United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS March 22, 2004
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
Clerk
No. 02-21254
NORTHFIELD INSURANCE CO.,
Plaintiff--Counter-Defendant--Appellant,
versus
LOVING HOME CARE, INC., SHEILA MARTHA DANIELS, AND
RONNIE RANDALL DANIELS,
Defendants-Appellees,
WILLIAM MAURICE BARROWS AND CATHERINE CELMER BARROWS,
INDIVIDUALLY AND AS HEIRS AND LEGAL REPRESENTATIVES OF BIANCA
LILLIAN BARROWS, DECEASED,
Defendants--Counter-Claimants--Appellees.
Appeal from the United States District Court
For the Southern District of Texas
Before REAVLEY, DAVIS, and DeMOSS, Circuit Judges.
DeMoss, Circuit Judge:
Plaintiff--Counter-Defendant--Appellant--Cross-Appellee
Northfield Insurance Co. (“Northfield”) seeks reversal of the
district court’s final judgment that declared Northfield had a duty
to defend Defendants-Appellees Loving Home Care, Inc. (“LHC”) and
Sheila and Ronnie Daniels (the “Daniels”) under the commercial
professional liability (“CPL”) part of the insurance policy issued
to LHC by Northfield, in the underlying tort suit by Defendants–
Counter-Claimants--Appellees--Cross-Appellants William and
Catherine Barrows (the “Barrows”) against LHC and the Daniels. The
Barrows cross-appeal, arguing this Court has no jurisdiction to
review the district court’s decision not to determine Northfield’s
duty to indemnify LHC and the Daniels at this time, and if there is
jurisdiction, that such duty is properly nonjusticiable at this
time. Because we find the district court properly concluded
Northfield owed LHC and the Daniels a duty to defend in the
underlying tort suit filed against them by the Barrows, and that
Northfield’s duty to indemnify LHC and the Daniels is presently
nonjusticiable, we AFFIRM the decision of the district court.
BACKGROUND
This appeal stems from a dispute about the duty of an insurer
to defend its insured in an underlying negligence suit in Texas
state court. The Daniels ran LHC, a business that provided nannies
for in-home child care. Celia Giral (“Giral”) was employed by LHC
and worked as a nanny for the Barrows. On October 13, 1997, Giral
was caring for the Barrows’ baby daughter, Bianca, when Bianca was
fatally injured. Bianca died at the hospital on the evening of
October 14, 1997. The Harris County coroner ruled Bianca’s death
a homicide, as the autopsy findings noted that Bianca’s injuries
included multiple skull fractures, brain hemorrhages, and blood
behind the eyes. The cause of death listed was “cranio-cerebral
2
injuries due to blunt force trauma of the head.” On May 22, 1998,
a Texas state court jury found Giral guilty of first-degree felony
injury to a child in the death of Bianca Barrows; Giral was
sentenced to seven years in prison.
The Barrows filed the underlying suit against several parties,
including LHC and the Daniels. The Barrows’ Third-Amended
Petition, their live petition, stated in part:
On October 14, 1997, Bianca died at the age of 3 ½
months. Bianca’s fatal injuries were proximately caused
by the negligence of Celia Giral, a nanny from Defendant
Loving Home Care, Inc. Giral negligently dropped Bianca,
and/or negligently shook Bianca, causing severe head
injuries that resulted in the infant’s death. In the
alternative, Plaintiffs would show that Giral was
reckless and/or criminally negligent as defined by Texas
Penal Code Sec. 6.03.
On September 9, 1997, Cathy Barrows had signed a
six-month Service Agreement, under which Mrs. Barrows
agreed to pay $377.00 per week to Loving Home Care for
Celia Giral, a Class A caregiver. This Service Agreement
stated, “All in-home care providers shall be employees of
Loving Home Care and will at all times remain subject to
the supervision of Loving Home Care.” [incorporation by
reference omitted].
Celia Giral was the nanny provided by Loving Home
Care, Inc. to care for Bianca. Loving Home Care, Inc.
entered a written employment agreement with Celia Giral
dated September 17, 1997. [incorporation by reference
omitted]. . . .
On Wednesday, September 17, 1997, Celia Giral began
working for the Barrows, “caring” for their infant
Bianca. On Monday, October 13, 1997, Mrs. Barrows left
Bianca with Giral and drove to work. When Mrs. Barrows
left Bianca with Giral, Bianca was awake, active,
smiling, and giggling. Mrs. Barrows arrived at work at
approximately 8:15 a.m. At approximately 8:45 a.m., Mrs.
Barrows received a telephone call from Giral. Giral told
Mrs. Barrows that she had to call 911 because Bianca
would not wake up. A paramedic then got on the phone and
3
told Mrs. Barrows that Giral claimed to have fallen while
carrying the baby. The paramedic told Mrs. Barrows that
they were going to take Bianca to Hermann Hospital.
. . .
