Sentry Insurance v. DFW Alliance Corp., 2007 U.S. Dist. LEXIS 15645 (N.D. Tex. March 6, 2007)
Posted by David S. White
The Texas Supreme Court’s holding in GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305, 308, (Tex. 2006), that a liability insurer’s duty to defend must be determined strictly under the “complaint allegation” or “eight-corners” rule, was generally greeted by policyholders as a victory and by insurers as a defeat. However, the recent DFW Alliance Corp. case shows that the rule can just as easily work against finding coverage. The “complaint allegation” rule provides that an insurer’s duty to defend the policyholder defendant in a lawsuit must be determined strictly from the terms of the insurance policy and the allegations in the complaint. A court should not consider evidence outside the eight corners of those two documents, even if the allegations are inaccurate, groundless, or frivolous.
In GuideOne Elite, for example, a church youth minister was accused of sexually abusing the plaintiff at the church from 1992 to 1994. The church’s insurance policy, which covered the alleged abuse, was issued effective March 1993 to March 1994, so the insurer appeared to owe a defense. In fact, however, the youth minister ceased employment with the church in December 1992. The insurer sought to introduce evidence of this fact to prove that the alleged conduct occurred before the policy period which meant it had no duty to defend the lawsuit. The courts, including the Texas High Court, said no. Extrinsic evidence not alleged within the four corners of the complaint was not admissible to determine the insurer’s duty to defend.
The DFW Alliance Corp. case shows that the complaint-allegation rule can just as easily work against the policyholder. The underlying plaintiff in that case sued DFW Alliance for copyright infringement and alleged that the company began infringing at least two years before the policy period. The insurer denied coverage on several bases, including what is called the fortuity or “known loss” doctrine, which prohibits someone from, say, running out the day after his house burns down and buying fire insurance. If the insured is aware when he buys the insurance that the loss already exists or is in progress, the coverage is void as a matter of public policy.
The court in DFW Alliance held that the complaint alleged that the insured was engaged in the infringing conduct before the policy was issued and granted summary judgment for the insurance company. The policyholder tried to argue that it could produce evidence showing that it in fact had not engaged in the infringing conduct before the policy period. However, relying on the cases cited above, the court held that extrinsic evidence was not admissible. The court could only consider the pleading and the policy.
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