Declaratory Judgments

DECLARATORY JUDGMENTS

Presented and Authored By:

Lee H. Shidlofsky Visser Shidlofsky LLP 7200 N. Mopac Expressway, Suite 430 Austin, Texas 78731 (512) 795-0600 (866) 232-8709 facsimile [email protected]

12th Annual Insurance Law Institute The University of Texas School of Law October 11-12, 2007 Austin, Texas I. INTRODUCTION likewise negate any possibility the insurer will ever have a duty to indemnify.” See This paper will address the ever-increasing Farmers Tex. County Mut. Ins. Co. v. use of declaratory judgments to determine Griffin, 955 S.W.2d 81, 84 (Tex. 1997). insurance coverage and, in particular, the Thus, if and only if the court declares that issues of who is a proper party to a there is no duty to defend, the court may declaratory judgment action and the proper also rule (prior to resolution of the scope of a court’s inquiry. underlying litigation) that no duty to indemnify exists. See Foust v. Ranger Ins. II. PROPER PARTIES TO Co., 975 S.W.2d 329, 332 n.1 (Tex. App.— DECLARATORY JUDGMENT San Antonio 1998, writ denied) (noting that ACTIONS the duty to indemnify is not justiciable prior to resolution of the underlying litigation A declaratory judgment is a judicial where the insurer’s duty to defend is determination of the rights of respective triggered). If a court rules that a duty to parties, as opposed to coercive relief or defend exists, however, it must await the damages. The purpose of declaratory resolution of the underlying lawsuit before judgments is to settle and afford relief from ruling on the duty to indemnify. See uncertainty and insecurity with respect to Northfield Ins. Co. v. Loving Home Care, rights, status, and other legal relations. Inc., 363 F.3d 523, 537 (5th Cir. 2004); Mt. Declaratory judgments can be brought in Hawley Ins. Co. v. Steve Roberts Custom federal court pursuant to 28 U.S.C. § 2201 Builders, Inc., 215 F. Supp. 2d 783, 793 or in state court under Chapter 37 of the (E.D. Tex. 2002); Gehan Homes, Ltd. v. Civil Practice and Remedies Code. Employers Mut. Cas. Co., 146 S.W.3d 833, 846 (Tex. App.—Dallas 2004, pet. filed). Declaratory judgments play a big role in determining the duty to defend in that Both Texas and federal courts have held that insurers frequently initiate declaratory a lawsuit filed against an insured creates a judgments to resolve duty to defend justiciable controversy so as to afford disputes. Because the duty to defend is a jurisdiction. See Griffin, 955 S.W.2d at 82; question of law, declaratory judgments are American States Ins. Co. v. Bailey, 133 F.3d typically disposed of by summary judgment. 363, 368 (5th Cir. 1998). Some differences between the Federal Declaratory Judgment Although Texas courts have had no problem Act and the Texas Declaratory Judgment entertaining a declaratory judgment on the Act exist, however, that are worthy of duty to defend issue, the traditional rule— discussion. First, whereas attorneys’ fees until fairly recently—was that the duty to can be awarded to the prevailing party under indemnify issue had to await resolution of the Texas statute, the federal statute does not the underlying lawsuit. See Firemen’s Ins. provide for such an award. See Utica Co. v. Burch, 442 S.W.2d 331 (Tex. 1968). Lloyd’s of Tex. v. Mitchell, 138 F.3d 208, In 1997, however, the Supreme Court of 210 (5th Cir. 1998).1 Second, in federal Texas held that “the duty to indemnify is justiciable before the insured’s liability is 1 determined in the liability lawsuit when the While the Federal Declaratory Judgment Act does not provide for attorneys’ fees, an insured in a federal insurer has no duty to defend and the same declaratory judgment still can recover attorneys’ fees reasons that negate the duty to defend to the extent the insured establishes a breach of contract. TEX. CIV. PRAC. & REM. CODE § 38.001. Declaratory Judgment Actions

court, third-party claimants in pending duplicative litigation. Technically, the non- litigation may intervene or be joined in the party, third-party claimant cannot be bound declaratory judgment action. See Nat’l Am. by any issues resolved in the declaratory Ins. Co. v. Breaux, 368 F.Supp.2d 604, 621 judgment proceeding and thus is free to (E.D. Tex. 2005) (holding that injured third relitigate the insurance issues. See parties were proper parties to a declaratory Dairlyland County Mut. Ins. Co. v. judgment action and that the court was Childress, 650 S.W.2d 770, 773–74 (Tex. entitled to declare the insurer’s legal rights 1983); State & County Mut. Fire Ins. Co. v. and relations with respect to both its insured Walker, 228 S.W.3d 404, 411 (Tex. App.— and the injured third party); Century Sur. Ft. Worth 2007, no pet.); El Naggar Fine Co. v. Hardscape Constr. Specialties, 2006 Arts Furniture, Inc. v. Indian Harbor Ins. WL 1948063 (N.D. Tex. July 13, 2006) Co., 2007 WL 624535 (Tex. App.—Houston (denying third-party claimant’s motion for [1st Dist] March 1, 2007, pet. denied); S. judgment asserting that it was not a proper County Mut. Ins. Co. v. Ochoa, 19 S.W.3d party in the declaratory judgment action); 452, 465 (Tex. App.—Corpus Christi 2000, Bituminous Cas. Corp. v. Garcia, 223 no pet.); Nat’l Sav. Ins. Co. v. Gaskins, 572 F.R.D. 308, 311 (N.D. Tex. 2004) (holding S.W.2d 573 (Tex. Civ. App.—Ft. Worth that third-party claimant had right to 1978, no writ). Thus, federal courts may intervene in declaratory judgment action to provide for more finality since a properly protect its interest); Ohio Cas. Ins. Co. v. joined third-party claimant will be bound by Cooper Mach. Corp., 817 F. Supp. 45 (N.D. the coverage court’s determination as to Tex. 1993). But see Standard Fire Ins. v. coverage. See State Farm Fire & Cas. Co. v. Sassin, 894 F. Supp. 1023 (N.D. Tex. 1995) Fullerton, 118 F.3d 374, 384 (5th Cir. 1997). (dismissing the injured third party as an improper party). In state courts, however, a While the traditional rule in state court has third-party claimant has not been considered been that a third-party claimant is not a a proper party until final resolution of the proper party to a declaratory judgment liability issues. See Feria v. CU Lloyd’s of action (at least until such time as the third- Texas, 2001 WL 1263666 (Tex. App.— party claimant becomes a judgment Dallas Oct. 23, 2001, no pet.); Safeway creditor), the Supreme Court of Texas has Managing Gen. Agency for State & County implied that third-party claimants may have Mut. Fire Ins. Co. v. Cooper, 952 S.W.2d an interest in declaratory judgment actions. 861, 868–69 (Tex. App.—Amarillo 1997, no See State Farm & Cas. Co. v. Gandy, 925 writ); Gracida v. Tagle, 946 S.W.2d 504, S.W.2d 696, 714 (Tex. 1996) (stating that 506–07 (Tex. App.—Corpus Christi 1997, “[a] plaintiff who thinks a defendant should orig. proceeding); Providence Lloyds v. be covered by insurance may be willing to Blevins, 741 S.W.2d 604, 606 (Tex. App.— . . . assist in obtaining an adjudication of the Austin 1987, no writ). But see Richardson v. insurer’s responsibility”); Griffin, 955 State Farm Lloyds Ins., 2007 WL 1018651 S.W.2d at 84 (stating that “Gandy requires (Tex. App.—Ft. Worth April 5, 2007, pet. an insurer to either accept coverage or make filed). a good faith effort to resolve coverage before adjudication of the plaintiff’s claim, The fact that third-party claimants, at least and also suggests that the plaintiff may wish traditionally, could not be added to to participate in that litigation”) (emphasis declaratory judgment proceedings in state added); see also Spruiell v. Lincoln Ins. Co., court has had the potential for creating No. 07-97-0336-CV, 1998 WL 174722