The occurrence, proximately caused by the negligence
of Defendants, caused severe bodily injury to Bianca,
that resulted in her death. At the hospital emergency
room, Bianca was examined by doctors who discovered
Bianca’s skull was fractured, her brain was hemorrhaging,
and she had blood behind her eyes. Giral claimed to
investigators that she had accidently dropped the infant,
then shook her in an attempt to revive her. Giral
therefore admitted conduct that failed to meet the
standard of care of an ordinarily prudent person acting
under the same or similar circumstances, which therefore
constituted negligence, and was the proximate cause of
the occurrence and Bianca’s bodily injury and death.
The Barrows had amended their petition to remove all allegations
relating to Giral’s criminal conviction and the intentional nature
of her behavior. At the time of Bianca’s death, LHC was covered by
a two-part insurance policy (including both commercial general
liability, “CGL,” and CPL coverage) issued by Northfield. Under
the terms of the policy, LHC and the Daniels requested defense and
indemnification from Northfield in the underlying action.
Northfield defended under a reservation of rights, filing a
declaratory judgment action in district court against LHC, the
Daniels, and others. In the course of the declaratory judgment
action, Northfield argued that it was not obligated to defend or
indemnify LHC and the Daniels in the underlying action because of
various exclusions in the policy. In particular, in Northfield’s
motion for summary judgment, it argued it had no duty to defend or
indemnify LHC and the Daniels under the CGL part of the policy
4
because the “designated professional services” exclusion barred
coverage for damages “due to the rendering or failure to render any
professional service.” Northfield also argued that it had no duty
to defend or indemnify LHC and the Daniels under the CPL part of
the policy, which provided coverage for damages “because of a
negligent act, error or omission in the rendering of or failure to
render professional services,” because of two exclusions relating
to “criminal acts” and “physical/sexual abuse.” The criminal acts
exclusion stated that coverage would not apply to “[a]ny damages
arising out of any dishonest, fraudulent, criminal or malicious act
or omission of any insured or ‘employee.’” The physical/sexual
abuse exclusion stated that coverage would not apply to “any
damages arising out of” the following:
1. The actual, alleged, or threatened physical abuse,
sexual abuse or molestation by anyone.
2. The investigation, hiring, training, placement,
supervision, or retention of anyone who engages or has
engaged in physical abuse, sexual abuse or molestation.
This endorsement applies whether damages arise from an
act or failure to act.
3. The reporting of or failure to report to authorities
any physical abuse, sexual abuse, or molestation.
The district court initially granted Northfield’s motion for
summary judgment in its entirety, ruling that the professional
services exclusion applied so as to preclude coverage under both
parts of the policy. LHC, the Daniels, and the Barrows then filed
motions for reconsideration of the summary judgment, pointing out
that the professional services exclusion only applied to the CGL
5
part of the policy. The district court recognized its error and
granted the motions for reconsideration as to the CPL part of the
policy but affirmed its ruling as to Northfield having no duties
under the CGL part. The district court ultimately determined that
the criminal acts and physical/sexual abuse exclusions did not apply
so as to preclude coverage and a duty to defend under the CPL part.
The court entered its declaratory judgment on October 8, 2002, which
ordered that Northfield has a duty to defend LHC and the Daniels.
The Barrows then filed a motion to amend the judgment, requesting
the district court delete the phrase “This is a final judgment”
because the duty-to-indemnify issue was still before the court. The
district court denied the motion and dismissed the duty-to-indemnify
issue without prejudice. Northfield timely appealed, and the
Barrows cross-appealed.
DISCUSSION
This Court reviews whether an insurer has a duty to defend its
insured in an underlying suit as a de novo question of law. Guar.
Nat’l Ins. Co. v. Vic Mfg. Co., 143 F.3d 192, 193 (5th Cir. 1998).
Under Texas law, which the parties agree governs this diversity
case, the duty to defend and the duty to indemnify are distinct and
separate duties. See King v. Dallas Fire Ins. Co., 85 S.W.3d 185,
187 (Tex. 2002) (citation omitted). The duty to defend is broader
than the duty to indemnify. Am. States Ins. Co. v. Bailey, 133 F.3d
363, 368 (5th Cir. 1998) (applying Texas law).
6
The Texas Supreme Court recently restated in King that:
An insurer’s duty to defend is determined solely by the
allegations in the pleadings and the language of the
insurance policy. This is the “eight corners” or
“complaint allegation rule.” If a petition does not
allege facts within the scope of coverage, an insurer is
not legally required to defend a suit against its
insured. But we resolve all doubts regarding the duty to
defend in favor of the duty.
85 S.W.3d at 187 (quotations and footnotes omitted); see also Nat’l
Union Fire Ins. Co. v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d
139, 141 (Tex. 1997) (noting that courts give the petition’s
allegations a liberal interpretation). Thus, the duty to defend
arises only when the facts alleged in the complaint, if taken as
true, would potentially state a cause of action falling within the
terms of the policy. Canutillo Indep. Sch. Dist. v. Nat’l Union
Fire Ins. Co., 99 F.3d 695, 701 (5th Cir. 1996) (applying Texas law)
(citation omitted). The insured bears the initial burden of
establishing that a claim against it is potentially within the
policy’s coverage. Id. (citation omitted). The insurer is
obligated to defend the insured, provided that the petition or
complaint alleges at least one cause of action potentially within
the policy’s coverage. Id. (citation omitted).
