Texas Supreme Court Recognizes Northfield-like Exception to Eight Corners Rule

Almost 20 years ago I stood before a panel of the U.S. Fifth Circuit Court of Appeals, arguing for an exception to what is commonly referred to among Texas insurance practitioners as the “eight-corners” rule. The eight-corners rule provides that in determining whether an insurer has a duty to defend its insured, courts are limited to considering only the factual allegations within the four corners of the plaintiff’s pleading and the terms of the insurance policy. If the allegations in the pleading, taken as true, potentially support a claim covered by the policy, the insurer has a duty to defend its insured.

In Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523 (5th Cir. 2004), I argued to the Fifth Circuit that Texas law should permit courts to consider extrinsic evidence in determining the duty to defend under certain circumstances. The Fifth Circuit subsequently issued an opinion, offering its “Erie guess” that the Texas Supreme Court would not recognize an exception to the eight-corners rule. In doing so, however, the Court opined that if Texas’ highest court were to recognize such an exception, it would apply 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.” Northfield, 363 F.3d at 531. In Texas insurance jurisprudence, this has come to be known as the “Northfield exception” to the eight-corners rule.

Despite the Fifth Circuit’s adherence to a strict eight-corners approach, some courts in Texas began applying the Northfield exception, whereas others declined to do so. This division among the courts prompted the Fifth Circuit to certify to Texas’ highest court the question of whether the Northfield exception is permissible under Texas law.

Today the Supreme Court answered that question in the affirmative, adopting a Northfield-like exception to the “eight corners” rule. See Monroe Guaranty Ins. Co. v. BITCO General Ins. Corp., No. 21-0232 (Tex. Feb. 11, 2022). In Monroe Guaranty, although the Court made clear that it was not abandoning the eight-corners rule, the Court went on to state:

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.

Op. at 15.

While the Court’s new rule looks very similar to the Northfield exception, it is actually more beneficial to insurers in that the extrinsic evidence need not relate to a “fundamental” issue of coverage. The evidence can relate to other facts bearing upon coverage, such as the date on which property damage occurs. This aspect of the Court’s decision will therefore have a significant impact in construction defect cases. The Court also made clear that the coverage fact at issue need not be the subject of a stipulation and can be established by other forms of proof. But the evidence must conclusively establish the fact.

The Texas Supreme Court’s holding today in Monroe Guaranty is a big win for the insurance industry. While it took almost 20 years for the Texas Supreme Court to finally address whether the Northfield exception constituted Texas law, Texas insurers will no doubt find that the Court’s decision was well worth the wait.

Alex Beard has 30 years of experience representing individuals and businesses, with a practice focusing on liability insurance coverage, property damage insurance, and civil appeals. He has extensive experience with liability insurance claims and enjoys analyzing coverage issues under numerous types of insurance, including commercial general liability, commercial auto, and life. He has handled over 100 appeals and original proceedings throughout Texas’ 14 intermediate appellate courts, the Texas Supreme Court, and U.S. Fifth Circuit Court of Appeals.