Liberty Mutual Insurance v. Graham

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT December 21, 2006

Charles R. Fulbruge III
Clerk

No. 05-10866

LIBERTY MUTUAL INSURANCE COMPANY,

Plaintiff-Appellee,

v.

PAUL M. GRAHAM,

Defendant-Appellant.

On Appeal from the United States District Court
for the Northern District of Texas, Fort Worth Division

Before JONES, Chief Judge, and DAVIS, and GARZA, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

In this diversity case, the Appellant, Paul M. Graham

(“Graham”), appeals the district court’s grant of summary judgment

declaring that Appellee, Liberty Mutual Insurance Company

(“Liberty”), has no duty to defend or indemnify him under the

omnibus clause of the insurance policy issued by Liberty to

Graham’s employer, Eagle Contracting, L.P. (“Eagle”), covering

Eagle’s vehicles.

1
 On appeal, Graham argues that the district court improperly

considered extrinsic evidence to defeat Liberty’s duty to defend in

violation of Texas’s eight-corners rule. Because we agree, we

REVERSE the district court’s judgment and RENDER judgment that

Liberty has a duty to defend Graham. We also conclude that genuine

issues of material fact remain regarding whether Graham was using

the company vehicle with the permission of Eagle at the time of the

accident. Accordingly, we REVERSE the district court’s summary

judgment declaring that Liberty has no duty to indemnify Graham and

REMAND to the district court for further proceedings.

I.

On the night of November 11, 2003, Graham was driving a

company vehicle belonging to his employer Eagle when he collided

with a motorcycle carrying Mikel Johnson and Christy Wright (“state

court plaintiffs”). At the time of the accident, Graham was on his

way home from a local restaurant where he had been celebrating his

40th birthday with a friend. Graham, who had consumed alcoholic

beverages at the restaurant, fell asleep while driving his company

truck and ran into the back of the state court plaintiffs’

motorcycle.

Johnson and Wright filed suit in state district court

asserting that Graham negligently operated the vehicle and Eagle

was negligent for entrusting the vehicle to Graham.1 The state
1
Because Plaintiffs make identical claims against the
corporate entities of Eagle Contracting L.P. and Eagle

2
court plaintiffs also asserted claims against Eagle based on a

respondeat superior theory.

At the time of the accident, Liberty’s policy covering the

Eagle vehicle provided in part as follows:

We will pay all sums an insured legally must pay as
damages because of bodily injury or property damage to
which this insurance applies, caused by an accident and
resulting from the ownership; maintenance or use of a
covered auto.
We have the right and duty to defend any suit asking for
these damages. However, we have no duty to defend suits
for bodily injury or property damage not covered by this
Coverage Form. We may investigate and settle any claim
or suit as we consider appropriate.
The policy defined the word “insured,” as used in the policy, as

follows:

WHO IS AN INSURED
The following are insureds:
a. You for any covered auto.
b. Anyone else while using with your permission a
covered auto you own, hire or borrow . . . .
The policy explains that the words “you” and “your” refer to Eagle,

the named insured. Graham asserts coverage through the permissive-

user or omnibus clause in subpart (b).

With regard to Graham’s permission to use his company vehicle,

the state court plaintiffs’ petition states in part:

• At the time of the incident complained of, Defendant Graham
was driving a Truck registered to his employer
• Such vehicle was entrusted to defendant Graham by [Eagle] as
Contracting, Inc., (Eagle Contracting, Inc., is a predecessor of
Eagle Contracting, L.P.) as well as Billy Haynes (a partner of
Eagle Contracting, L.P. and owner of the truck), we refer to
these entities and individual collectively as “Eagle.”

3
 part of his job
• Paul Graham has a long history of permissive use of the
vehicle notwithstanding any written or unwritten policies to
the contrary
• Eagle . . . knew and condoned the use of a company vehicle by
Graham and other employees in violation of purported policies
• Eagle has no effective or even attempted policy or practice to
regulate personal use of vehicles other than [giving employees
a written vehicle policy]
• Paul Graham had all of his gasoline and maintenance costs
reimbursed by Eagle
• Eagle had receipts clearly indicative of the use of Graham’s
company vehicle for personal use
• The night of the incident . . . was the fortieth (40) Birthday
of Defendant Graham. [Eagle] regularly allow[s] some of its
employees, including Defendant Graham, to drive business
vehicles in pursuit of personal activities.
Graham asserts that the allegations at least support an inference

that he had implied permission to use the Eagle vehicle.

