Houston, Texas (February 15, 2022) - For almost two decades, policyholders and insurers alike have wondered if the Fifth Circuit Court of Appeals got it right with its Erie guess in Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523 (5th Cir. 2004), holding that Texas law should permit courts to consider extrinsic evidence when determining the duty to defend. On February 11, 2022, the Texas Supreme Court determined that it agreed with this holding when it was presented with a certified question from the Fifth Circuit in Monroe Guaranty Ins. Co. v. BITCO General Ins. Corp., No. 21-0232.

The underlying matter arose from a property damage case in which the insured was sued for negligently drilling an irrigation well after it allegedly got a drilling bit stuck in a bore hole and then abandoned the well. The insured stipulated as to the date on which the bit got stuck, which was prior to the relevant policy period. The policy did not cover continuing property damage known to the insured before the policy incepted and the insurer argued the stipulation should be considered, which is normally disallowed under Texas' Eight Corners Rule.

The Texas Supreme Court held that, with some qualifications, the evidence could be considered, noting:

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.

The Texas Supreme Court deviated slightly from the Northfield rule in disregarding the limitation that the extrinsic evidence must relate to a "fundamental coverage issues." Further the evidence must be "conclusive" in establishing the fact sought to be proven. While an official adoption of a variation of the Northfield doctrine, the court ultimately declined to consider the extrinsic evidence in Monroe Guaranty, holding that a stipulation between the parties coincided with the merits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.