In or Out? Courts Continue to Struggle with the Issue of Extrinsic Evidence

The issue of whether, and when, extrinsic evidence may be used to determine a duty to defend has never been clearly defined under Texas law. While a number of courts have recognized an exception, the exact parameters of the exception have been the subject of continuing debate. The Texas Supreme Court has not squarely addressed the issue. Recently, however, the Fifth Circuit made an Erie guess and staked out a position–on both sides of the issue.

In March 2004, the Fifth Circuit addressed the use of extrinsic evidence in Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523 (5th Cir. 2004). The court noted that Texas follows a complaint allegation rule, and a duty to defend is typically determined by a comparison of the pleadings and the policy. The court also noted, however, that a number of cases–in both the state and federal systems–had recognized an exception. Relying heavily on an opinion from the Eastern District, Westport Ins. Group v. Atchley, Russell, Waldrop & Hlavinka, L.L.P., 267 F.Supp.2d 601 (E.D. Tex. 2003), the court rejected or distinguished this line of cases and predicted that the Texas Supreme Court would adopt an absolute complaint allegation rule, and would not recognize any exception.

The facts of the case made this ruling even more unusual. The underlying lawsuit arose from the death of an infant, caused after a caretaker shook and dropped the child, causing her death. The caretaker was indicted and convicted of felony injury to a child. The policy provided both general and professional liability coverage. However, the general liability coverage was limited to “occurrences,” typically construed as requiring an accident, and the professional liability coverage included exclusions for damages arising out of criminal or malicious acts, or physical or sexual abuse. The pleadings in the underlying case alleged negligence, with no mention of the criminal conviction.

The court noted its own previous reliance on the Wade coverage exception: Allowing extrinsic evidence when pleadings are silent on a fact affecting coverage. In Western Heritage Ins. Co. v. River Entertainment, 998 F.2d 311 (5th Cir. 1993) (relying on State Farm Fire & Casualty v. Wade, 827 S.W.2d 448 (Tex. App.–Corpus Christi 1992, writ denied)), the court had held that it was permissible to look beyond the pleadings to determine the applicability of the liquor liability exclusion, when the plaintiff had artfully omitted any mention of alcohol from its allegations. Similarly, in John Deere Ins. Co. v. Truckin’ USA, 122 F.3d 270 (5th Cir. 1997), the court allowed extrinsic evidence to determine whether a truck was a “covered auto.”

While the court found that its determination of a duty to defend was not inconsistent with these prior cases, it also opined that the Wade exception had never been followed by Texas courts and should be rejected.

The court then recognized, however, that if the Texas Supreme Court were to recognize any exception, it would be limited to situations where the pleadings were silent as to a fundamental coverage issue. The court appeared to view a fundamental coverage issue as one involving whether a party is an insured or whether a vehicle is covered, and not one of whether an exclusion would apply. It nevertheless recognized that the earlier Western Heritage opinion, which does rely on an exclusion, would fall within this exception.

The Loving Home Care opinion represented a fairly drastic change in the approach of the federal courts to coverage issues involving extrinsic evidence. In retrospect, however, the change may not have been so significant.

A mere six months later, the Fifth Circuit issued an opinion in Primrose Operating Co. v. Nat’l American Ins. Co., 382 F.3d 546 (5th Cir. 2004). Although the case was presented to a different panel, the opinions are actually authored by the same judge. In the Primrose opinion, the court recognized that Texas employs a complaint allegation rule and then noted:

“The duty to defend analysis is not influenced by facts ascertained before the suit, developed in the process of litigation, or by the ultimate outcome of the suit … Fact finders, however, may look to extrinsic evidence if the petition ‘does not contain sufficient facts to enable the court to determine if coverage exists.'”

The court then cited the Western Heritage opinion in support of this principle. On the facts, the court found that there was not sufficient information in the pleadings, or based upon extrinsic evidence, to determine that a pollution exclusion applied to preclude coverage. Therefore, it found a duty to defend.

If the Primrose opinion is any indication, it appears that the alternative ruling from the Loving Home Care case may in fact be the present law, at least in the Fifth Circuit.

In the Texas courts, things are no less muddled. The Texas Supreme Court has recognized a fairly strict interpretation of the complaint allegation rule. See, e.g., National Union Fire Ins. Co. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139 (Tex. 1997); Farmers Texas County Mut. v. Griffin, 955 S.W.2d 81 (Tex. 1997). In those cases, however, it was not specifically addressing the extrinsic evidence exception, which has never been overruled.

Extrinsic evidence is also at issue in a petition for review from the Fort Worth Court of Appeals in Fielder Rd. Baptist Church v. GuideOne Elite Ins. Co., 139 S.W.3d 184 (Tex. App.–Fort Worth 2003, pet. filed). Moreover, in a recent opinion, Allstate Ins. Co. v. Hallman, No. 03-0957 (Tex., Mar. 11, 2005), the court recognized that a profit motive could be implied from the insured’s mining activities, despite any specific allegation of a business pursuit.

It is worth considering that a strict “eight corners” rule can eliminate, as well as provide, coverage. In fact, a number of the recent opinions refusing to consider extrinsic evidence resulted in findings in favor of the insurers, who had no duty to defend absent consideration of facts not specifically alleged. Because coverage issues and liability issues are not parallel, there will always be cases in which the pleadings will not address relevant coverage facts and should not be entirely determinative.

While the parameters are not clear, it appears there is still support for an extrinsic evidence exception, especially as to “fundamental coverage issues.”

Beth D. Bradley is a partner in the Dallas office of Thompson, Coe, Cousins & Irons L.L.P. She is a member of the Insurance Litigation and Coverage Section and leads the firm’s coverage practice. She has represented agents in disputes with policyholders and insurers and routinely represents insurers in evaluating and litigating coverage issues under general and professional liability policies, commercial auto and trucking policies, commercial property policies and homeowners policies.