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(Tex. App.—Amarillo Apr. 13, 1998) not to defend Kays; (ii) no relationship (unpublished) (resolving standing question exists between State Farm and the in favor of injured third party and noting that Richardsons under the policy; and (iii) State “the Supreme Court has suggested that third Farm’s duty to indemnify Kays is not ripe parties may wish to participate in for adjudication because no judgment has declaratory judgment actions involving the been entered demonstrating Kays is legally insured’s duty to defend”). And, like most liable to the Richardsons. courts, the Supreme Court of Texas has expressed its concern with duplicative The trial court granted State Farm’s plea to litigation. Accordingly, if squarely presented the jurisdiction. Surprisingly, the court of with the issue, the Supreme Court may appeals disagreed. In doing so, the court of reassess whether a third-party claimant can appeals looked to the Supreme Court of be a proper party to a declaratory judgment Texas’ opinion in Farmers Texas County action and, if so, in what circumstances. Mutual Insurance Company v. Griffin, 955 S.W.2d 81 (Tex. 1997). In Griffin, the Supreme Court s approved of the use of The Supreme Court may get that chance in declaratory judgment actions to resolve the Richardson case. In Richardson, the insurance coverage issues. Even so, the court of appeals held that a third-party Richardson court took the Griffin holding claimant can bring a declaratory judgment one step further by concluding that “a action against a liability insurer to determine declaratory judgment action is permissible whether the insurer has a duty to defend when brought by a third party seeking to and/or indemnify its insured. The facts are have the insurance company defend or as follows. indemnify for the conduct of its insured.” Richardson, 2007 WL 1018651, at *5. Eunice and Bobby Richardson (the “Richardsons”) filed suit against Robert F. It is common practice for insurers to include Kays (“Kays”) and State Farm Lloyds third-party claimants as parties to Insurance (“State Farm”). The Richardsons declaratory judgment actions. Oftentimes, alleged that Kays killed their son by rolling insurers add third-party claimants as over him with Kays’ vehicle. In the same defendants in declaratory judgment actions lawsuit, the Richardsons sought a against insureds so as to bind the third-party declaratory judgment action against Kays’ claimant to any ruling on coverage made in insurer, State Farm. In particular, the the declaratory judgment action.2 It appears Richardsons sought a ruling that State Farm the Ft. Worth Court of Appeals believed that had a duty to defend and indemnify Kays. it should be a two-way street.

State Farm, in response, filed a plea to the It is questionable, however, whether a third- jurisdiction. In the plea to the jurisdiction, party claimant is a proper party to a State Farm alleged that the trial court did not declaratory judgment action on coverage, have subject matter jurisdiction because the regardless of whether the third-party Richardsons have no standing to litigate claimant initiates the declaratory judgment whether State Farm has a duty to defend or indemnify Kays under the condominium 2 As noted previously, a third-party claimant is not policy because (i) the Richardsons have bound by a coverage determination made in a suffered no injury by State Farm’s decision declaratory judgment action in which it is not a party.

