The End of Extrinsic Evidence’

For years, a debate has existed as to whether, and under what circumstances, an insurer or insured can introduce evidence outside of the policy and pleadings (the “eight corners”) to seek a determination of the duty to defend.

Various Texas cases have suggested that, although a duty to defend is typically determined by the complaint allegation rule, there are some situations in which extrinsic evidence may be admissible. Typically, these relate to a determination of whether the party seeking coverage qualifies as an insured, or whether the vehicle or instrument in question (e.g., car or boat) is covered under the policy. In addition, courts have recognized an exception where the extrinsic facts do not controvert the pleadings; rather, the pleadings are simply silent as to the critical facts that will determine coverage.

Notably, the development of the law has been only among the courts of appeal, with no input from the Texas Supreme Court. In several recent opinions, the Texas Supreme Court did affirm that Texas is a complaint allegation state, but did not squarely deal with the issue of extrinsic evidence.

In the federal courts, however, there has been a long tradition of allowing extrinsic evidence when the circumstances permit. If anything, the analysis of the federal courts has been more lenient as to when extrinsic evidence is admissible. See, e.g., John Deere Ins. Co. v. Truckin’ U.S.A., 122 F.3d 270 (5th Cir. 1997); McLaren v. Imperial Cas. & Indem. Co., 767 F. Supp. 1364, 1374 (N.D. Tex. 1991), aff’d, 968 F.2d 17 (5th Cir. 1992).

Perhaps the most persuasive example was Western Heritage Ins. Co. v. River Entertainment, 998 F.2d 311, 313 (5th Cir. 1993). In River Entertainment, an accident happened after a patron was allowed to leave an establishment while he was intoxicated. The claimant sought to invoke coverage, while avoiding the implications of a liquor liability exclusion. In the amended pleadings, the facts simply alleged that the insured establishment was negligent for allowing the patron to leave the facility, without any explanation of why this conduct was negligent, or how it caused the accident.

The district court found, and the Fifth Circuit agreed, that extrinsic evidence was admissible, because the facts were simply omitted from the relevant pleadings. Moreover, the court was troubled by the fact that a party might be able to omit critical facts and thus “plead into” coverage.

A Fifth District reversal
Despite its prior precedent, and the opinions of the courts of appeal in Texas, the Fifth Circuit recently reversed itself, making an “Erie” guess as to what the Texas Supreme Court would say, and severely restricting, if not eliminating, the use of extrinsic evidence in regard to a duty to defend.

The Fifth Circuit issued an opinion in Northfield Ins. Co. v. Loving Home Care Inc., in March. Northfield Ins. Co. v. Loving Home Care Inc., 363 F.3d 523 (5th Cir. 2004). At issue was an underlying negligence suit, arising from a fatal injury to an infant, for whom the insured, Loving Home Care, provided in-home childcare. The Harris County coroner ruled the death a homicide, noting injuries to the skull and brain, and listed the cause of death as cranial-cerebral injuries due to blunt force trauma of the head. Moreover, the childcare provider was found guilty of first degree felony injury to a child and sentenced to seven years in prison.

The liability suit, however, was framed in terms of “negligence.” Plaintiffs alleged that the childcare provider negligently dropped the infant, or negligently shook her, causing severe head injuries that resulted in her death. In the alternative, plaintiffs alleged defendant was reckless or criminally negligent.

Loving Home Care was covered by a policy that provided both commercial general liability and professional liability coverage. The insurer, Northfield, provided a defense under reservation of rights, but filed a declaratory judgment action, seeking a determination that it had no duty of defense or indemnity under the general liability part of the policy, because the injuries arose out of professional services, and that it had no duty under the professional liability part because of exclusions relating to criminal acts and physical/sexual abuse.

The district court ultimately agreed that the professional liability exclusion applied, under the general liability portion, but found that the exclusions for criminal acts and physical abuse did not preclude a duty to defend under the professional liability portion.

