Many people think of insurance for covering something you own when it is damaged, such as your home or auto. Or, people thing if health insurance and life insurance. But there is another type of insurance that is important to all of us. That is liability insurance. This is the insurance that is suppose to protect you when someone sues you for something they allege you did wrong.
Under Texas law, the duty to defend depends on the language of the policy setting out the contractual agreement between insurer and insured. Whether an insurer has a duty to defend its insured is a question of law. An insurer must defend its insured if a plaintiff ’s factual allegations potentially support a covered claim, while the facts actually established in the underlying suit determine whether the insurer must indemnify its insured. Thus, an insurer may have a duty to defend but, eventually, no obligation to indemnify. The initial burden is placed on the insured to demonstrate that coverage exists considering only the policies and the underlying lawsuit papers. The burden then shifts to the carrier to establish that one or more of the policy exclusions apply to negate any otherwise-applicable duty to defend. Courts consider the factual allegations without regard to their truth or falsity, and resolve all doubts regarding the duty to defend in favor of the insured. Further, in making the determination, courts look to the factual allegations showing the origin of the damages claimed, not the legal theories or conclusions alleged. If the petition asserts one claim that could potentially be covered by the insurance policy, the insurer must defend the entire suit. The duty to defend is a sprawling topic on which Texas law and the Restatement of Insurance agree on many issues. For example, it is well settled that an insurer’s right to conduct the defense includes the authority to select the attorney who will defend the claim and to make other decisions that would normally be vested in the insured as the named party in the case. Likewise, the Restatement outlines the scope of an insurer’s right to control the defense as follows:
§ 10. Scope of the Right to Defend
When a liability insurance policy grants the insurer the right to defend a legal action, that right includes, unless otherwise stated in the policy or limited by applicable law:
(1) The authority to direct all the activities of the defense of any legal action that the insurer has a right to defend, including the selection and oversight of defense counsel; and
(2) The right to receive from defense counsel all information relevant to the defense or settlement of the action, subject to the exception for confidential information stated in §11(2).
Both Texas law and the Restatement also recognize that an insurer will have a duty to defend the whole suit so long as one claim is potentially covered. Under Texas law, the duty to defend obligates an insurer to defend the insured in any lawsuit that ‘alleges and seeks damages for an event potentially covered by the policy. Likewise, the Restatement provides as follows:
Section 13. Conditions Under Which the Insurer Must Defend
(1) An insurer that has issued an insurance policy that includes a duty to defend must defend any legal action brought against an insured that is based in whole or in part on any allegations that, if proved, would be covered by the policy, without regard to the merits of those allegations.
The major divergence between Texas law and the Restatement on the duty to defend is the use of extrinsic evidence to determine whether the duty is owed. In determining whether an insurer has a duty to defend a claim against its insured, Texas courts apply the eight-corners rule. Under the eight-corners rule, the duty to defend is determined by the claims alleged in the petition and the coverage provided in the policy. If a petition does not allege facts within the scope of coverage, an insurer is not legally required to defend a suit against its insured. The court may not (1) read facts into the pleadings, (2) look outside the pleadings, or (3) imagine factual scenarios which might trigger coverage. In examining the petition, courts “construe the allegations in the pleadings liberally.
In contrast, the Restatement requires a broad reliance on extrinsic evidence for finding a duty to defend, and a narrow allowance for extrinsic evidence to deny the duty:
§ 13. Conditions Under Which the Insurer Must Defend
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(2) For the purpose of determining whether an insurer must defend, the legal action is deemed to be based on:
(a) Any allegation contained in the complaint or comparable document stating the legal action; and
(b) Any additional allegation known to the insurer, not contained in the complaint or comparable document stating the legal action, that a reasonable insurer would regard as an actual or potential basis for all or part of the action.
(3) An insurer that has the duty to defend under subsections (1) and (2) must defend until its duty to defend is terminated under § 18 by declaratory judgment or otherwise, unless facts not at issue in the legal action for which coverage is sought and as to which there is no genuine dispute establish that:
(a) The defendant in the action is not an insured under the insurance policy pursuant to which the duty to defend is asserted;
(b) The vehicle or other property involved in the accident is not covered property under a liability insurance policy pursuant to which the duty to defend is asserted and the defendant is not otherwise entitled to a defense;
(c) The claim was reported late under a claims-made-and-reported policy such that the insurer’s performance is excused under the rule stated in § 35(2);
(d) The action is subject to a prior-and-pending-litigation exclusion or a related-claim exclusion in a claims-made policy;
(e) There is no duty to defend because the insurance policy has been properly cancelled; or
(f ) There is no duty to defend under a similar, narrowly defined exception to the complaint-allegation rule recognized by the courts in the applicable jurisdiction.
Despite various requests over the years to recognize exceptions to the eight-corners rule, the Supreme Court of Texas has never done so. In 2006, the Texas Supreme Court discussed the possibility of recognizing an exception to this rule, but did not ultimately adopt the exception. Since that time, the Texas Supreme Court has continued to adhere to the eight-corners rule.
In GuideOne, the Texas Supreme Court noted the Fifth Circuit’s observation that, if Texas were to recognize any exception to the eight-corners rule, it would be a limited exception for when it 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. In GuideOne, the insurance policy provided coverage for sexual misconduct occurring during the policy period. The insurer sought to introduce extrinsic evidence that the individual alleged to have engaged in the sexual misconduct left the insured’s employ before the policy’s effective date. The Texas Supreme Court held that the proffered extrinsic evidence was relevant to both coverage and the merits and, therefore, did not fall within the limited exception to the eight-corners rule. The Texas Supreme Court in GuideOne rejected the use of overlapping evidence as an exception to the eight-corners rule because it poses a significant risk of undermining the insured’s ability to defend itself in the underlying litigation.