4 Declaratory Judgment Actions action, intervenes in an ongoing declaratory declaratory judgment action against a judgment action between an insurer and its liability insurer until such time as the third- insured, or is made a defendant in the party claimant becomes a judgment creditor. declaratory judgment action by the insurer. Even so, given the court’s dislike for Simply put, Texas is not a direct action state duplicative litigation, it will be interesting to and the third-party claimant is a stranger to see whether the court allows a third-party the policy until such time as the third-party claimant to be joined as a party to a claimant becomes a judgment creditor. declaratory judgment action initiated by an insurer against its insured. Likewise, it will Accordingly, at least historically, most be interesting to see whether the court will Texas state courts have concluded that a allow a third-party claimant to intervene into third-party claimant is neither a necessary an existing declaratory judgment action party nor an indispensable party to a between an insurer and its insured. declaratory judgment action—at least prior to the point at which the third-party claimant III. THE GENERAL CONTOURS OF becomes a judgment creditor. As noted THE DUTY TO DEFEND above, however, federal courts have taken a more liberal view and, for the most part, Since most declaratory judgments involve have allowed third-party claimants to be the issue of whether an insurer has a duty to joined or to intervene into declaratory defend, it is essential to focus on how courts judgment actions. determine the duty to defend and what evidence is admissible, if any, to determine The Ft. Worth Court of Appeals believed the duty to defend. Texas courts apply the that the Griffin case changed the law in “eight corners” rule to determine whether an Texas. It is questionable whether the insurer has a duty to defend its insured. See Supreme Court of Texas will see it that way. GuideOne Elite Ins. Co. v. Fielder Road Notably, in Griffin, the Supreme Court of Baptist Church, 197 S.W.3d 305, 308 (Tex. Texas did not address whether a third-party 2006); Nat’l Union Fire Ins. Co. v. claimant should be made a party to a Merchants Fast Motor Lines, Inc., 939 declaratory judgment action. Rather, the S.W.2d 139, 141 (Tex. 1997); Northfield Supreme Court simply noted that a Ins. Co. v. Loving Home Care, Inc., 363 declaratory judgment action is an F.3d 523, 528–35 (5th Cir. 2004). In appropriate mechanism for the insurance undertaking the “eight corners” analysis, a company to utilize in seeking a declaration court must compare the allegations in the that it is not obligated to defend or live pleading to the insurance policy without indemnify its insured in a suit brought by a regard to the truth, falsity, or veracity of the third party. While it is true that the Griffin allegations. See King v. Dallas Fire Ins. Co., court suggested that the third-party claimant 85 S.W.3d 185, 191 (Tex. 2002); Northfield, “may wish to participate in [the declaratory 363 F.3d at 528. Thus, at least in most judgment],” the court’s comment in this circumstances, only two documents are regard arguably was dicta. Griffin, 955 relevant to the duty to defend analysis: (i) S.W.2d at 84. When directly presented with the insurance policy; and (ii) the pleading of the issue, it is more likely that the Supreme the third-party claimant. See King, 85 Court of Texas will adhere to the S.W.3d at 187. Facts ascertained before suit, longstanding principle that a third-party developed in the process of litigation, or claimant has no standing to initiate a determined by the ultimate outcome of the

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suit do not affect the duty to defend. See ● The truth or veracity of the allegations Trinity Universal Ins. Co. v. Cowan, 945 is irrelevant—all factual allegations S.W.2d 819, 829 (Tex. 1997); Northfield, must be taken as true. 363 F.3d at 528. Accordingly, except in very limited circumstances, the duty to defend is ● The allegations should be interpreted a question of law. See State Farm Gen. Ins. liberally with any doubts being resolved Co. v. White, 955 S.W.2d 474, 475 (Tex. in favor of the duty to defend. App.—Austin 1997, no writ); State Farm Lloyds v. Kessler, 932 S.W.2d 732, 736 ● Insurers are not, however, required to (Tex. App.—Ft. Worth 1996, writ denied). read facts into the pleadings and/or imagine factual scenarios that might The Supreme Court of Texas has explained trigger coverage. the “eight corners” rule in the following way: ● When a petition alleges multiple or alternative causes of action, the insurer Where the [complaint] does not must examine each separate allegation state facts sufficient to clearly bring to determine whether it has a duty to the case within or without the defend. If one alternative cause of coverage, the general rule is that action or allegation is within the terms the insurer is obligated to defend if of the policy, the insurer has a duty to there is, potentially, a case under defend the entire lawsuit. the complaint within the coverage of the policy. Stated differently, in ● The proper focus is on the factual case of doubt as to whether or not allegations that establish the origin of the allegations of a complaint the damages alleged in the petition against the insured state a cause of rather than on the legal theories asserted action within the coverage of a in the petition. liability policy sufficient to compel the insurer to defend the action, In short, an insurer has a duty to defend a such doubt will be resolved in the lawsuit against its insured unless it can insured’s favor. establish that a comparison of the policy with the complaint or petition shows on its Merchants, 939 S.W.2d at 141 (quoting face that no potential for coverage exists. Heyden Newport Chem. Corp. v. Southern Stated otherwise, an insurer can refuse to Gen. Ins. Co., 387 S.W.2d 22, 26 (Tex. provide a defense only when the facts as 1965)). The above quote from the Supreme alleged fall outside of the coverage grant or Court of Texas and the case law (both state when an exclusion applies that negates any and federal) that has followed reveals the potential for coverage. following important contours of the duty to defend: While it sounds simple enough, an issue exists as to how far an insurer needs to go in ● An insurer is required to defend its liberally construing a pleading in favor of insured if the allegations state a the duty to defend. On the one hand, courts potential claim for coverage under the have continuously held that pleadings policy. should be liberally construed with all doubts and reasonable inferences resolved in favor

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of a duty to defend. On the other hand, create a duty to defend when such a courts also have continuously held that the duty would not exist based solely liberal standards of the “eight corners” rule on the allegations in the complaint. do not mandate that courts imagine factual scenarios that might trigger coverage. * * * Adding to the confusion is a steady stream of inconsistent applications of the so-called An insurer should not be able to “eight corners” rule. For example, when it escape its defense obligation by comes to determining trigger, what do you ignoring the true facts and relying do if the petition or complaint is completely on either erroneous allegations in date-deprived? Likewise, when applying the the complaint or the absence of “subcontractor exception” to the “your certain material allegations in the work” exclusion or in determining complaint. The insurer’s sole additional insured status for a general concern should be with whether the contractor on a construction project, what do judgment that may ultimately be you do if the petition or complaint is silent entered against the insured might, as to the use of subcontractors? Recently, either in whole or in part, be the trend seems to be that courts appear encompassed by the policy. There willing to make logical inferences from is authority to the contrary, holding pleaded facts while, at the same time, courts that the insurer’s defense obligation will refuse to completely fill in gaps in should be determined solely from pleadings. Oftentimes, the debate centers on the complaint, but such authority is whether it is even appropriate to use unreasoned and consists merely of extrinsic evidence. a blind adherence to the general rule in a situation in which the IV. THE EXTRINSIC EVIDENCE general rule was never intended to DEBATE apply.