Liberty brought this action for declaratory judgment in the

district court against Graham seeking a declaration that Liberty is

not obligated to defend or indemnify Graham in the underlying tort

suit. In its motion for summary judgment, Liberty sought to

establish the unauthorized nature of Graham’s use of the vehicle by

introducing Eagle’s written vehicle usage policy (“Vehicle Policy”)

as well as evidence of Graham’s intoxication. The Vehicle Policy

was given to Graham when he received his company truck and states

that “usage of the [company] vehicle must be limited to company

related business.”

Graham argued to the district court that Liberty owed him a

defense because under Texas’s eight-corners rule, a liability

4
insurer’s duty to defend is to be determined solely from the terms

of the insurance policy and the pleadings of the underlying

plaintiff. Graham contended that because the complaint alleges

permission and the policy covers permissive drivers, the duty to

defend was invoked. Liberty argued that the complaint does not

allege permissive use of the vehicle and that, even if it does,

this case justifies an exception to the eight-corners rule and

considering extrinsic evidence is appropriate because such evidence

relates solely to a coverage determination.

The district court, while acknowledging the general

prohibition against extrinsic evidence in duty to defend disputes,

concluded that extrinsic evidence was proper in this case for both

of the reasons asserted by Liberty. First, the district court

found that the insurance policy and third party complaint did not

permit a conclusive determination on coverage. The court explained

that the state court plaintiffs’ reference to the use of the

vehicle with permission at other times and places did not address

permission on the night in question. Second, the district court

found that the extrinsic evidence related only to a coverage

determination.

Based on these conclusions, the district court considered

extrinsic evidence and found that the evidence affirmatively

established a lack of permissive use by Graham at the time of the

accident. The judge particularly relied upon evidence that the

5
defendant had received and signed a copy of the Vehicle Policy. As

a result, the district court found that the insurance company had

neither a payment nor defense obligation and granted Liberty’s

motion for summary judgment. Graham lodged a timely appeal.

II.

A.

The central issue in this case is whether the district court

erred in concluding that Graham was not entitled to a defense from

Liberty in the state court suit brought by the state court

plaintiffs. The resolution of this question depends on whether the

state court plaintiffs’ allegations are sufficient to demonstrate

that Graham was a permissive user of the Eagle vehicle and an

“insured.”

This court reviews whether an insurer has a duty to defend its

insured in an underlying suit as a de novo question of law.2

Similarly, this court reviews de novo a district court’s grant of

summary judgment, applying the same standard as below.3 The

parties agree that Texas law governs this diversity case.

As a general proposition, Texas has followed the “eight-

corners rule.” Under this rule, an insurer’s duty to defend is

determined by the underlying plaintiff’s pleadings, considered in

light of the policy provisions, without regard to the truth or
2
Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d
523, 528 (5th Cir. 2004).
3
Ford Motor Co. v. Tex. Dep’t of Transp., 264 F.3d 493, 498
(5th Cir. 2001).