The duty to defend is determined by consulting the latest
amended pleading. Id. (citation omitted); see also Guar. Nat’l,
143 F.3d at 194. The focus of the inquiry is on the alleged facts,
not on the asserted legal theories. St. Paul Fire & Marine Ins. Co.
7
v. Green Tree Fin. Corp.-Tex., 249 F.3d 389, 392 (5th Cir. 2001)
(applying Texas law). “[I]n case of doubt as to whether or not the
allegations of a complaint against the insured state a cause of
action within the coverage of a liability policy sufficient to
compel the insurer to defend the action, such doubt will be resolved
in insured’s favor.” Merchants, 939 S.W.2d at 141 (citation
omitted). If the petition only alleges facts excluded by the
policy, however, the insurer is not required to defend. Fid. &
Guar. Ins. Underwriters, Inc. v. McManus, 633 S.W.2d 787, 788 (Tex.
1982). Facts ascertained before suit, developed in the process of
litigation, or determined by the ultimate outcome of the suit do not
affect the duty to defend. Trinity Universal Ins. Co. v. Cowan, 945
S.W.2d 819, 829 (Tex. 1997) (citation omitted).
After the insured meets his burden to show that the alleged
facts in the petition state a potential claim against him, to defeat
the duty to defend, the insurer bears the burden of showing that the
plain language of a policy exclusion or limitation allows the
insurer to avoid coverage of all claims, also within the confines
of the eight corners rule. See Tex. Ins. Code Ann. art. 21.58(b)
(Vernon Supp. 1997); Calderon v. Mid-Century Ins. Co. of Tex., No.
03-97-00735-CV, 1998 WL 898471, at *2 (Tex. App.–Austin Dec. 29,
1998, pet. denied) (not designated for publication) (citing E&L
Chipping Co. v. Hanover Ins. Co., 962 S.W.2d 272, 274 (Tex.
App.–Beaumont 1998, no pet.)); Butler & Binion v. Hartford Lloyd’s
8
Ins. Co., 957 S.W.2d 566, 568 (Tex. App.–Houston [14th Dist.] 1995,
writ denied).
In contrast, “the duty to indemnify is not based on the third
party’s allegations, but upon the actual facts that underlie the
cause of action and result in liability.” Canutillo, 99 F.3d at 701
(citations omitted); see also Tesoro Pet. Corp. v. Nabors Drilling,
USA, Inc., 106 S.W.3d 118, 125 (Tex. App.–Houston [1st Dist.] 2002,
pet. denied) (“Facts, however, not allegations, determine an
indemnitor’s duty to indemnify.”). If any ambiguity exists,
exceptions and limitations in a policy are construed strictly
against the insurer. Canutillo, 99 F.3d at 701 (citations omitted).
Thus, courts “adopt the construction of an exclusionary clause urged
by the insured as long as that construction is not itself
unreasonable, even if the construction urged by the insurer appears
to be more reasonable or a more accurate reflection of the parties’
intent." Id. (quoting Barnett v. Aetna Life Ins. Co., 723 S.W.2d
663, 666 (Tex. 1987)). Generally, Texas law only considers the
duty-to-indemnify question justiciable after the underlying suit is
concluded, unless “the same reasons that negate the duty to defend
likewise negate any possibility the insurer will ever have a duty
to indemnify.” Farmers Tex. County Mut. Ins. Co. v. Griffin,
955 S.W.2d 81, 84 (Tex. 1997).
Whether there is an exception to the strict eight corners rule in
Texas.
9
The Texas Supreme Court has never recognized any exception to
the strict eight corners rule that would allow courts to examine
extrinsic evidence when determining an insurer’s duty to defend.
Landmark Chevrolet Corp. v. Universal Underwriters Ins. Co.,
121 S.W.3d 886, 890 (Tex. App.–Houston [1st Dist.] 2003, pet.
filed). However, as the district court in Westport Insurance Corp.
v. Atchley, Russell, Waldrop & Hlavinka, L.L.P., 267 F. Supp. 2d
601, 611-22 (E.D. Tex. 2003), extensively examined, certain Texas
appellate courts, this Court, and district courts in this Circuit
have appeared to recognize a narrow exception.1 The most recent
1
See, e.g., W. Heritage Ins. Co. v. River Entm’t, 998 F.2d 311,
313 (5th Cir. 1993) (“However, 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 in order to
adequately address the issue.”); McLaren v. Imperial Cas. & Indem.
Co., 767 F. Supp. 1364, 1374 (N.D. Tex. 1991), aff’d, 968 F.2d 17
(5th Cir. 1992) (“[T]here appears to be a more general rule that
the true facts always can be used to establish non-existence of a
defense obligation, no matter what the plaintiff might allege in
her damage suit complaint.”); State Farm Fire & Cas. Co. v. Wade,
827 S.W.2d 448, 452-53 (Tex. App.–Corpus Christi 1992, writ denied)
(concluding that extrinsic evidence could be admitted in deciding
the duty to defend when the facts alleged are insufficient to
determine coverage and “when doing so does not question the truth
or falsity of any facts alleged in the underlying petition”);
Gonzales v. Am. States Ins. Co., 628 S.W.2d 184, 187 (Tex.