The role of extrinsic evidence in the duty to ALLAN D. WINDT, INSURANCE CLAIMS & defend analysis continues to be an area of DISPUTES: REPRESENTATION OF INSURANCE confusion and debate. As a general rule, the COMPANIES AND INSUREDS § 4:3 (4th ed. use of extrinsic evidence to either create or 2001); see also Ellen S. Pryor, Mapping the defeat a duty to defend violates a strict Changing Boundaries of the Duty to Defend “eight corners” rule. Most jurisdictions, in Texas, 31 TEX. TECH L. REV. 869, 890–98 however, recognize an exception to the (2000). “eight corners” rule when the insurer knows or reasonably should know facts that would California, for example, permits both the establish coverage. See ROBERT H. JERRY, II, insured and the insurer to use extrinsic UNDERSTANDING INSURANCE LAW § evidence in determining the duty to defend. 111[c][2] (2d ed. 1996). A leading insurance Texas courts, to put it kindly, have been treatise concurs with this approach: sporadic in their application of the “eight corners” rule. In June 2006, the Supreme The existence of the duty to defend Court of Texas weighed in on the debate. is normally determined by an See GuideOne Elite Ins. Co. v. Fielder Road analysis of the pleadings. Extrinsic Baptist Church, 197 S.W.3d 305 (Tex. evidence can, however, serve to 2006). Unfortunately, the opinion has

7 Declaratory Judgment Actions provided more questions than it did answers. duty to defend.”); Tri-Coastal Contractors, Prior to discussing Fielder Road, a little bit Inc. v. Hartford Underwriters Ins. Co., 981 of historical background is in order. S.W.2d 861, 863–64 (Tex. App.—Houston [1st Dist.] 1998, pet. denied) (recognizing A. History of Extrinsic Evidence Prior to limited exceptions to the “eight corners” 2006 rule); State Farm Fire & Cas. Co. v. Wade, 827 S.W.2d 448, 451–52 (Tex. App.— Prior to 2006, although the Supreme Court Corpus Christi 1992, writ denied) (allowing had hinted that Texas was a strict “eight extrinsic evidence to be used to fill gaps in a corners” state, the Supreme Court had never petition or complaint); Cook v. Ohio Cas. squarely rejected an exception to the “eight Ins. Co., 418 S.W.2d 712, 715–16 (Tex. Civ. corners” rule. Whether and in what instances App.—Texarkana 1967, no writ.) (holding an exception existed basically was left to the extrinsic evidence allowed to show trial and appellate courts to decide on a case- automobile involved in accident was by-case basis. While a vast majority of the excluded from coverage); Int’l Serv. Ins. Co. cases declined to recognize or apply any v. Boll, 392 S.W.2d 158, 161 (Tex. Civ. exception to the “eight corners” rule, such App.—Houston 1965, writ ref’d n.r.e.) was not always the result. (holding extrinsic evidence allowed to show person involved in accident was excluded Several state appellate courts have from policy). concluded that the so-called “eight corners” rule is not absolute. See Utica Lloyd’s of Some federal courts have likewise Tex. v. Sitech Eng’g Corp., 38 S.W.3d 260, concluded that the “eight corners” rule may 263 (Tex. App.—Texarkana 2001, no pet.) not be absolute. See Primrose Operating Co. (“Where the terms of the policy are v. Nat’l Am. Ins. Co., 382 F.3d 546, 552 (5th ambiguous, or where the petition in the Cir. 2004) (permitting the review of underlying suit does not contain factual extrinsic evidence when the underlying allegations sufficient to enable the court to complaint did not contain sufficient facts to determine whether the claims are within the determine whether a potential for coverage policy coverage, the court may consider exists); Mid-Continent Cas. Co. v. extrinsic evidence to assist in making the Oney, 2004 WL 1175569 (N.D. Tex. May determination.”); Mid-Continent Cas. Co. v. 27, 2004) (noting that extrinsic evidence can Safe Tire Disposal Corp., 16 S.W.3d 418, be considered to determine fundamental 421 (Tex. App.—Waco 2000, pet. denied) coverage issues); Westport Ins. Corp. v. (“The exception to this general rule occurs Atchley, Russell, Waldrop & Hlavinka, ‘[w]hen the petition in the Underlying L.L.P., 267 F. Supp. 2d 601, 612–25 (E.D. Litigation does not allege facts sufficient for Tex. 2003) (recognizing that extrinsic a determination of whether those facts, even evidence may be used to establish if true, are covered by the policy.’”); fundamental coverage facts, such as whether Providence Wash. Ins. Co. v. A&A Coating, the party bringing the claim is a named Inc., 30 S.W.3d 554, 556 (Tex. App.— insured under the policy); John Deere Ins. Texarkana 2000, pet. denied) (“However, Co. v. Truckin’ U.S.A., 122 F.3d 270, 272 there are certain limited circumstances (5th Cir. 1997) (holding that extrinsic where extrinsic evidence beyond the ‘eight- evidence can be considered where the corners’ will be allowed to aid in the allegations in the underlying petition are not determination of whether an insurer has a sufficient to determine whether a potential

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for coverage exists); Sw. Tank & Treater evidence should not be admitted to Mfg. Co. v. Mid-Continent Cas. Co., 243 F. show that an instrumentality (boat) Supp. 2d 597, 602 (E.D. Tex. 2003) (holding was being used for a purpose that the consideration of extrinsic evidence explicitly excluded from coverage is warranted in certain circumstances); particularly, when doing so does Matagorda Ventures, Inc. v. Travelers not question the truth or falsity of Lloyds Ins. Co., 203 F. Supp. 2d 704, 714 any facts alleged in the underlying (S.D. Tex. 2000) (noting that the “eight petition filed against the insured. corners” rule does not apply rigidly in every case). Wade, 827 S.W.2d at 453. Thus, under the Wade exception to the “eight corners” rule, The Wade decision from the Corpus Christi extrinsic evidence may be admitted in a Court of Appeals, at least traditionally, had declaratory judgment proceeding when the been the most widely cited case in petition does not set out facts sufficient to connection with the use of extrinsic allow a determination of whether those evidence under Texas law. The facts of facts—even if true—would state a covered Wade are as follows. Williamson owned a claim. Stated differently, under Wade, boat that was insured by State Farm. extrinsic evidence can be admitted where a Williamson and a passenger set off from “gap” in the pleadings exists. Port O’Connor, Texas in Williamson’s boat, but subsequently they were found drowned Wade has been cited favorably by numerous in the Gulf of Mexico. The passenger’s federal courts. See Guar. Nat’l Ins. Co. v. estate brought suit against Williamson. State Vic Mfg. Co., 143 F.3d 192, 194–95 (5th Cir. Farm tendered a defense under a reservation 1998) (acknowledging a “narrow exception” of rights and filed a declaratory judgment to the “eight corners” rule when a petition action to determine its policy obligations. does not contain sufficient facts to enable a The applicable policy contained a “business court to determine if the duty to defend pursuits” exclusion. The problem, according exists); W. Heritage Ins. Co. v. River Entm’t, to the court, was that the petition did not 998 F.2d 311, 313 (5th Cir. 1993) (same); contain sufficient factual allegations to Acceptance Ins. Co. v. Hood, 895 F. Supp. determine whether State Farm owed a 2d. 131, 134 n.1 (E.D. Tex. 1995) (same). In defense: contrast, Texas state courts generally had rejected the Wade approach to extrinsic Texas courts allow extrinsic evidence. In Tri-Coastal, for example, the evidence to be admitted to show a court noted that “we are unable to find other lack of a duty to defend. We Texas appellate courts that have followed conclude that the underlying the Wade rationale.” Tri-Coastal, 981 petition, read broadly, does not S.W.2d at 863–64. address the issue of how the boat was used, which is an essential fact Although rejecting Wade, the Tri-Coastal for determining coverage under this court did recognize certain instances when private boatowner’s policy, and extrinsic evidence may be permissible: whether State Farm has a duty to defend the wrongful death suit. It In Texas, extrinsic evidence is makes no sense to us, in light of permitted to show no duty to these holdings, to say that extrinsic defend only in very limited