6
falsity of those allegations.4 As the name of the rule suggests,

only two documents are ordinarily relevant to the determination of

the duty to defend: the policy and the pleadings of the underlying

claimant.5 Facts outside the pleadings, even those easily

ascertained, are ordinarily not material to the determination and

allegations against the insured are liberally construed in favor of

coverage.6

If the four corners of a petition allege facts stating a cause

of action which potentially falls within the four corners of the

policy’s scope of coverage, the insurer has a duty to defend.7 If

all the facts alleged in the underlying petition fall outside the

scope of coverage, then there is no duty to defend, but we resolve

all doubts regarding duty to defend in favor of the duty.8

After the district court rendered its judgment, the Texas

Supreme Court issued its decision in GuideOne Ins. Co. v. Fielder

Rd. Baptist Church9 which we conclude controls this appeal.10 In
4
GuideOne Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d
305, 308 (Tex. 2006).
5
Id.
6
Id.
7
Northfield, 363 F.3d at 528.
8
Id.
9
197 S.W.3d 305.
10
Liberty cites this court’s post-GuideOne opinion in Adams
v. Travelers Indemnity Co. Of Connecticut, 465 F.3d 156 (5th Cir.
2006), for the proposition that an eight-corners analysis is
inapplicable to cases involving coverage determinations which
involve a permissive user clause. However, the Adams decision
does not so hold. Further, GuideOne was decided after the
parties had both briefed and argued the Adams case. While we
would be bound by another panel’s interpretation of a state court
decision, it is clear to us that the Adams panel did not consider

7
that case, GuideOne Insurance Company (“GuideOne”) issued a

liability policy to Fielder Road Baptist Church (“Church”) which

included liability coverage for claims against the Church for

sexual misconduct of its employees occurring during the policy

period of March 31, 1993 to March 31, 1994. In 2001, Jane Doe sued

the Church and a former employee, Charles Patrick Evans, for sexual

misconduct. In her pleadings, Jane Doe alleged that “[a]t all

times material herein from 1992 to 1994, Evans was employed as an

associate youth minister and was under [the Church]’s direct

supervision and control when he sexually exploited and abused

Plaintiff.” Based on these allegations, the Church asserted that

the policy required GuideOne to defend it in the lawsuit and

indemnify it for any judgment or settlement.

GuideOne challenged its duty to defend and obtained discovery

from the Church indicating that Evans’s employment ended on

December 15, 1992, before the insurance policy became effective.

This evidence led the trial court to render judgment declaring that

GuideOne had no duty to defend the Church in the underlying sexual

misconduct case. The court of appeals reversed the summary

judgment, concluding that, based on the eight-corners rule, the

trial court had erred in considering extrinsic evidence to defeat

GuideOne. This conclusion is based on our review of the record
in Adams revealing no supplemental briefing calling GuideOne to
the panel’s attention together with the fact that the panel does
not refer to GuideOne in its decision.

8
GuideOne’s duty to defend its insured.

The Texas Supreme Court affirmed the decision of the court of

appeals, agreeing that the trial court had erred in considering

extrinsic evidence.11 The court began its analysis by citing with

approval this court’s prediction in Northfield that the Texas

Supreme Court would only recognize an exception to the eight-

corners rule in the narrow circumstance where “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.”12

The court explained that GuideOne’s case did not fit this

predicted exception on either count. First, the underlying

plaintiff’s complaint clearly alleged that Evans was employed

during the relevant policy period and the conduct alleged was

covered by the terms of the policy.13 Second, GuideOne was

attempting to rely on extrinsic evidence that was relevant not only

to a coverage issue but also to the merits. Specifically,

GuideOne’s evidence concerning Evans's employment directly

contradicted the plaintiff's allegations that the Church employed

Evans during the relevant coverage period, an allegation the court

found material to the merits of the underlying plaintiff’s claims
11
GuideOne, 197 S.W.2d at 311.
12
Id., at 308-09 (quoting Northfield, 363 F.3d at 531
(emphasis in original)).
13
Id. at 310.

9
that the Church directly supervised and controlled Evans at the

time he committed the sexual assaults.14

The Texas Supreme Court noted that the exception urged by

GuideOne would conflate the insurer’s defense and indemnity duties

without regard for the policy’s express terms.15 The court

explained that the duty to defend is broader than the duty to

indemnify and that “[a] plaintiff’s factual allegations that

potentially support a covered claim is all that is needed to invoke

the insurer’s duty to defend, whereas, the facts actually

established in the underlying suit control the duty to indemnify.”16

B.

We therefore turn to a consideration of whether the facts

alleged in the state court complaint assert a covered claim against

Graham. Some of the state court complaint’s factual allegations

are devoted to demonstrating Graham’s longstanding permission from

Eagle to use his company vehicle for personal use:

• Paul Graham has a long history of permissive use of the
vehicle notwithstanding any written or unwritten policies to
the contrary

• Eagle . . . knew and condoned the use of a company vehicle by
Graham and other employees in violation of purported policies

• Eagle has no effective or even attempted policy or practice to
regulate personal use of vehicles other than [giving employees
the Vehicle Policy]
14
See id.
15
Id.
16
Id. (citation omitted).