App.–Corpus Christi 1982, no writ) (holding that facts extrinsic to
the petition relating only to coverage, not liability, may be
considered to determine a duty to defend, where such evidence does
not contradict any allegation in the petition); Cook v. Ohio Cas.
Ins. Co., 418 S.W.2d 712, 715-16 (Tex. Civ. App.–Texarkana 1967, no
writ) (“[T]he [Texas] Supreme Court draws a distinction between
cases in which the merit of the claim is the issue and those where
the coverage of the insurance policy is in question. In the first
instance the allegation of the petition controls, and in the second
the known or ascertainable facts are to be allowed to prevail.”);
Int’l Serv. Ins. Co. v. Boll, 392 S.W.2d 158, 161 (Tex. Civ.
10
Texas appellate court case to apply an exception to the eight
corners rule is State Farm Fire & Casualty Co. v. Wade, 827 S.W.2d
448 (Tex. App.-Corpus Christi 1992, writ denied), which was decided
in 1992. There, an appeals court found that in the absence of any
factual allegation concerning how the boat which was the subject of
the policy was used, because the court could not determine whether
or not the personal boat owner’s private liability policy possibly
provided coverage even by reading the underlying petition broadly,
extrinsic evidence could be considered. Id. at 453. The court
found that how the boat in question was used at the time of the
accident – whether the use was commercial or private – was an
essential fact of coverage that did not question the truth or
falsity of any facts alleged in the underlying petition. Id.
However, in making an Erie2 guess about what the current Texas
Supreme Court would say about the existence and application of such
an exception, the court in Westport noted that no Texas appellate
decision has ever both cited and applied this Wade line of cases.
267 F. Supp. 2d at 618-19 (“[E]ven the court that announced the
decision on which the Wade line of cases depends has retreated . .
App.–Houston [1st Dist.] 1965, writ ref’d n.r.e.) (considering
extrinsic evidence of identity of driver of insured boat by
stipulation to conclude no duty to defend or indemnify arose).
2
Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938); Transcon. Gas
Pipe Line Corp. v. Transp. Ins. Co., 953 F.2d 985, 988 (5th Cir.
1992)(“[I]t is the duty of the federal court to determine as best
it can, what the highest court of the state would decide.”).
11
. .”; see also Tri-Coastal Contractors, Inc. v. Hartford
Underwriters Ins. Co., 981 S.W.2d 861, 863-64 (Tex. App.–Houston
[1st Dist.] 1998, pet. denied) (applying the strict eight corners
approach to reverse the trial court’s use of extrinsic evidence and
noting how no other Texas appellate court has ever applied Wade).
In Tri-Coastal, the appellate court declined to follow Wade and
refused to consider extrinsic evidence, even though the petition did
not contain sufficient facts to determine the application of a
worker’s compensation exclusion, which indisputably would have
applied to bar the duties to defend and indemnify if such evidence
had been considered. 981 S.W.2d at 863-64. The court found the
petition did allege facts regarding the negligence of the insured
sufficient to state a potentially covered cause of action. Id. at
864. The court also concluded that the issue of whether an injured
employee of the insured collected worker’s compensation benefits
went to the merits of his lawsuit; extrinsic evidence could not be
considered even if the court were to “craft an exception to the
general rule.” Id. Most recently in December 2003, in light of the
consideration and rejection of any exception to the strict eight
corners rule by the Texas appellate court in Tri-Coastal, the
appeals court in Landmark Chevrolet again declined to apply any
Wade-type exception to supplement insufficient pleadings that, even
given a liberal interpretation, did not state even a possibly
covered truth-in-lending claim. 121 S.W.3d at 890-91.
12
The Westport court thus came to the conclusion that only in
very limited circumstances is extrinsic evidence admissible in
deciding the duty to defend – where fundamental policy coverage
questions can be resolved by readily determined facts that do not
engage the truth or falsity of the allegations in the underlying
petition, or overlap with the merits of the underlying suit. 267 F.
Supp. 2d at 621 (quotations and citation omitted). Fundamental
coverage issues have been defined to include: (1) whether the
person sued has been specifically excluded by name or description
from any coverage, (2) whether the property in suit is included in
or has been expressly excluded from any coverage, and (3) whether
the policy exists. Id.; see also Calderon, 1998 WL 898471, at *4;
Tri-Coastal, 981 S.W.2d at 863 n.1.
