Expert Commentary

Coverage Triggers and Duty-To-Defend Dilemmas*

Over the last 15 years, many states have reexamined their positions on what act or what event will trigger a duty to defend under a liability policy. Most recently, Texas, in Don's Bldg. Supply, Inc. v. OneBeacon Ins., 267 S.W.3d 20 (Tex. 2008), clarified for the first time the position that Texas was going to adopt regarding trigger events for property damage under most liability policies.


Courts and Coverage
October 2009

Before this decision, it has been assumed by most courts and most insurers that the trigger event would be the manifestation of the property damage. However, the Texas Supreme Court, relying principally on the plain language of the policy, rejected this trigger theory and instead adopted the trigger of actual injury. With the adoption of the actual injury rule, many issues have been created, particularly with respect to the duty to defend.

Prior to the change in the rule, it was common and still is common for the plaintiff to allege a particular date that the property damage manifested itself. The reason for allegation of manifestations historically was not so much as a trigger of coverage, but to bring the case within the applicable statute of limitations. Many states have a discovery rule in place with respect to certain types of claims and certain types of property damage. Therefore, if the statute of limitations were an issue, the plaintiff would allege merely that the property damage had been discovered or had manifested within a certain period of time prior to the filing of the lawsuit. In many cases, this may be the only allegation regarding the timing of the property damage. However, there is no evidence regarding when the actual injury took place.

Likewise, in some circumstances, there may be a complete absence of any allegations regarding when the actual injury took place. The plaintiff may allege that the defendant's conduct resulted in property damage to the plaintiff, and the plaintiff is entitled to recovery of damages from that defendant for the property damage. In such a case, the question presented is what, if any, insurer is obligated to provide the insured a defense.

The Case for Extrinsic Evidence

Most states in this country follow the eight-corners rule. Under the terms of the eight-corners rule, the duty to defend is determined by looking at the four corners of the petition and the four corners of the policy. However, in the Don's Bldg. Supply v. OneBeacon case, reviewing the four corners of the petition provided no guidance or instruction regarding when the actual injury took place. In such case, then, is the insured entitled to no defense? Assuming that the insured has been insured continually, this does not seem to be a fair or just result. On the other hand, should every insurer who has ever insured the insured be required to participate in the defense? This likewise does not seem to be a fair or reasonable result. The question then becomes to what extent in situations where there are no allegations or insufficient allegations regarding trigger should extrinsic evidence be allowed.

In GuideOne Elite Ins. v. Fielder Road Baptist Church, 197 S.W.3d 305 (Tex. 2006), the Texas Supreme Court indicated that extrinsic evidence would not be allowed to determine the duty to defend in Texas where the facts overlap with the facts in the underlying case or where it would contradict specific allegations in the petition. The court noted that it would likely allow extrinsic evidence:

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.

Id. at 308. The court cited with approval the holding from the Fifth Circuit to the effect that when the petition does not contain sufficient facts to enable the court to determine if coverage exists, it is proper to look to extrinsic evidence to adequately address the issue. This rule would seem to have solid application with respect to determining whether coverage has been triggered or has not been triggered. As stated earlier, it seems hardly fair or reasonable for an insured that has had continual coverage not to be entitled to a defense solely for the reason that there are no allegations in the petition regarding when the injury actually occurred.

Assuming that extrinsic evidence can be utilized to create a duty to defend, the question is then presented as to whether it can also be used by an insurer under appropriate circumstances to defeat a duty to defend. Some may argue that while it is permissible to introduce extrinsic evidence for the purpose of creating a duty to defend, the use of extrinsic evidence to defeat a duty to defend should not be permitted. While this may be the rule in some states, it does not appear to be the rule in Texas or the majority of states. More recently, in Pine Oak Bldrs., Inc. v. Great Am. Lloyd's Ins., 279 S.W.3d 650 (Tex. 2009), the supreme court ruled that:

Pine Oak views GuideOne Elite as distinguishable because in that case, the insurer was attempting to introduce extrinsic evidence to limit its duty to defend, whereas here, Pine Oak, the insured, offered extrinsic evidence to trigger the duty to defend. This distinction is not legally significant.

Id. at 655. As far as the supreme court in Texas is concerned, if extrinsic evidence is to be used, it can be used not only to create a duty to defend but also to defeat the duty to defend as well. This rule would appear to be keeping in line with the majority of jurisdictions that address this rule.

Conclusion

The issues of triggers of coverage and duty to defend present complex and vexing questions. The cases discussed have addressed situations on the outer edges of the continuum. That is, where there are clear allegations of when the property damage occurred. In real life, many of the factual situations are not so neat. Most will tend to be closer to the middle than to the edges. For example, there may be allegations that after a certain day, the property damage occurred. These are the situations that are more problematic. Where there are allegations that property damage did occur after a certain date, can and should extrinsic evidence be admissible? These are situations where no one broad rule can apply or can control, and generally, are left up to the courts to decide on a case-by-case basis.


*The author would like to thank and acknowledge the contributions to this Commentary by Elliott T. Cooper, an associate with Cooper & Scully's Dallas office.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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