Colony Insurance Co. v. Peachtree Construction, LTD., No. 4-08-CV-135-Y (October 14, 2009), see Peachtree Construction Decision
Texas's unusually strict adherence to the "complaint-allegation" or "8-corners" rule can be especially perilous for additional-insureds, a group typically including general contractors, commercial landlords, and oil companies, who have the clout to require subcontractors and tenants to add them as additional insureds to the subordinate's liability insurance. Additional insureds are usually covered only when the accident arises from the named insured's activities.
The 8-corners rule precludes a court from considering any evidence to resolve an insurer's duty to defend other than the 4 corners of the pleading and the 4 corners of the policy. All too often, as in this case, an injured plaintiff, often in his zeal to tag the defendant with the deepest pockets, fails to sue the named insured subcontrator or even allege that it exists. (Often the plaintiff is the subcontractor's employee and is barred by the workers' compensation laws from suing the employer).
When that happens, the subcontractor's insurer refuses to defend its additional insured because the pleading fails to allege that the injury arose out of the subcontractor's work. The insurer almost invariably wins dismissal of the insurance claim because the judge is barred from considering the abundant proof that in fact the named-insured subcontractor's work was the cause of the injury. Texas is, I believe, the only state that recognizes no exceptions to the 8-corner rule to avoid law-is-an-ass ridiculous results. I would welcome any corrections if this is not the case.
Here, Peachtree Construction was building a road and hired Cross Roads LP to install warning signs and barriers. A passing motorcyclist lost control and crashed at the site. The surviving spouse sued Peachtree alleging that the crash was the result of negligent placement of barriers and failure to post warning signs, matters squarely within Cross Road's contractual responsibilities. However, the pleading did not mention Cross Roads.
Although Peachtree was an additional insured under Cross Road's general liability policy, the insurer refused to defend for the reasons described above. In the ensuing coverage litigation, the judge refused to admit the subcontract or other evidence establishing Cross Road's role in the construction, again for reasons described above.
Compare this result with one in a similar case I discussed last year. See 8-Corners Rule Requires Close Look at Factual Allegations, Says Fifth Circuit, in which the court put on its Sherlock Holme's cap and searched the pleadings with a magnifying glass to find traces in the pleadings that potentially implicated the involvement of a subcontractor in the allegations. But the 5th Circuit had more to go on than here. At least the the subcontractor was mentioned in that case. In Peachtree, nothing was said to justify an inference supporting coverage.
So, what can an additional insured do in this situation? It might try to challenge the pleadings in the underlying case by filing "special exceptions" in Texas state court or a motion for a more definite statement under Rule 12 (e) in federal court, devices designed to force the plaintiff to replead with greater detail. Should Peachtree have pointed out to the plaintiff that Cross Roads was the subcontractor responsible for the signage and barriers, the plaintiff might have repled and at least mentioned the subcontractor.
Failing that, Peachtree might bring Cross Roads into the lawsuit as a third-party defendant, which might prompt the plaintiff to add the subcontractor as an additional defendant.
But these are cumbersome strategms that could fail. The rationale behind the 8-corner rule is sound. The insurer should have to take the pleadings as given and defend without developing extrinsic evidence early in a case to avoid coverage. But the rule arguably gives the underlying plaintiff too much control over coverage. Plaintiffs motivated to bring a deep pocket insurance company to the settlement table may plead or omit allegations just to trigger the duty to defend. On the other hand, a plaintiff seeking to deprive the defendant of a fund to pay for the defense, may falsely plead out of coverage.
It seems only fair that the parties to the insurance contract have some means of addressing obvious and egregious manipulation of the pleadings.
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