As mentioned above, this Court has previously relied on the
Wade line of Texas appellate cases to recognize a narrow exception
to Texas’s strict eight corners rule. For example, in Western
Heritage, we determined that extrinsic evidence could be used in an
insurance dispute where the underlying amended petition did not
allege or provide any factual explanation for how the restaurant
patron involved had arrived at such an impaired state that he could
not operate a vehicle. 998 F.2d at 313-15. There, because the
facts alleged were not specific enough, even interpreted in the
light most favorable to the insured, to possibly bring the claim
within the negligence coverage of the policy, which specifically
13
excluded damages stemming from the sale of alcoholic beverages to
an intoxicated person, extrinsic evidence was allowed to determine
the insured’s duty to defend. Id. Likewise, in John Deere
Insurance Co. v. Truckin’ U.S.A., 122 F.3d 270, 272-73 (5th Cir.
1997), we determined that extrinsic evidence could be considered in
an insurance dispute where the underlying petition only alleged that
the tractor trailer rig involved in an accident had been furnished
to the defendants or that defendants had a working relationship with
the insured trucking company. There, because the facts alleged were
insufficient, even if taken as true, to state a cause of action
under the policy, extrinsic evidence was allowed to show whether the
rig was a “covered auto” such that insurer had a duty to defend.
Id.
In light of the Texas appellate courts’ unwavering
unwillingness to apply and recent repudiations of the Wade type of
exception, this Court makes its Erie guess that the current Texas
Supreme Court would not recognize any exception to the strict eight
corners rule. That is, if the four corners of the petition allege
facts stating a cause of action which potentially falls within the
four corners of the policy’s scope of coverage, resolving all doubts
in favor of the insured, the insurer has a duty to defend. If all
the facts alleged in the underlying petition fall outside the scope
of coverage, then there is no duty to defend. However, in the
unlikely situation that the Texas Supreme Court were to recognize
14
an exception to the strict eight corners rule, we conclude any
exception would only apply in very limited circumstances: 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.3
Whether the district court erred in determining that Northfield had
a duty to defend LHC and the Daniels in the underlying tort suit.
3
This alternative position is not at odds with this Court’s
previous decisions in Western Heritage and John Deere. In Western
Heritage, the facts alleged as to the restaurant’s failure to
prevent the patron from driving away or failure to call him a cab,
998 F.2d at 314, were clearly not sufficient to determine whether
policy coverage for negligence was potentially implicated. Such
alleged facts did not explain how the restaurant came to have any
sort of duty regarding the patron. The stipulated extrinsic fact
that the sale of alcoholic beverages was involved and the patron
was intoxicated was readily determinable and went to the
fundamental issue of whether the restaurant was specifically
excluded by description from coverage in the case. The underlying
petition did not factually explain at all how the patron had
arrived at such an impaired state that he could not operate a
vehicle, so the extrinsic evidence did not engage the truth or
falsity of the underlying allegations nor overlap with the merits
of the underlying case. Likewise, in John Deere, the facts alleged
as to the rig involved in the accident being a covered vehicle
under the policy, 122 F.3d at 272, were clearly not sufficient to
determine whether coverage for negligence was potentially
implicated. The extrinsic evidence consulted to determine whether
the rig was a covered vehicle was readily determined by looking to
the rig’s title certificate; such evidence went to the fundamental
issue of whether the property involved was indeed insured under the
policy. The underlying petition did not factually explain at all
how the allegations that the rig was furnished to the defendants or
that the defendants had a working relationship with the insured
determined the insured status of the rig involved, so the extrinsic
evidence did not engage the truth or falsity of the underlying
allegations nor overlap with the merits of the underlying case.
15
On appeal, Northfield only challenges the district court’s
refusal to look to extrinsic evidence to determine “whether Bianca
Barrows’ death resulted from a ‘criminal act’ by Celia Giral” or
arose from physical abuse by Giral.4 Northfield points to the
Barrows’ petition and labels all the so-called factual allegations
– such as the negligent dropping and/or shaking of Bianca by Giral
and the negligent hiring, training, and supervising of Giral by LHC
– as legal theories that do not determine the duty to defend. Thus,
Northfield asserts that Texas law allows courts to consider
extrinsic evidence when the petition in the underlying suit does not
allege facts sufficient to enable the court to determine whether the
criminal acts and physical exclusions apply. Northfield relies on
three cases for this proposition: Guaranty National, 143 F.3d at
194 (applying Western Heritage); John Deere, 122 F.3d at 272
(applying Wade); and Matagorda Ventures, Inc. v. Travelers Lloyds
Insurance Co., 203 F. Supp. 2d 704, 714 (S.D. Tex. 2000) (citing but
not applying Wade). Northfield thus argues that Giral’s criminal
conviction and the autopsy report on Bianca’s injuries establish as
a matter of law that all the damages suffered by the Barrows arise
4
Northfield did not challenge the district court’s finding that
“the Barrowses’ complaint asserts negligence against LHC and the
Danielses, and not an intentional tort, [such that] Northfield has
a duty to defend LHC absent any policy exclusion.” Thus,
Northfield asks this Court to allow extrinsic evidence at the point
where the burden has shifted to Northfield to show that an
exclusion plainly bars coverage of all the Barrows’ claims under
the eight corners rule.
16
from a criminal act and/or physical abuse; thus, no duty to defend
or to indemnify LHC and the Daniels can be imposed on Northfield.
