Duty to or Not to Defend? That is The Question. Recent Application of the ‘Eight-Corners Rule’ Under Texas Law in Finding Insurer Had Duty to Defend

Written by: Timothy A. Bishop, Esq.

In Siplast, Inc. v. Emps. Mut. Cas. Co., 23 F.4th 486 (5th Cir. 2022), the Fifth Circuit Court of Appeals, construing Texas law, applied the “eight-corners rule” in finding that the insurer had a duty to defend.

In Siplast, the insured, a roofing manufacturer, brought an action against its commercial general liability (CGL) insurer for breach of contract and a declaratory judgment that the insurer owed a duty to defend in a building owner’s underlying suit against the insured, alleging a breach of guarantee. The insurer asserted a counterclaim for a declaratory judgment, seeking a judicial declaration that it had no duty to defend the insured in the underlying lawsuit and that it had no duty to indemnify the insured for any non-covered damages. The United States District Court for the Northern District of Texas, Ada Brown, J., 489 F.Supp.3d 603, granted the insurer’s motion for summary judgment, and denied the insured’s motion for partial summary judgment and the insured appealed. See generally Siplast, Inc. v. Emps. Mut. Cas. Co., 23 F.4th 486 (5th Cir. 2022).

The Court of Appeals held that the underlying complaint presented an “occurrence,” under the applicable insurance policy thus prompting the insurer’s duty to defend and reversing the decision of the District Court.

“Under Texas law, an insurer may have two responsibilities relating to coverage—the duty to defend and the duty to indemnify.” ACE Am. Ins. Co. v. Freeport Welding & Fabricating, Inc., 699 F.3d 832, 839 (5th Cir. 2012) (quoting Gilbane Bldg. Co. v. Admiral Ins. Co., 664 F.3d 589, 594 (5th Cir. 2011)). These duties are separate, with the duty to defend the broader of the two; “[t]hus, an insurer may have a duty to defend but, eventually, no obligation to indemnify.” Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 490-91 (Tex. 2008). Therefore, even though an insurer may not ultimately indemnify its insured, it “must defend its insured if a plaintiff’s factual allegations potentially support a covered claim.” Id. at 490.

Under Texas law, the determination of whether an insurer has a duty to defend is made under the “eight-corners rule.” Richards v. State Farm Lloyds, 597 S.W.3d 492, 494 (Tex. 2020). “The eight-corners rule provides that when an insured is sued by a third party, the liability insurer is to determine its duty to defend solely from the terms of the policy and the pleadings of the third-party claimant.” GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305, 307 (Tex. 2006) (emphasis added). “The ‘four corners’ of the petition and the ‘four corners’ of the policy together comprise the ‘eight corners’ that give the rule its name.” Richards, 597 S.W.3d at 494-95.

When considering whether a third-party complaint triggers a duty to defend, the focus is “on the factual allegations that show the origin of the damages rather than on the legal theories alleged.” Nat’l Union Fire Ins. Co. v. Merchs. Fast Motor Lines, 939 S.W.2d 139, 141 (Tex. 1997) (per curiam) (quoting and reversing the lower court). “If the underlying pleadings allege facts that may fall within the scope of coverage, the insurer has a duty to defend; if the pleading only alleges facts excluded by the policy, there is no duty to defend.” Freeport Welding & Fabricating, 699 F.3d at 840.

In Siplast, the Court of Appeals compared two cases Wilshire Insurance Co. v. RJT Construction, LLC, 581 F.3d 222 (5th Cir. 2009), and Building Specialties, Inc. v. Liberty Mutual Fire Insurance Co., 712 F. Supp. 2d 628 (S.D. Tex. 2010), in considering the type of factual allegations that are required to trigger the duty to defend.

Wilshire Insurance considered whether there was a duty to defend the insured, a construction company that performed work on the foundation of a home, when the homeowner “allege[d] that cracks in the walls and ceilings suddenly appeared in his home, damage which he attribute[d] to the foundation being out of level.” 581 F.3d at 224. The Fifth Circuit Court of Appeals held that there was.