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circumstances, for example where supra, at 869; see also Randall L. Smith & the evidence is used to disprove the Fred A. Simpson, Extrinsic Facts & The fundamentals of insurance Eight Corners Rule Under Texas Law—The coverage, such as whether the World is Not as Flat as Some Would Have person sued is excluded from the You Believe, 46 S. TEX. L. REV. 463 (2004). policy, whether a policy contract exists, or whether the property in In the past couple of years, the confusion question is insured under the has reached new heights. In Northfield, policy. which was issued in March of 2004, the Fifth Circuit reviewed the long and winding Id. at 863 n.1. The Tri-Coastal court adopted road of Texas case law and made an “Erie what can be called a “fundamentals of guess that the current Texas Supreme Court insurance exception” to the “eight corners” would not recognize any exception to the rule. See, e.g., Landmark Chevrolet Corp. v. strict eight corners rule.” Northfield, 363 Universal Underwriters Ins. Co., 121 F.3d at 531. The Northfield court went on to S.W.3d 886, 890–91 (Tex. App.—Houston say that: [1st Dist.] 2003, pet. filed); Chapman, 2005 WL 20541, at *7–*8. In a treatise-like [I]n the unlikely situation that the opinion, District Judge Folsom essentially Texas Supreme Court were to adopted the Tri-Coastal analysis and, in so recognize an exception to the strict doing, concluded: eight corners rule, we conclude any exception would only apply in very Only in very limited circumstances limited circumstances: when it is is extrinsic evidence admissible to initially impossible to discern rebut [the presumption of whether coverage is potentially coverage]. These instances are ones implicated and when the extrinsic in which “fundamental” policy evidence goes solely to a coverage questions are resolved by fundamental issue of coverage “readily determined facts.” which does not overlap with the merits of or engage the truth or Westport, 267 F. Supp. 2d at 621. The falsity of any facts alleged in the Westport opinion is perhaps the most underlying case. comprehensive discussion of Texas case law on the extrinsic evidence issue. Id. (emphasis in original).

Both Westport and Tri-Coastal, at least Following Northfield, one would have impliedly, recognized that the extrinsic expected the extrinsic evidence issue to be evidence debate may turn on the type of settled within the Fifth Circuit (at least until extrinsic evidence being considered. such time as the Supreme Court of Texas Generally speaking, extrinsic evidence can weighed in on the issue). Expectations do be broken down into three categories: (i) not always come true. Two months after evidence that relates only to liability; (ii) Northfield was issued, a federal district court evidence that relates only to coverage; and in Lubbock held that “[t]his court may (iii) mixed or overlapping evidence that properly consider extrinsic evidence on the relates to both liability and coverage. See duty to defend only in the very narrow Pryor, Mapping Changing Boundaries, circumstance of ‘where fundamental policy

10 Declaratory Judgment Actions coverage questions can be resolved by that it was improper for the trial court to readily determined facts that do not engage consider extrinsic evidence. In particular, the truth or falsity of the allegations in the despite recognizing that the allegations in underlying suit.’” Oney, 2004 WL 1175569, the pleading may not have been truthful, the at *5 (citing Northfield, 633 F.3d at 530). court of appeals rejected the use of extrinsic Given the Erie guess made in Northfield, the evidence in such circumstances because the Oney analysis appears to be flawed. Or was extrinsic evidence at issue did not fall within it? A few months later, in August of 2004, the fundamentals of insurance exception. Id. the Fifth Circuit issued another opinion, In other words, the Fort Worth Court of concluding that “[f]act finders . . . may look Appeals essentially adopted the to extrinsic evidence if the petition ‘does not “fundamentals of insurance exception” from contain sufficient facts to enable the court to Tri-Coastal. The Supreme Court accepted determine if coverage exists.’” Primrose, the petition for review. 382 F.3d at 552 (citing Western Heritage, 998 F.2d at 313). Ironically, the judge that B. The Supreme Court Weighs In authored Primrose is the very same judge that authored Northfield. On June 30, 2006, the Supreme Court of Texas handed down its long-awaited opinion Right about the same time, the Fort Worth in Fielder Road. In so doing, the court Court of Appeals issued its opinion in agreed with the court of appeals and Fielder Road Baptist Church v. GuideOne declined to adopt an exception to the “eight Elite Insurance Co., 139 S.W.3d 384, 388– corners” rule. Nevertheless, the Supreme 89 (Tex. App.—Ft. Worth 2004), aff’d, 197 Court was careful to limit its decision to S.W.3d 305 (Tex. 2006). The facts are as situations when the extrinsic evidence is follows: Jane Doe filed a sexual misconduct “relevant both to coverage and the merits lawsuit against the Church and Charles . . . .” Fielder Road, 197 S.W.3d at 310. Patrick Evans. In her petition, Jane Doe More specifically, the court refused to adopt alleged that “[a]t all times material herein any exception to the “eight corners” rule for from 1992 to 1994, Evans was employed as “liability only” or “overlapping/mixed fact” an associate youth minister and was under scenarios: Fielder Road’s direct supervision and control when he sexually exploited and [W]ere we to recognize the abused Plaintiff.” The Church tendered the exception urged here, we would by lawsuit to GuideOne, who undertook the necessity conflate the insurer’s Church’s defense under a reservation of defense and indemnity duties rights. A few months later, GuideOne without regard for the policy’s initiated a declaratory judgment action. In express terms. Although these the declaratory judgment action, GuideOne duties are created by contract, they sought discovery of Evans’ employment are rarely coextensive. history with the Church. Ultimately, the Church stipulated that Evans had ceased Id. at 310. Moreover, in reaching its working at the Church prior to the time the decision, the court did not disapprove of GuideOne policy took effect. The trial court other case law and commentary that relied on the stipulation in granting discussed a “coverage only” exception to the GuideOne’s summary judgment. The court “eight corners” rule. As noted in the prior of appeals, however, reversed by concluding section, and as recognized by the Supreme