Northfield maintains that although the general rule under Texas
law is that where the complaint does not allege facts sufficient to
bring it clearly within the scope of coverage, the insurer is
obligated to defend if there is potentially a case falling within
coverage, the exception applies when the petition labels conduct as
negligent, where the true nature of the conduct has been found
criminal. Northfield relies on a North Dakota Supreme Court case,
Ohio Casualty Insurance Co. v. Clark, 583 N.W.2d 377, 380 (N.D.
1998), which held that an insurer had no duty to defend based on
extrinsic evidence of criminal conviction that established that
“intentional injury” exclusion applied, even where the underlying
petition alleged negligence.5
Northfield also contends that Texas law under the Wade line of
cases permits exceptions to the eight corners rule, such as in
Western Heritage. There, the district court concluded that based
on extrinsic evidence establishing that a “liquor liability”
exclusion applied, there was no duty to defend the insured
5
We note that North Dakota does not operate under a strict eight
corners rule like Texas. There, “an insurer has no duty to provide
a defense in an action that would yield no possibility of liability
to its insured.” Clark, 583 N.W.2d at 380 (quotations omitted).
Clark is inapposite because in Texas, the duty to defend is broader
than the duty to indemnify; and generally the duty to indemnify is
not justiciable until the underlying suit is over, so the insurer
may bear a duty to defend even where ultimately no duty to
indemnify is found.
17
restaurant, even where all references to alcohol and intoxication
had been deleted in the amended complaint. 998 F.2d at 313, 315.6
In essence, Northfield argues the Barrows are perpetuating a fraud
upon the court by artfully pleading facts to bring excluded claims
within coverage; courts can look to extrinsic evidence when the
petition omits or misrepresents material facts that clearly would
have excluded coverage, such as the Barrows have done here.
Finally, Northfield argues that the fundamental coverage caveat to
the eight corners exception is either wrong, or is not limited to
the three definitions laid out in case law. That is, if the caveat
applies, the question of the application of the criminal acts and
physical abuse exclusions is one of fundamental coverage.
The Barrows, LHC, and the Daniels argue that because this is
a duty-to-defend inquiry only, the district court properly applied
Texas law, which is clear that extrinsic evidence is not to be
considered under any exception. The Barrows’ third-amended petition
clearly alleged negligent dropping and/or shaking behavior by Giral
toward Bianca, not intentional acts of physical abuse; and these
facts, if properly assumed to be true, unambiguously stated at least
6
What fully distinguishes this case from Western Heritage is that
the Barrows’ petition did not fail to explain what factually had
happened to Bianca to result in her death at all. Moreover, the
facts alleged clearly indicated LHC and its employees had a duty
toward the Barrows and Bianca. In Western Heritage, the petition
did not factually explain at all how the patron involved had
arrived at such an impaired state that he could not operate a
vehicle such that any possible duty owed by the restaurant to the
patron might have arisen. 998 F.2d at 313.
18
one negligence claim facially within the policy’s coverage. See
Lafarge Corp. v. Hartford Cas. Ins. Co., 61 F.3d 389, 394 (5th Cir.
1995), overruled on other grounds by Grapevine Excavation, Inc. v.
Maryland Lloyds, 35 S.W.3d 1, 5 (Tex. 2000) (noting that the
complaint as amended to include facts alleging negligence was
clearly not a case where it was impossible to discern whether
coverage was potentially indicated). The Barrows, LHC, and the
Daniels contend that any uncertainties as to whether allegations in
a petition state a covered cause are to be resolved in favor of the
insured. See Tri-Coastal, 981 S.W.2d at 863. In Tri-Coastal, the
Texas appeals court refused to consider extrinsic evidence, even
though the petition did not contain sufficient facts to determine
the application of a worker’s compensation exclusion, where the
employee’s underlying petition alleged facts indicating negligence
potentially covered by the employer’s liability policy. Id. at 862-
64. Likewise, here, without such extrinsic evidence, Northfield
cannot and did not demonstrate that any exclusion applied to all the
Barrows’ claims against LHC and the Daniels.
The Barrows, LHC, and the Daniels assert that even if an
exception to the eight corners rule does exist, it does not apply
here because the Barrows’ petition properly alleged facts
sufficient, if taken as true, to potentially state at least one
cause of action falling within the policy; namely, negligence on the
part of Giral in dropping and/or shaking Bianca. This is a
19
separate, alternative allegation from that claiming Giral’s behavior
was criminally negligent under Texas Penal Code Section 6.03.
Likewise, the allegation of Giral’s negligent behavior, criminal or
not, does not constitute the kind of culpable mental state to which
the physical abuse exclusion would apply. This is clearly what the
district court found, and what Northfield did and does not contest:
the Barrows’ petition alleged facts sufficient to state a claim of
negligence potentially falling within Northfield’s policy with LHC.
The Barrows attack the cases relied on by Northfield for its
proposition that extrinsic evidence may be considered when a
petition does not state sufficient facts to determine the
applicability of an exclusion. Guaranty National did not address
this issue because in that case there was no doubt a pollution
exclusion applied; extrinsic evidence was necessary because
sufficient facts were not alleged to meet the insured’s burden of
showing a sudden and accidental exception to the exclusion applied.