10
• Eagle had receipts clearly indicative of the use of Graham's
company vehicle for personal use

The complaint also describes Graham’s personal pursuit on the night

of the accident and then immediately asserts that Eagle permitted

its employees to use its vehicles in personal pursuits:

• The night of the incident was . . . the fortieth Birthday of
Defendant Graham. . . . Eagle . . . allow[s] some of its
employees, including Defendant Graham, to drive business
vehicles in pursuit of personal activities

Texas law requires us to consider the allegations in the complaint

along with any reasonable inferences that flow from the facts

alleged.17 Taking all the facts alleged in combination–including

(i) Graham’s long history of permissive personal use of the

vehicle, (ii) Eagle’s failure to enact any effective restrictions

on personal use of company vehicles, and (iii) Graham’s use of his

company vehicle for a personal activity on the night of the

accident–it is reasonable to infer that the plaintiffs assert that

Graham was driving the vehicle with Eagle’s permission at the time

of the accident.18

Our conclusion that the underlying plaintiffs’ complaint

alleges a covered claim is supported by the Texas Supreme Court’s

command to liberally construe a plaintiff’s allegations in favor of

17
See Allstate Ins. Co. v. Hallman, 159 S.W.3d 640, 645
(Tex. 2005).
18
See id. (applying eight-corners analysis; although the
petition against the insured homeowner did not contend the event
alleged to have caused damage to insured property was undertaken
with a profit motive, the court inferred a profit motive from
petition’s allegations).

11
coverage and to resolve all doubts regarding the duty to defend in

favor of the insured.19

C.

Liberty also argues that even if the plaintiffs’ allegations

facially invoke its duty to defend, extrinsic evidence of Graham’s

permission to use the company truck is appropriate under the

limited exception to the eight corners rule applied by some Texas

appellate courts and approved in the GuideOne decision’s dicta.

Liberty contends that such evidence relates solely to Graham’s

status as an insured and, while it may contradict the merits of the

state court plaintiffs’ various claims against Eagle, the evidence

does not challenge the merits of the state court plaintiffs’ case

against Graham.20

An examination of the case discussed approvingly by the Texas

Supreme Court for its application of a narrow eight-corners

exception, International Service Insurance Co. v. Boll,21

illustrates the inapplicability of such an exception to the present

case. In Boll, the insurer refused to defend its insured in an

auto-collision case because of a policy endorsement that excluded
19
See Nat’l Union Fire Ins. Co., 939 S.W.2d at 141 (“When
applying the eight corners rule, we give the allegations in the
petition a liberal interpretation.”); see also King v. Dallas
Fire Ins. Co., 85 S.W.3d 185, 187 (Tex. 2002) (“We resolve all
doubts regarding the duty to defend in favor of the duty.”).
20
See GuideOne, 197 S.W.3d at 310 (noting that courts have
recognized an exception to the eight-corners rule under limited
circumstances involving pure coverage questions).
21
392 S.W.2d 158 (Tex. Civ. App.—Houston 1965, writ ref’d
n.r.e.).