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Court of Texas, authority exists for and noted that the Fifth Circuit had admitting extrinsic evidence in “coverage opined that, were any exception to only” situations—at least when the be recognized by the Texas high “coverage only” evidence involves court, it would likely be such a fundamental coverage facts that can be narrow exception. readily ascertained and are undisputed. Although allowing extrinsic evidence in Bayou Bend Homes v. Scottsdale Ins. Co., such circumstances may technically violate 2006 WL 2037564 (S.D. Tex. July 18, a strict “eight corners” rule, the reality is 2006). And, subsequent to Bayou Bend that considering “coverage only” evidence Homes, several courts have applied a does not violate the contractual “coverage only” exception under Texas law. underpinnings of the duty to defend. See, e.g., B. Hall Contracting, Inc. v. Moreover, insurers still will have to defend Evanston Ins. Co., 447 F. Supp.2d 634, 647 groundless, false, or fraudulent claims that (N.D. Tex. 2006) (holding that “coverage otherwise state a potential for coverage. only” extrinsic evidence can be considered Under a “coverage only” exception, for in the duty to defend analysis);3 Boss example, insurers only will be able to avoid Management Services, Inc. v. Acceptance the duty to defend in situations when the Ins. Co., 2007 WL 2752700 (S.D. Tex. Sept. insured has not paid premiums for a defense 19, 2007) (recognizing a “coverage only” (e.g., when the defendant is not listed as an exception to the “eight corners” rule); insured, or where the property is not Roberts, Taylor & Sensabaugh, Inc., 2007 scheduled on the policy). Unfortunately, the WL 2592748 (S.D. Tex. 2007) (same). Supreme Court of Texas in Fielder Road did Likewise, although not applying the not expressly say one way or the other exception, the Fifth Circuit has interpreted whether it would recognize the exception. Fielder Road as permitting extrinsic evidence in “coverage only” scenarios. See Subsequent to the issuance of Fielder Road, Liberty Mut. Ins. Co. v. Graham, 2006 WL one court noted the following: 3743108 (5th Cir. Dec. 21, 2006). Moreover, subsequent to Fielder Road, the Supreme Although the Texas Supreme Court Court has been vague on the issue. See explicitly rejected the use of Lamar Homes, Inc. v. Mid-Continent Cas. extrinsic evidence that was relevant Co., 2007 WL 2459193 (Tex. Aug. 31, both to coverage and to the merits 2007) (holding that the duty to defend must of the underlying action, it did not “generally be gleaned from the plaintiff’s rule on the validity of a more complaint.”) (emphasis added). narrow exception that would allow extrinsic evidence solely on the Even if admission of “coverage only” facts issue of coverage. In fact, the is allowed, an insurer should not be language of the opinion hints that

the court views the more narrow exception favorably. For example, 3 Interestingly, the court in B. Hall concluded that the the court specifically “‘eight-corners or complaint-allegation rule’ is not applicable to this case” because the policy in question acknowledged that other courts did not contain language requiring the insurer to recognized a narrow exception for defend suits that contain allegations that are extrinsic evidence that is relevant “groundless, false, or fraudulent.” B. Hall, 447 F. to the discrete issue of coverage Supp. 2d at 645. In so doing, the court placed too much emphasis on the missing language.

12 Declaratory Judgment Actions permitted to use such evidence to contradict 2006 WL 3040756 (Tex App.—Houston allegations in a petition. See, e.g., Graham, [14th Dist.] Oct. 26, 2006, pet. filed). 473 F.3d at 602–03. Stated simply, while extrinsic evidence may be used in certain In D.R. Horton, the Houston Court of limited circumstances in which it is initially Appeals addressed the duty to defend and impossible to discern whether coverage is extrinsic evidence issue in the context of an potentially implicated and when the additional insured tender. In 2002, James extrinsic evidence goes solely to a coverage and Cicely Holmes sued D.R. Horton issue that does not overlap with the merits of alleging that their house contained latent the underlying lawsuit, extrinsic evidence defects that led to the propagation of toxic cannot be used to contradict allegations— mold. The Holmes’ petition was silent about even untrue allegations—in a petition or D.R. Horton’s use of subcontractors to complaint. See Valley Forge Ins. Co. v. construct the home. In particular, the Shah, 2007 WL 737490 (S.D. Tex. March 7, Holmes’ petition did not name any 2007) (“Even when the allegations appear to subcontractors, nor did it make any be untrue, the court ordinarily cannot reference to damage caused by any of D.R. consider extrinsic evidence to defeat an Horton’s subcontractors. D.R. Horton, insurer’s duty to defend.”). Likewise, when however, had extrinsic evidence that a potential for coverage can be found from demonstrated that the alleged damages to the the face of a pleading, an insurer should not home were caused, at least in part, by work be permitted to develop extrinsic evidence performed on D.R. Horton’s behalf by its through discovery or through the admission masonry subcontractor. Accordingly, since of extrinsic evidence in an effort to defeat D.R. Horton required its subcontractors to the duty to defend. See Fair Operating, Inc. name it as an additional insured, D.R. v. Mid-Continent Cas. Co., 2006 WL Horton tendered the Holmes’ lawsuit to the 2242547 (5th Cir. Aug. 1, 2006) (affirming liability carriers for the masonry district court’s order refusing insurer’s subcontractor. Those insurers, however, request to undertake discovery of extrinsic declined to defend D.R. Horton based on the evidence);4 Graham, 473 F.3d at 602. fact that the Holmes’ petition failed to mention the use of or otherwise reference Given the uncertainty surrounding the any subcontractors.5 In the coverage Fielder Road opinion, it appears that the litigation against the additional insured extrinsic evidence debate will continue until carriers, D.R. Horton sought to introduce the Supreme Court of Texas once again extrinsic evidence that the damages to the weighs in on the issue. The Supreme Court home were caused by the masonry may get that opportunity very soon. See D.R. subcontractor (i.e., the named insured). The Horton-Texas, Ltd. v. Markel Int’l Ins. Co., trial court refused to permit the use of extrinsic evidence. The court of appeals, while recognizing that D.R. Horton “produced a significant amount of summary 4 Courts in other jurisdictions have refused to allow judgment evidence that . . . links [the an insurer to undertake discovery in a declaratory judgment when the underlying lawsuit remains pending. See Harleysville Lake States Ins. Co. v. Granite Ridge Builders, Inc., 2007 WL 1662676 5 The additional insured endorsement limits the (N.D. Ind. June 7, 2007); see also Old Republic Ins. insurer’s liability to those claims arising out of the Co. v. Chuhak & Tecson, P.C., 84 F.3d 998, 1002 (7th named insured’s (i.e., the masonry subcontractor) Cir. 1996). work for the additional insured (D.R. Horton).