143 F.3d at 195. The Barrows’ case is distinguished because LHC has
already carried its initial burden of showing that the claims
against it fall potentially within the scope of coverage, and
Northfield has failed to meet its burden of showing an exclusion
plainly applied to exclude all the Barrows’ claims. The Barrows
also argue against any exception applying here to use extrinsic
evidence to trigger an exclusion because such evidence would not
pertain only to coverage, but to liability as well, Gonzales v.
20
American States Insurance Co., 628 S.W.2d 184, 186-87 (Tex. App.-
Corpus Christi 1982, no writ), and because such evidence would tend
to contradict allegations pertaining to Giral’s neglectful dropping
and/or shaking behavior in the Barrows’ petition, id. at 187.
The Barrows emphasize that the Wade rationale applied by
Western Heritage has never been followed by other Texas courts and
should be rejected. And even if such limited exception exists, it
does not apply here because the extrinsic evidence would engage the
truth or falsity of the Barrows’ alleged facts. Wade, 827 S.W.2d
at 453. That is, evidence of the intentional actions of Giral would
place the accidental nature of the dropping and/or shaking
allegations in the Barrows’ petition in question.7 Unlike the
petition in John Deere, which did not sufficiently allege that the
rig involved in the accident was a vehicle covered by the policy,
122 F.3d at 272, the Barrows’ petition clearly did trigger the
negligence coverage provision of the CPL part of the policy.
Likewise, Matagorda Ventures is inapposite because the court’s
statement that an exception applies when the petition does not state
facts sufficient to determine the applicability of an exclusion is
dicta and has never been applied in practice, 203 F. Supp. 2d at
714-15. Finally, the Barrows argue that if any exception applies
to the eight corners rule, it solely concerns the determination of
7
Giral was convicted of first-degree felony injury to a child,
which means the jury had to find that she acted intentionally or
knowingly. Tex. Pen. Code Ann. § 22.04(a)(1), (e) (West 1996).
21
fundamental coverage questions, which does not encompass whether any
criminal act or physical abuse exclusion applies here.
Here, the district court correctly looked to the strict eight
corners rule to determine the duty to defend. It properly focused
on the alleged facts in the Barrows’ petition about Bianca and
Giral’s behavior toward her, not legal theories, and that they
should be construed in the insured’s favor. Contrary to what may
have been implied by Northfield, the district court did not refuse
to acknowledge that any exception to the eight corners rule might
exist. In fact, the district court cited John Deere for the
proposition that Texas law would allow extrinsic evidence if the
petition did not allege facts sufficient to trigger coverage.
122 F.3d at 272 (citation omitted). The district court properly
placed the initial burden on LHC and the Daniels to establish that
at least one claim against them was potentially within the scope of
coverage and then shifted the burden to Northfield to establish that
an exclusion plainly applied to all claims to defeat coverage. The
district court correctly determined that the Barrows’ complaint
asserted a claim of negligence within the policy’s scope of coverage
– properly construing in LHC’s favor the Barrows’ factual
allegations pertaining to Giral’s dropping and/or shaking behavior.
This determination was not challenged by Northfield.
What Northfield did challenge was that the policy’s exclusions
vitiated any duties to defend and indemnify LHC based on the
22
Barrows’ original complaint, which referenced Giral’s criminal
conviction. LHC, the Daniels, and the Barrows responded that the
live, third-amended petition’s alleged facts only supported a cause
of action for negligence. The district court properly refused to
read extrinsic facts into the pleadings and followed the strict
eight corners rule, finding no exception to apply. Although
Northfield makes arguments that stress the artful pleading by the
Barrows to keep the criminal and intentional allegations out, the
latest pronouncement on the eight corners rule by the Texas Supreme
Court in King reemphasized the strictness of the rule. Once the
Barrows alleged facts that stated a cause of action that potentially
fell within the scope of CPL coverage, no matter what facts the
previous versions of their petition alleged, the burden shifted to
Northfield to show that the plain language of the policy exclusions
when compared against the facts alleged in the underlying petition
precluded coverage. Northfield did not meet this burden under the
duty to defend’s eight corners inquiry.
And even in the unlikely event that the Texas Supreme Court
were to allow for a limited exception, whether the criminal acts and
physical abuse exclusions bar the duty to defend in this case would
not fit such narrow exception. First, it is clearly possible to
discern whether coverage is potentially implicated here, as
distinguished from all the cases Northfield relies on, including
Wade and Western Heritage. In fact, Northfield did not even raise
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this argument before the district court. Second, there is no case
in Texas or this Circuit that has ever applied any exception to
allow extrinsic evidence where the insurer submits the petition in
the underlying suit that does not allege facts sufficient to enable
the court to determine whether certain exclusions apply, as distinct
from and after the initial inquiry to determine whether coverage is
potentially implicated. Third, even if Texas law permitted
extrinsic evidence during the initial duty-to-defend determination
of potential coverage, the possible application of these specific
exclusions does not constitute a fundamental issue of coverage. It
is at least a step removed from any inquiry about express inclusions
or exclusions of specific property or persons, or if the policy
exists. There is no express exclusion in the policy specific to
Giral as a covered employee or to injuries to Bianca as covered
property, such as could be resolved by any readily determined fact.
