The Supreme Court of Texas recently affirmed summary judgment in favor of an insurer in a declaratory judgment action, holding that the allegations in the underlying complaint against its insured did not fall within the coverage provided by the insurance policy. Pine Oak Builders, Inc. v. Great American Lloyds Ins. Co., No. 06-0867 (Tex. February 13, 2009). In reaching its decision, the court declined to consider extrinsic evidence that suggested that the underlying complaint would have been covered under the policy if the underlying plaintiff had pleaded certain additional allegations.
The controversy stemmed from five separate lawsuits against the insured, a homebuilder, alleging construction defects. The insurance policy in question, an occurrence-based commercial general liability policy, contains an exclusion for property damage to the insured’s completed work. However, that exclusion contains an exception for work performed by a subcontractor. Four of the five lawsuits against the insured alleged defective work performed by a subcontractor, so the exclusion did not apply to those lawsuits. However, the fifth lawsuit (referred to in the decision as “the Glass case”) did not allege defective work by a subcontractor. Accordingly, the Court found that the exclusion for property damage to the insured’s completed work applied to the Glass case.
On appeal, the insured argued that evidence it submitted in the lower court showed that the allegedly defective work complained of in the Glass case was performed by subcontractors. However, the Court held that evidence extrinsic to the “eight corners” (the four corners of the underlying lawsuit and the four corners of the policy) could not be relied on to establish an insurer’s duty to defend. In so holding, the Court cited its earlier decision in Guideone Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305 (Tex. 2006), in which it applied the eight-corners rule and found a duty to defend on the part of an insurer, despite extrinsic evidence showing that the conduct alleged could not have occurred during the coverage period. The insured in Pine Oak argued that Guideone was distinguishable in that the effect of the eight-corners rule in Guideone was to trigger coverage, not to limit it; however, the Court stated that “this distinction is not legally significant.”