of Monroe.

For those courts that determined that the strict standards were not met, the reasoning generally was that no “gap” existed in the pleadings that needed to be filled by extrinsic evidence. That decision was reached by federal district courts in Everest National Insurance Co. v. Megasand Enterprises, Inc., Allied Property & Casualty Insurance Co. v. Armadillo Distribution Enterprises, Inc., and Certain Underwriters at Lloyd’s, London v. Keystone Development, LLC. A single court ruled that the evidence at issue conflicted with the merits of the underlying liability lawsuit in Knife River Corp.-South v. Zurich American Insurance Co.

In the four that addressed extrinsic evidence substantively and allowed the evidence to be considered, one did so in the context of a claims-made policy and in determination of whether a claim was “first made” during the policy (Drawbridge Energy US Ventures, LLC v. Federal Insurance Co.), one did so to determine whether a party was an insured (Benites v. Western World Insurance Co.), one did so for purposes of determining the identification of a truck at issue (Progressive Commercial Casualty Insurance Co. v. Xpress Transport Logistics, LLC), and one did so in order to establish whether the accident at issue occurred in the “coverage territory” of the policy (National Liability & Fire Insurance Co. v. Turimex, LLC).

Interestingly, in Monroe, the Supreme Court of Texas eschewed any notion that the consideration of extrinsic evidence should be limited to “fundamental” issues of coverage like insured status or whether the property at issue was insured. Yet, in practice, at least so far, that is exactly the types of cases in which extrinsic evidence actually has been allowed. Only time will tell whether that will continue to be the case, but one thing remains certain—the duty to defend is governed in most cases by the “eight corners” rule in Texas.