Court Finds Exceptions to Texas' Strict 8-Corner Rule

Roberts, Taylor and Sensabaugh, Inc. v. Lexington Insurance Co., H-06-2197 (S. D. Tex. Sept. 5, 2007)

Texas is probably the strictest follower in the nation of the so-called 8-corner rule that an insurer's duty to defend must be determined without reference to any extrinsic evidence beyond the 8 corners of the lawsuit complaint and the insurance policy.  The Texas Supreme Court declined to apply any exception to this rule in GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305 (Tex. 2006) where the complaint alleged that a youth minister accused of sexual improprieties was employed by the insured church during the policy period, but extrinsic facts would have shown that he was fired before the policy began.  Other cases have left policyholders without coverage even though extrinsic facts would have established a duty to defend.  (See Good for the Gander.)

However, the GuideOne Court did not absolutely close the door on possible exceptions, and the federal Fifth Circuit Court of Appeals has suggested that Texas law would allow extrinsic evidence where "[I]t 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 Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523, 531 (5th Cir. 2004).

In the recent Roberts, Taylor case, a general contractor hired a sub on a municipal project, requiring the sub to procure insurance naming the general as an additional insured for liability arising from the sub's work on project.  The sub in turn hired a sub sub, whose employee was injured and sued the general.  The lawsuit didn't allege any facts about the sub or for whom the employee was performing work at the time of the accident.  The sub's insurer admitted that the general was an additional insured under the policy but refused to defend because the lawsuit did not allege that the injured employee of the sub sub was working on a project for the sub or that the sub was working for the general.  The additional insured general naturally asked the court to recognize an exception (or two) to the strict 8-corner rule and admit evidence that the sub sub's work was within the scope of the sub's covered work.

The federal district court decided that this situation met the criteria justifying the exceptions suggested in the Loving Home case.  The pleadings were silent on the applicable subcontracts under which the sub sub's employee was working, and evidence of these subcontracts would not engage the truth or falsity of the plaintiff's allegations.  Therefore, the insurer had a duty to defend the additional insured.

However, in reaching its decision, the court ignored the insurer's argument, which appears to be a good one, that the evidence of the general's contract with the sub did in fact engage the truth or falsity of the allegations in the complaint, in the same way that the actual termination date of the youth minister affected the church's liability in the GuideOne case.  If the general had no subcontract with the sub, wouldn't that affect the general's legal liability to a sub sub's employee?  Arguably, the Roberts, Taylor decision raises more problems than it solves about how Texas courts should view possible exceptions to the 8-corner rule.