Finally, even if the application of these exclusions were
considered a fundamental coverage issue that could be answered by
looking to extrinsic evidence, the extrinsic evidence here (Giral’s
conviction and the autopsy report on Bianca) would be barred by the
prohibition that such evidence cannot put the truth of the dropping
and/or shaking facts alleged in the Barrows’ petition into question.
Such evidence clearly overlaps with the merits of the Barrows’
underlying negligence suit. Thus, the district court properly used
Texas’s strict eight corners rule in determining Northfield had a
duty to defend LHC and the Daniels in the underlying tort suit filed
24
against them by the Barrows.
Whether this Court can review whether the district court properly
refused to decide the issue of Northfield’s duty to indemnify LHC
and the Daniels.
On cross-appeal, the Barrows argue that this Court has no
jurisdiction to decide Northfield’s duty to indemnify LHC and the
Daniels. Fed. R. App. P. 3(c)(1)(B) requires a notice of appeal to
“designate the judgment, order, or part thereof being appealed.”
The Barrows assert Northfield’s October 31, 2002, notice of appeal
only referenced the final judgment entered on October 8, 2002, and
not the order entered on June 4, 2003, which denied the Barrows’
motion to amend judgment and dismissed the duty-to-indemnify issue
without prejudice because it was nonjusticiable. The Barrows also
contend that Northfield waived any error in the district court’s
duty-to-indemnify decision because Northfield opposed the Barrows’
motion to amend to make the judgment nonfinal by agreeing the duty
to indemnify was nonjusticiable.
Northfield responds that it would have no reason to appeal the
June 4, 2003, order, as that order went in its favor by refusing to
make the judgment nonfinal. Northfield argues that its initial
summary judgment motion addressed its lack of both the duty to
defend and indemnify LHC and the Daniels, which the district court
initially granted but then later denied by granting the Barrows’,
the Daniels’, and LHC’s motions for reconsideration. That is, the
district court ultimately denied Northfield’s motion for summary
25
judgment as to both duties. Northfield contends the final judgment
decided that Northfield had a duty to defend and that its duty to
indemnify was nonjusticiable at the time. The district court
clarified this in its order denying the Barrows’ motion to amend:
“A review of the record indicates that the parties and the Court
agreed that the declaratory judgment in question was a final
judgment, as the issues regarding the duty to indemnify were not
justiciable at that point.” Northfield notes that Guaranty
National, 143 F.3d at 196, relied on by the Barrows, is
distinguishable because here Northfield had not stipulated that its
duty to indemnify was nonjusticiable but rather had argued that it
had no such duty when it moved for summary judgment. Northfield
asserts that the duty to indemnify only became nonjusticiable when
the district court erroneously determined there was a duty to
defend.
Northfield is correct as to the reviewability of its duty to
indemnify. The district court did ultimately deny Northfield’s
motion for summary judgment on both the duties to defend and
indemnify; however, when the district court ruled there was a duty
to defend, then the duty to indemnify became nonjusticiable. That
is, the district court was only going to find lack of a duty to
indemnify if it found lack of a duty to defend because Texas law
generally prohibits the determination of the duty to indemnify
before the conclusion of the underlying suit against the insured.
26
Westport, 267 F. Supp. 2d at 626 (citing Griffin, 955 S.W.2d at 84).
Thus, this Court can review the district court’s decision on
Northfield’s duty to indemnify.
Whether the district court erred in determining Northfield’s duty
to indemnify LHC and the Daniels was nonjusticiable.
As stated above, Texas law only considers the duty-to-indemnify
question justiciable after the underlying suit is concluded, unless
“the same reasons that negate the duty to defend likewise negate any
possibility the insurer will ever have a duty to indemnify.”
Griffin, 955 S.W.2d at 84. In addition, district courts have
discretion to decline to grant relief as to the duty to indemnify
under the authorization of the Declaratory Judgment Act. See
Westport, 267 F. Supp. 2d at 633 (citations omitted).
Here, the only way for the district court to have erred in its
nonjusticiability decision of Northfield’s duty to indemnify would
be if it had erred in its decision that Northfield owed LHC and the
Daniels a duty to defend. Because the district court was correct
in that determination, it not only had discretion to refuse to
decide the duty-to-indemnify issue, but Texas law clearly indicated
that it would err by doing so because the underlying litigation was
not completed.
CONCLUSION
Having carefully reviewed the record of this case, the parties’
respective briefing and arguments, and for the reasons set forth
27
above, we AFFIRM the district court’s decisions as to Northfield’s
duty to defend LHC and the Daniels in the underlying tort suit filed
against them by the Barrows and as to the present nonjusticiability
of Northfield’s duty to indemnify LHC and the Daniels.
AFFIRMED.
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