12
coverage for “any claim arising from accidents which occur while

any automobile is being operated by Roy Hamilton Boll.” The

plaintiff’s petition alleged only that the insured’s son was

driving the insured’s car when the accident occurred, but did not

otherwise identify the driver. The parties eventually stipulated

that the insured’s only son, Roy Hamilton Boll, was driving the

insured vehicle. The court of appeals noted that without reference

to this extrinsic evidence identifying the driver, it was

impossible to determine whether coverage was afforded.22 The court,

after finding they could properly consider the stipulation,

concluded that the insurer had no duty to defend.23

Unlike the situation in GuideOne or in the present case, the

policy and complaint in Boll did not bring the claim within or

outside the scope of coverage. Reference to the eight-corners in

Boll failed to allow a determination as to coverage because of the

petition’s imprecision in identifying the son who was driving the

vehicle involved in the collision.24 In this case, the complaint

alleges facts sufficient to infer that Graham was driving with

Eagle’s express or implied permission. Since the policy

unambiguously covers permissive drivers, the duty to defend is

22
See id. at 160.
23
Id. at 161.
24
See id. at 160.

13
invoked.25 Accordingly, the Boll exception has no application.26

We also find Boll and other Texas intermediate court decisions

allowing extrinsic evidence to establish a lack of coverage are

distinguishable because they involved explicit policy coverage

exclusion clauses, the applicability of which could not be

established under the allegations of the complaint but rather

required reference to unrelated but readily ascertainable facts.27

The coverage issue in the instant case does not turn on the

existence of such a clause. Because none of the exceptions to the

rule allowing a court to consider extrinsic evidence in this

circumstance apply, Liberty owes Graham a duty to defend.

D.

Turning to the duty to indemnify, the district court concluded

that no issue of fact was presented as to whether Graham was a
25
GuideOne, 197 S.W. at 310 (“A plaintiff’s factual
allegations that potentially support a covered claim is all that
is needed to invoke the insurer’s duty to defend.”).
26
See id., 197 S.W. at 308-09 (citing with approval this
court's prediction in Northfield, 363 F.3d at 531, that the Texas
Supreme Court would only recognize an exception to the
eight-corners rule in the narrow circumstance where “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.”).
27
See, e.g., Farm Fire & Cas. Co. v. Wade, 827 S.W.2d 448,
453 (Tex.App.—Corpus Christi 1992, writ denied) (extrinsic
evidence introduced to establish that plaintiff was injured while
paid passenger on a vessel; such injuries were explicitly
excluded from coverage); Boll, 392 S.W.2d at 160-61 (extrinsic
evidence introduced to establish the identity of driver where
specific policy coverage exclusion named an excluded driver); see
also King, 85 S.W.3d at 189.

14
permissive user of the insured vehicle and therefore found that

Liberty had no duty to indemnify. We disagree.

Graham testified in his deposition that it was his

understanding that he had permission to use the vehicle on the

night of the accident based on his extensive personal use of the

vehicle and the personal use of company vehicles by other employees

without objection by company supervisors. He stated that the

company never limited the personal use of company vehicles by him

or other employees in the face of their knowledge of such use. In

contrast, Eagle Company President Charles Howard testified that the

Vehicle Policy, which Graham received and signed, was a binding

company rule and adherence to the policy, including the bar on

personal use, was a precondition for any employee’s permission to

drive trucks owned by Eagle. He further stated in a sworn

affidavit that Graham never asked him for permission to use the

company vehicle for a personal outing on the evening of the

accident. Howard admitted in deposition testimony, however, his

belief that employees likely used their company vehicles for

personal use.28 He also admitted that he had not sanctioned Graham

for using a company vehicle for a personal visit to his daughter in

East Texas. In addition, Billy Haynes, a limited partner of Eagle,

stated in his deposition that he did not question Graham’s personal
28
Q: So, you know, do you think that in reality, since these
people are taking these vehicles home, that they probably do use
it for personal use?
A: They probably do.

15
use of a company truck when Graham traveled to Haynes’s house on at

least one weekend in order to accompany him on a fishing trip.

We conclude that these statements create a fact issue about

whether Graham was driving his company vehicle with the implied

permission of Eagle on the night of the accident. Summary judgment

was therefore inappropriate on the indemnity issue.

III.

Because we find that correct application of Texas’s eight-

corners rule requires Liberty to defend the suit against Graham, we

REVERSE the district court’s contrary ruling and RENDER judgment

that Liberty has a duty to defend Graham in the state court

plaintiffs’ litigation. Further, because we are persuaded that a

genuine issue of material fact exists as to whether Graham

qualifies as an insured under the policy, we REVERSE the grant of

summary judgment finding Liberty has no duty to indemnify and

REMAND the case for further proceedings.

REVERSED AND RENDERED IN PART.

REVERSED AND REMANDED IN PART.

16