The Complaint Allegation Rule: Is It Really Only Eight Corners’

Texas, like many states, purports to employ a complaint allegation or “eight corners” rule. Under this “rule,” a duty to defend is determined by comparing the four corners of the petition to the four corners of the policy: if the allegations potentially state a claim within coverage, defense is owed. Conversely, if the allegations do not even potentially fall within coverage, no defense is owed. In several cases in the last few years, the Texas Supreme Court has reiterated the force of the eight corners doctrine.

Indeed, under recent pronouncements from the Texas Supreme Court, if the facts alleged do not give rise to potential coverage, there may not be any duty to indemnify, either. The Court has also made clear that it is the actual facts alleged— not the causes of action or theories of damage— that will determine whether coverage exists.

The eight corners rule, however, is riddled with exceptions. In an increasing number of circumstances, the pleadings and the policy do not provide all the answers, and both insureds and insurers are turning to extrinsic evidence to determine coverage. While the courts have not clearly laid out the parameters of the use of extrinsic evidence, there are several clear exceptions to the rule that seem to have emerged.

The most obvious exception to the eight corners rule is when the pleading is silent as to facts necessary to determine coverage. If the date of an accident is not alleged, an insurer should certainly be entitled to use extrinsic evidence to determine if the accident falls within its policy period and whether it is that policy—rather than some other insurer’s—that should respond.

Similarly, if the relationship between a defendant and the named insured is not clearly defined by the pleadings, it may be to the insured’s interest to turn to extrinsic evidence. Consider, for instance, an employee who may qualify as an insured and therefore be entitled to coverage, but whose employment relationship is not clearly laid out in the pleadings. Increasingly, insurance companies have also used extrinsic evidence to defeat coverage where the facts that would implicate an exclusion are omitted from the pleadings.

The omission may be inadvertent, or a deliberate attempt to “plead into” coverage. For instance, in one case, the court relieved an insurer of the duty to defend when the pleadings in the underlying suit had originally included dram shop allegations, excluded by the liquor liability exclusion. The pleadings were amended to omit any reference to alcohol and to allege, simply, that the insured defendant’s employees had negligently allowed the other defendant to leave the establishment and drive a vehicle, when they should have known his driving ability was impaired.

While the reasoning of the cases allowing use of extrinsic evidence is not well-defined, courts seem to recognize that certain coverage determinations precede application of the complaint allegation rule. For instance, the determination of whether a defendant is an insured, or whether a covered auto is involved in an accident, may be a prerequisite to application of the rule. As only an insured is entitled to coverage, in any event, the insured’s status should be determined by actual, not alleged, facts.

Typically, courts have rejected attempts by either insurers or insureds to use extrinsic evidence to controvert alleged facts. That is, even if the facts are demonstrably wrong, if they give rise to a duty to defend, the insurer must defend. If they do not, no defense is owed; the insurer has no duty to investigate beyond the pleadings.

Even this seemingly immutable boundary of the eight corners rule is subject to possible exceptions, however, because of the competing requirement that a defendant be an insured to obtain coverage. For instance, it may be that a pleading alleges that a defendant is an employee of the named insured.

In fact, no such employment relationship exists. In that instance, the facts alleged would give rise to coverage. Courts, however, have allowed the use of extrinsic evidence in analogous circumstances, despite direct contradiction of the allegations, to demonstrate that the defendant is not an insured, and is entitled to no coverage under the policy.

The emerging debate over use of extrinsic evidence is in regard to issues material to the outcome of the underlying suit. Where the same issues are material to both the insured’s liability in the underlying suit, and the determination of coverage, most courts will not allow the insurer to introduce extrinsic evidence to determine its duties, until the underlying suit is resolved. There are good reasons for this prohibition. It prevents conflicting results, preserves attorney-client privilege, and prevents discovery in a declaratory judgment action that could negatively impact the insured in the underlying liability suit. It can, on the other hand, render an insurer responsible for protracted and costly litigation, where no coverage should lie.

One common situation where this dilemma arises is, again, in regard to employment relationships. Frequently, a fact issue exists regarding whether an injured party is an employee or an independent contractor of a named insured. This situation typically arises where there is no workers’ compensation insurance in effect that would otherwise provide coverage for the damages. If the injured party is an employee, no coverage will exist, as most liability policies specifically exclude injuries to employees, or injuries covered by workers’ compensation.

On the other hand, if the claimant is an independent contractor, coverage will exist. If the insurance company litigates coverage, the seminal issue will be the existence of an employment relationship. This is the same issue involved in the liability suit. Therefore, there is a risk that the insurer could prevail, and establish an employment relationship before the underlying case is resolved, leaving the insured without coverage, exposed to liability and, as a non-subscriber, without common law defenses. In addition, there is a legitimate concern that discovery conducted by the insurer could be used to the benefit of the claimant in the underlying case.

Occasionally, where the facts are not in dispute, a court will allow a determination of these issues under the auspices of a protective order. More frequently, however, courts will require the abatement or dismissal of the declaratory judgment suit, until the underlying case has been determined. This delay poses an additional concern to insurers, as it seems contrary to the Texas Supreme Court’s recent decisions, encouraging insurers to litigate and determine coverage issues before liability is assessed. In addition, it paves the way for collusion between the insured and insurer, designed to obtain a liability finding based on facts that will trigger coverage and by which the insurer may then be bound.

There are no clear answers to many of these dilemmas, and there is a continuing evolution of responses to address the tension between contractual obligations and creative pleadings. It does seem clear, though, that the “eight corners” rule is frequently only a starting point, and not the final test of an insurer’s duty to defend.

Beth 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 homeowner’s policies.