In Wilshire Insurance, the complaint alleged that the faulty foundation caused damage to other parts of the house that the insured construction company did not work on including the walls and ceilings. The “your work” exclusion did not preclude coverage for damage to the parts of the house resulting from the allegedly faulty foundation. Because these damages presented a covered claim, the Court found that the insurer must defend the entire suit. Id. at 227.

By way of contrast, Building Specialties concerned an insured company hired to install heating and air conditioning insulation for a residential construction project. Building Specialties, 712 F. Supp. 2d at 631. The third-party complaint in that case alleged that “shortly after the system began operating, defects in the installation of the duct work were discovered” and that the insured “refused to tender payment” for both completed and future “repairs to fix the defective heating and air conditioning duct work.”

The District Court found that there was no duty to defend reasoning that “the underlying petition only alleged defective installation of the duct work” and that “the only damages alleged and sought were ‘for payment for the additional work to remedy the problem and fix the damage.’ ” Building Specialties, 712 F. Supp. 2d at 640.

In contrast to Wilshire Insurance, the “amended petition in the underlying suit did not allege that the allegedly defective heating and air conditioning duct work damaged any other part of the home or resulted in any loss of use.” Id. Therefore, the district court ruled that “as a matter of law, there was no duty to defend because the underlying lawsuit did not claim covered property damage.” Id. at 645.

In Siplast, the Fifth Circuit Court of Appeals reasoned that reading the aforementioned two cases together demonstrates the type of factual allegations necessary to trigger a duty to defend:

If the complaint alleges damage to and seeks damages for any property that is not the insured’s product or directly subject to the insured’s work, as occurred in Wilshire Insurance, then the claim falls outside of a “your product/your work” exclusion and the insurer has a duty to defend. However, as in Building Specialties, if the complaint solely alleges facts and damage to the insured’s own products, or solely seeks to recover the costs to repair the insured’s work, then it is covered by a “your product/your work” exclusion and the duty to defend remains dormant.

Siplast, Inc. v. Emps. Mut. Cas. Co., 23 F.4th 486 (5th Cir. 2022).

The Court reasoned that each of Siplast’s and EMCC’s claims that were at issue could largely be reduced to the question of whether the Underlying Complaint contained allegations of damage to property other than Siplast’s roof membrane as part of the cause of action against Siplast. The Court found that it did and reasoned as follows:

As the district court noted, “the [U]nderlying [C]omplaint mentions damage to school property other than the Siplast roofing products.” The district court, however, found that while the complaint mentioned said damage, the Archdiocese did not actually make “a claim to recover from Siplast for any damage to the building caused by the leaky roof that is separate from the damage to Siplast’s product.” That reading of the Underlying Plaintiffs’ complaint is overly narrow. The factual allegations raised by the complaint repeatedly point to damage to property other than Siplast’s roof membrane system. The Underlying Complaint alleges that there was “water damage in the ceiling tiles throughout the [school] after a rain storm” and that Siplast recommended the Archdiocese “contact a designated Siplast roofing contractor to address the damage and leak.” The complaint further alleges that “[d]espite the work performed by Siplast’s designated contractor, the School continued to suffer from additional leaks and water damage.” It then alleges that the installing contractor told the Archdiocese that “the leaks and any damage created thereby were the sole responsibility of Siplast under the Siplast Guarantee.”

Siplast, Inc. v. Emps. Mut. Cas. Co., 23 F.4th 486 (5th Cir. 2022).

In comparing Wilshire Insurance with Building Specialties, the Court of Appeals reasoned that Siplast was more like the Wilshire Insurance case. The Complaint alleged damage to property beyond the product and work of the insured. Therefore, the Fifth Circuit Court of Appeals held that there was a duty to defend based on those allegations.