On appeal, the Fifth Circuit extensively reviewed Texas state and federal opinions, analyzing the duty to defend and the use of extrinsic evidence. It noted, in particular, the several recent opinions from the Texas Supreme Court, emphasizing that the complaint allegation rule is dependent solely upon the policy and the live petition. E.g., King v. Dallas Fire Ins. Co., 85 S.W.3d 185 (Tex. 2002); National Union Fire Ins. Co. v. Merchants Fast Motor Lines, 939 S.W.2d 139 (Tex. 1997); Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819 (Tex. 1997).

The court noted, “The Texas Supreme Court has never recognized any exception to the strict eight corners rule that would allow courts to examine extrinsic evidence when determining an insurer’s duty to defend.” Of course, it also implicitly recognized that the Texas Supreme Court never squarely addressed the issue, as this is what required its Erie guess.

Ultimately, the Fifth Circuit concluded the Texas Supreme Court would not recognize any exception to the strict eight corners rule. “That is, if the four corners of the petition allege facts stating a cause of action which potentially falls within the four corners of the policy’s scope of coverage, resolving all doubts in favor of the insured, the insurer has a duty to defend. If all the facts alleged in the underlying petition fall outside the scope of coverage, then there is no duty to defend.”

In what is almost an alternative holding, however, the court continued “However, in the unlikely situation that the Texas Supreme Court were to recognize an exception to the strict eight corners rule, we conclude any exception would only apply in very limited circumstances: 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.” The court then noted that the alternative position was not at odds with the Fifth Circuit’s own previous decisions, including Western Heritage.

On the case before it, the court found that the fact that the care provider had been convicted, and the autopsy established that the injuries were the result of physical abuse, were extrinsic facts, that were in conflict with the allegations of negligence in the petition. Accordingly, the court found a duty to defend existed. The court also found that any determination of indemnity was premature. In addition, the court found that, even if its alternative ruling applied, and extrinsic evidence were allowed, it would not be allowed in this instance, as the extrinsic evidence conflicted with the allegations of negligence.

No guarantees
While the Loving Home Care opinion may offer litigants in courts a bright line test, it may not ultimately serve the interests of any of the parties. The opinion deals only with the duty to defend. Thus, while parties may be clever enough to implicate the defendant’s policy and trigger a defense, it does not guarantee an indemnity payment.

As to indemnity, the same rule should not apply, and extrinsic evidence should be fair game. It is also questionable whether encouraging pleadings that omit, shade or simply misrepresent critical facts is a beneficial advance for the judicial system. Unfor-tunately, the defense lawyer’s hands will also be tied, since there is the risk of a charge of conflict of interest, as the defense attorney seeks to clarify the pleadings and, in doing so, defeats coverage for the insured.

As a practical matter, the court’s opinion, by ignoring even the exception recognized by Texas courts of appeal (allowing extrinsic evidence when a pleading is silent as to determinative facts), ignores the realities of litigation. Frequently, the fact that is critical to coverage is irrelevant to a liability case, and will never be pleaded. Examples abound: whether the conduct is related to a business pursuit; whether the defendant owns the car; whether the building was occupied by the insureds. In addition, the court’s broad statements of the law fail to recognize that some determinations—such as whether a defendant even qualifies as an insured, should be made before application of the complaint allegation rule, and will often depend on extrinsic evidence.

By ignoring the use of extrinsic evidence, when the pleadings are silent, the court expands the insurer’s contractual obligations, and provides a benefit to the insured for which it did not bargain. More-over, because the same rules do not apply to indemnity, the prohibition against extrinsic evidence may simply delay the inevitable: the parties will litigate the liability case, and then litigate coverage. And, because the Supreme Court has not yet squarely addressed recovery of defense costs, the insurer may then have a claim against the insured for the monies spent defending the non-covered claims. In sum, while the opinion may initially be viewed as beneficial to insureds, it will likely ultimately be viewed as short-sighted and impractical.

Topics Texas