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masonry subcontractor] to the injuries 1892669, at *5–*6. In so doing, the court claimed by the Holmeses,” concluded that noted: the trial court properly excluded the evidence. In particular, without explaining We recognize that the refusal to its basis for doing so, the court of appeals consider extrinsic evidence will side-stepped the debate by classifying the inevitably result in some extrinsic evidence before it as relating to inequitable outcomes. both coverage and liability. See D.R. Nonetheless, two factors stand at Horton, 2006 WL 3050756, at *5 n.11. the forefront of our decision and trump any equitable D.R. Horton has filed a petition for review considerations: (i) the Texas with the Supreme Court of Texas. In the Supreme Court has only applied petition for review, D.R. Horton refutes the the eight-corners analysis in duty contention that the extrinsic evidence related to defend cases and has resisted to both liability and coverage. Rather, D.R. all opportunities to adopt a Horton contends that the extrinsic evidence permissive extrinsic evidence it sought to introduce went solely to stance in such cases, and (ii) the coverage (i.e., additional insured status). clear majority of courts of D.R. Horton then urges the Supreme Court appeals that have addressed the to take Fielder Road one step further by issue, including most of the expressly adopting a “coverage only” recent opinions, have rejected the exception to the “eight corners” rule. permissive rule.

Another opportunity will be in the Pine Oak Id. at *6. The Supreme Court has granted the Builders case. See Pine Oak Builders, Inc. v. petition for review in Pine Oak Builders. Great Am. Lloyds Ins. Co., 2006 WL Accordingly, it will give the court an 1892669 (Tex. App.—Houston [14th Dist.] excellent opportunity to “clarify” the July 6, 2006, pet. granted). One of the issues position set forth in Fielder Road. in Pine Oak Builders was whether the so- called “subcontractor exception” to the V. DOES A FINDING OF NO DUTY “your work” exclusion applied. The Pine TO DEFEND NECESSARILY MEAN Oak Builders case involved five underlying NO DUTY TO INDEMNIFY? lawsuits. In four of the underlying lawsuits, the homeowners specifically alleged that It is uniformly accepted that the duty to Pine Oak Builders utilized subcontractors to defend is broader than the duty to construct the homes—thus falling within the indemnify. See Burlington Ins. Co. v. Tex. “subcontractor exception” to the “your Krishnas, Inc., 143 S.W.3d 226, 229 (Tex. work” exclusion. In one of the underlying App.—Eastland 2004, no pet.); E&L lawsuits, however, the homeowners failed to Chipping Co. v. Hanover Ins. Co., 962 mention the use of subcontractors. Pine Oak S.W.2d 272, 274 (Tex. App.—Beaumont Builders sought to introduce extrinsic 1998, no writ); Northfield, 363 F.3d at 528. evidence that it used subcontractors in all of Accordingly, an insurer may have a duty to the underlying lawsuits. The court of defend even when the adjudicated facts appeals refused to consider the extrinsic ultimately result in a finding that the insurer evidence. See Pine Oak Builders, 2006 WL has no duty to indemnify. See Utica Nat’l Ins. Co. v. Am. Indem. Co., 141 S.W.3d 198,

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203 (Tex. 2004); Farmers Tex. County Mut. 2006 WL 1948063 (N.D. Tex. July 13, Ins. Co. v. Griffin, 955 S.W.2d 81, 82 (Tex. 2006) (“Of course, when there is no duty to 1997). In other words, it is well-settled that defend, there is also no duty to indemnify.”). the duty to defend and the duty to indemnify Notably, a quick Westlaw or Lexis search are distinct and separate duties. See Griffin, will reveal dozens of cases that stand for the 955 S.W.2d at 82; Cowan, 945 S.W.2d at proposition that if there is no duty to defend, 821–22. In contrast to the duty to defend, the there can be no duty to indemnify. While duty to indemnify is not based on the third- oftentimes true, such a conclusion is by no party claimant’s allegations, but rather upon means automatic. Even if an insurer obtains the actual facts that comprise the third a judgment as to defense and indemnity party’s claim. See Am. Alliance Ins. Co. v. based on a particular petition or complaint, Frito-Lay, Inc., 788 S.W.2d 152, 154 (Tex. for example, it is always possible that the App.—Dallas 1990, writ dism’d); Canutillo petition or complaint can be amended to Indep. Sch. Dist. v. Nat’l Union Fire Ins. trigger a duty to defend. For example, in Co., 99 F.3d 695, 701 (5th Cir. 1996). Nautilus Insurance Co. v. Nevco Simply put, extrinsic evidence is admissible Waterproofing, Inc., 2005 WL 1847094 to determine the duty to indemnify. See (S.D. Tex. Aug. 3, 2005), the court noted as Acceptance Indemnity Ins. Co. v. Maltez, follows: 2007 WL 2471481 (S.D. Tex. Aug. 28, 2007) (noting that the court may consider This Court’s ruling [on the duty to extrinsic evidence to determine the scope of indemnify] is issued without the duty to indemnify). In fact, “[a]n insurer prejudice and is based on the is not obligated to pay a liability claim until petition in the underlying suit at the [the] insured has been adjudicated to be time the court ruled. The Court legally responsible.” S. County Mut. Ins. Co. does not intend to preclude Nevco v. Ochoa, 19 S.W.3d 452, 460 (Tex. App.— from seeking indemnity from Corpus Christi 2000, no pet.). For this Evanston if Nevco is found liable reason, the duty to indemnify is not ripe for on a theory that was not pleaded in determination prior to the resolution of the Concierge’s operative petition underlying lawsuit unless a court first when construed broadly. determines, based on the “eight corners” rule, that there is no duty to defend and the Id. at *3 n.6.6 Similarly, in Markel same reasons that negate the duty to defend International Insurance Co. v. Campise also negate any potential for indemnity. See Homes, Inc., 2006 WL 1662604 (S.D. Tex. Griffin, 955 S.W.2d at 82. June 6, 2006), the court concluded that:

