Texas is one of the minority of states that allows few, if any, deviations from the “eight corner rule,” which stipulates that an insurer’s liability must be determined based on the complaint and policy, regardless of external evidence or facts. IN Bitco Gen. Ins. Corp. v. Monroe Guar. Ins. Co.no. 19-51012, 2022 WL 1090800 (5th ed. 12 April 2022) (“Bitco“), The Fifth Circuit Court of Appeals declined to consider external evidence in determining Bitco’s obligation to defend and described when a court applying Texas law may deviate from the state’s strict octagonal rule under Monroe exception.
Bitco and Monroe issued commercial general liability policies to 5D Drilling & Pump Services, Inc. for the years 2013-2014 and 2015-2016, respectively. 5D was sued after it was alleged to have failed to drill a well properly in the summer of 2014. Both insurance companies were notified. Bitco agreed to defend 5D and Monroe refused, citing two business risk exclusions, claiming that the damage occurred outside the insurance period. Bitco filed a declaratory action seeking a declaration that Monroe was also liable to defend and sought to recover Monroe’s share of the defense costs. The district court granted a summary judgment in Bitco’s favor based on the allegations about the underlying complaint. Monroe appealed.
On appeal, Monroe relied on an agreement between the parties that the loss occurred in November 2014, outside the insurance period. However, as the provision was extrinsic to the policy and the underlying complaints, a question arose as to whether the external provision could be taken into account in determining the duty of defense.
In an appeal, the court has in Bitco noted that in Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523 (5th Circ. 2004), the Fifth Circuit previously predicted that Texas law would recognize a limited exception to the eight-corner rule where the external evidence only concerns the issue of coverage and does not overlap with the facts of the underlying case. Quotes to Northfieldthe fifth circuit in Bitco raised two key issues before the Texas Supreme Court:
- Regardless of the exception in Northfield is allowed under Texas law?
- When a court applies such an exception, a court may consider external evidence of the date of an event when (1) it is initially impossible to discern whether an obligation to defend potentially exists solely on the basis of the eight corners of the policy and submissions; (2) the date goes solely to the issue of coverage and does not overlap with the liability benefits; and (3) the date does not show the truth or falsity of any facts alleged in third party submissions?
In response, the Texas Supreme Court in Monroe stated what is now called “it Monroe exception “, which provides:
[I]If the underlying petition states a statement that may trigger the obligation to defend, and the application of the octagonal rule, due to a gap in the plaintiff’s submission, is not decisive as to whether coverage exists, Texas law allows consideration of external evidence provided by the evidence (1) only to a question of coverage and does not overlap the liability for damages, (2) does not contradict the facts alleged in the submission, and (3) definitively establishes that the coverage fact must be proved.
The Monroe The court also looked at its previous decision in Richards vs. State Farm Lloyds, 597 SW 3d 492 (Tex. 2020), where the court had previously addressed the use of external evidence and refused to allow a departure from the eight-corner rule. IN Richards, the insurance claimed a defense if “a claim is made or an action is brought against an insured for damages due to bodily injury … to which this coverage applies.” The Court noted that “[w]some liability insurance companies agree to defend an insured person even if the allegations about the trial are “unfounded, false or fraudulent”;  the policy in question did not contain that language. ” Nevertheless, the insurer tried to rely on external evidence to prove that the allegations about the underlying complaint were false. The court rejected the insurer’s attempt to rely on a “policy language exception” to avoid the octagonal rule, noting that “the presence or absence of an unfounded claim clause has seldom, if ever, been important to Texas courts” analysis of the contractual obligation to defend, “and reiterated that the court “has never considered or suggested that the octagonal rule is subject to an unfounded claim clause.”
After arrest, the fifth circuit entered Bitco declined to consider the statute and apply the newly established Monroe exception. The provision would unlawfully overlap with the determination of liability as “[a] dispute about when Property damage occurs also means whether “property damage occurred on that date, forcing the insured to acknowledge damage at a certain date in order to invoke coverage, when its position may well be that no damage occurred at all.”
Bitco shows that courts enforcing Texas law are still bound by strict standards for when they can allow external evidence in determining the obligation to defend. To date, Texas allows external evidence in very few cases. Beyond Monroe In exceptional cases, the Texas Supreme Court also recently approved a “fraud” exception. IN Loya Ins. Co. v. Avalos610 SW3d 878, 881 (Tex. 2020), reh’g nekad (2 October 2020), the Court held that “[g]Taking into account the contractual grounds for the octagonal rule, we conclude that it does not prevent courts from considering such external evidence of collusion fraud on the part of the insured in determining the insurer’s liability. “
 Bitco Gen. Ins. Corp. v. Monroe Guar. Ins. Co.846 F. App’x 248, 252 (5th Cir. 2021), certified question accepted (March 19, 2021), certified question answered, 640 SW3d 195 (Tex. 2022).  Monroe Guar. Ins. Co. v. BITCO Gen. Ins. Corp.640 SW3d 195, 199 (Tex. 2022) (“Monroe”). The Monroe exceptions were recently applied in Pharr-San Juan-Alamo Indep. Sch. Dist. v. Tex. Political subdivisions Prop./Cas. Joint Self Ins. FundNo. 20-0033, 2022 WL 420491 (Tex. 2022).  Bitco2022 WL 1090800, at * 3 (citing Monroe640 SW3d at 203) (emphasis in original).