Texas Supreme Court Recognizes and Expands “Northfield Exception” to Eight-Corners Rule
This morning the Texas Supreme Court issued a significant decision recognizing additional instances where an insurer may consider extrinsic evidence in assessing its duty to defend. Texas courts have long followed the eight-corners rule when assessing an insurer’s defense obligations. Under this rule, an insurer’s duty to defend is determined by the pleadings and the policy. However, several Texas appellate courts and the Fifth Circuit recognized an exception to this rule, which permitted insurers to consider extrinsic evidence that goes solely to a fundamental issue of coverage and does not overlap with the facts alleged in the underlying case. This exception is commonly referred to as the Northfield Exception, after the Fifth Circuit’s decision in Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523 (5th Cir. 2004).
In Monroe Guaranty Insurance Co. v. BITCO General Insurance Company, the Texas Supreme Court adopted and modified the Northfield Exception, holding that an insurer may consider extrinsic evidence when: (1) it relates solely to the issue of coverage and does not overlap with the merits of liability, (2) it does not contradict facts alleged in the pleading, and (3) it conclusively establishes the coverage fact to be proved. The Court’s decision expanded the Northfield Exception by making clear the consideration of extrinsic evidence is not limited to evidence concerning a “fundamental issue of coverage.” The Court explained that considering extrinsic evidence was permissible because ignoring “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.”
The Monroe Case
The suit at issue concerned a dispute where one insurer (BITCO) sought payment from another insurer (Monroe) for litigation costs BITCO incurred defending a mutual insured, 5D Drilling & Pump Services. 5D had been sued by a landowner for damages purportedly resulting from 5D’s irrigation drilling operations on the landowner’s property. Monroe denied 5D’s request for defense, determining it owed no defense because the damage alleged against 5D did not occur within its policy period. While the petition filed against 5D was silent as to when alleged damage occurred, Monroe claimed that because its policy provided that Monroe would have no duty to defend against suits “to which this insurance does not apply,” Monroe could look to extrinsic evidence in making its determination.
BITCO subsequently sued Monroe in federal court, seeking a declaration that Monroe owed a duty to defend the insured. Both parties stipulated that the damage at issue first occurred during BITCO’s policy period and before Monroe’s period began. Nevertheless, BITCO argued, and the district court agreed, that the stipulation could not be considered in assessing Monroe’s defense obligation. The district court applied a strict eight-corners analysis and ultimately granted summary judgment in BITCO’s favor, finding the possibility existed that the alleged damage could have occurred during either insurers’ respective policy period. Monroe appealed this ruling to the Fifth Circuit, which subsequently certified questions to the Texas Supreme Court on the issue.
The Texas Supreme Court’s Holding
In its decision, the Texas Supreme Court first reiterated the eight-corners rule, acknowledging 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.” While the eight-corners rule remains the primary initial inquiry, the Court held that if the pleading is silent on a coverage-determinative fact, extrinsic evidence may be considered if (1) it does not overlap with the merits of underlying, (2) it does not contradict facts plead, and (3) it conclusively establishes the necessary coverage fact. With respect to the “conclusiveness” requirement, the Court noted that the coverage fact need not be the subject of a stipulation but must be one where no genuine issue of fact exists.
The Court ultimately held Monroe could not rely on the parties’ stipulation on when property damage occurred because this fact overlapped with the merits of the underlying suit against 5D. According to the Court, “[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.”
Potential Implications of the Monroe Decision
The Monroe decision marks the second time the Texas Supreme Court has recognized exceptions to the long-standing eight-corners rule. This past year, the court recognized that extrinsic evidence could be considered where “the insured and a third party suing the insured colluded to make false representations of fact in that suit for the purpose of securing a defense and coverage where they would not otherwise exist.” Loya Ins. Co. v. Avalos, 610 S.W.3d 878, 884 (Tex. 2020). While the Court’s “collusion” exception appears to have somewhat of a limited application, the exception the Court articulated in Monroe is potentially much broader and could have significant ramifications. Under prior precedent, strategic omissions in an underlying pleading often precluded an insurer from either denying a defense or seeking declarations of no coverage in a declaratory judgment action, even in situations where undisputed facts made clear no coverage existed. In light of Monroe, these strategic omissions may provide an insurer with an avenue to further investigate its defense obligation through requests for information or an examination under oath, or through a declaratory judgment action.