In most cases, the negation of the duty to The resolution of the duty to defend defend also will negate the duty to issue is not automatically indemnify. See Griffin, 955 S.W.2d at 84. dispositive of the issue of This fact, however, oftentimes is overstated indemnity. An insurer’s duty to as an absolute rule. See, e.g., Am. States Ins. indemnify is distinct and separate Co. v. Bailey, 133 F.3d 363 (5th Cir. 1998) (“Logic and common sense dictate that if there is no duty to defend then there must be 6 This decision was ultimately vacated and remanded no duty to indemnify.”); see also Century by the Fifth Circuit based on mootness after the Sur. Co. v. Hardscape Constr. Specialties, underlying action against the insured was dismissed after settlement was made with a major contractor.

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from its duty to defend . . . . ground, the duty to indemnify should be However, “[l]anguage in some triggered even though the insurer never cases can be read to indicate that if defended. See Trinity Universal Ins. Co. v. the live pleading at the time a Cowan, 945 S.W.2d 819, 825 n.4 (Tex. determination of the duty to 1997) (“This holding does not affect a indemnify is sought did not trigger party’s right to introduce evidence of the duty to defend, no duty to physical manifestations of mental anguish indemnify can be found.” For against a tortfeasor under the ‘fair notice’ example, if the same basis that rule . . . . Our holding extends only to the negates the duty to defend likewise duty to defend under the complaint negates any possible duty to allegation rule.”); see also Pryor, Mapping indemnify, then a court may Changing Boundaries, supra. Accordingly, properly consider the issue of the rule is better stated as follows: When no indemnity. duty to defend exists, and no facts can be developed at the trial of the underlying In the instant case, the Court cannot lawsuit to impose coverage, an insurer’s find that the same basis that duty to indemnify may be determined by negated the duty to defend negates summary judgment. any possible duty to indemnify. Due to the sloppy pleading in the The D.R. Horton case provides the perfect underlying lawsuit, it remains a example of a mistaken application of the “if fundamental mystery when the no duty to defend, then no duty to alleged property damage occurred. indemnify” rule. As noted in the previous The Wolfes’ did not allege property section, the D.R. Horton court concluded damage within the policy period, that no duty to defend existed because the therefore, there is no duty to underlying petition failed to mention the use defend. However, this does not of subcontractors so as to trigger additional conclusively resolve the issue of insured status. After reaching this indemnification. Presumably, the conclusion, the court stated as follows: conclusion of the underlying lawsuit will clarify when the Even though we do not look at the alleged damaged occurred—outside specific legal theories alleged to or within the policy period. If the determine the duty to indemnify, if alleged damage occurred within the the underlying petition does not policy period, then there may be raise factual allegations sufficient a duty to indemnify. It is to invoke the duty to defend, then impossible at this juncture to make even proof of all of those a determination as to allegations could not invoke the indemnification. insurer’s duty to indemnify. For this reason, the same arguments Id. at *3 (internal citations omitted). that disposed of Markel’s duty to Likewise, if a plaintiff brings a lawsuit defend also dispose of its duty against the insured alleging only intentional indemnify. Because the Holmes conduct but is granted a trial amendment suit did not allege facts covered by alleging non-intentional conduct and the policy, even proof of those facts obtains a judgment on the alternative would not trigger coverage. We

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therefore affirm the trial court’s defend stage. In addition, an issue exists as summary judgment in favor of to whether a ruling that no duty to defend Markel on the issue of Markel’s exists necessarily negates a duty to duty to indemnify. indemnify. The Supreme Court of Texas will soon have the opportunity to address D.R. Horton, 2006 WL 2040756, at *6 these issues. (internal citations omitted). The court clearly was wrong in this regard. In particular, as noted in the opinion, D.R Horton had produced ample summary judgment evidence demonstrating the requisite causal link between the named insured’s work and D.R. Horton’s liability. Even if such evidence is not admissible at the duty to defend context, no valid reason exists to ignore the extrinsic evidence at the duty to indemnify stage. In fact, since the duty to indemnify is based on actual facts, it is definitely proper for a court to consider extrinsic evidence.7

VI. CONCLUSION

Declaratory judgments are a popular tool to determine an insurer’s obligations to its insured. Nevertheless, significant issues remain such as whether the third-party claimant is a proper party and, if so, under what circumstances. Another significant issue is the proper scope of the court’s inquiry in a declaratory judgment. More specifically, the primary issue is whether extrinsic evidence can be used at the duty to

7 Insurers sometimes attempt an end run around the “eight corners” rule by trying to use extrinsic evidence on the duty to indemnify while the underlying lawsuit is pending. Assuming the extrinsic evidence would defeat the duty to indemnify, insurers then argue that no potential for coverage exists and thus no duty to defend. Such a tactic is wholly improper. When an insurer has a duty to defend, based on the “eight corners” rule, it is wholly improper to use extrinsic evidence during the pendency of the underlying lawsuit. The only exception to this rule is if the extrinsic evidence is wholly unrelated to the merits of the underlying lawsuit (e.g., a late notice defense).