Virginia law controlling the question of when an insurer has a duty to defend its insured is so well established and clearly understood that it hardly bears discussion – or, at least, it would seem so. Under Virginia’s familiar “eight corners” rule, “only the allegations in the complaint and the provisions of the insurance policy are to be considered in deciding whether there is a duty on the part of the insurer to defend and indemnify the insured.” AES Corp. v. Steadfast Ins. Co., 725 S.E.2d 532, 535 (Va. 2012). This principle has become known as the “‘eight-corners rule’ because the determination is made by comparing the ‘four corners’ of the underlying complaint with the ‘four corners’ of the policy, to determine whether the allegations in the underlying complaint come within the [insurance] coverage provided by the policy.” Id. Under the eight-corners rule, the “insurer’s duty to defend is broader than the obligation to pay, and arises whenever the complaint alleges facts and circumstances, some of which would, if proved, fall within the risk covered by the policy.” Id. (int’l punct. & cits. omit’d).

Despite its clear-cut nature, the eight-corners rules does not adequately answer every insurance-coverage question that arises. Thus, Virginia’s application of the eight-corners rule has never been so hidebound that it does not admit any exceptions. The most well known is that for resolution of a latent ambiguity in policy language: while “insurance contracts, like other contracts, generally are to be construed according to their terms and without reference to parol evidence. . . . resort to parol evidence is [nevertheless] proper where a latent ambiguity exists in a particular insurance contract.” Southern Ins. Co. of Va. v. Williams, 561 S.E.2d 730, 733 (Va. 2002). “An ambiguity is latent where the language in question appears ‘perfectly clear’ at the time of contract formation, but owing to ‘subsequently discovered or developed facts, may reasonably be interpreted in either of two ways.’” Lott v. Scottsdale Ins. Co., 827 F. Supp.2d 626, 631 (E.D. Va. 2011), citing VEPCO v. Norfolk So. Ry. Co., 683 S.E.2d 517, 526 (Va. 2009). “[P]arol evidence may be used to resolve latent ambiguities.” Id., citing Williams, 561 S.E.2d at 733. See Cox v. Snap, Inc., No. 1:16cv9, 2016 U.S. Dist. LEXIS 128605, *16 (E.D. Va. Sept. 20, 2016).

Latent ambiguity is but one example of a situation in which the law has found it necessary to craft an exception to the eight-corners rule’s general prohibition against considering extrinsic evidence. Sometimes, questions over insurance coverage arise which have no direct connection with the allegations against an insured in a pending lawsuit, but instead are tangential to those allegations. A prime example is the effect on the insurer’s duty to defend a claim of an insurance policy’s cancellation, when the underlying lawsuit is silent on the question of when the harm or damage at issue occurred.

Unlike many states, Virginia has not adopted a rule for whether extrinsic evidence can be considered by a court in this context. By contrast, in many states that follow the eight-corners rule (or the substantially identical “pleading comparison” and “potentiality” rules) in determining the duty to defend, “declaratory judgment may be entered simultaneously as to both the duty to defend and the duty to pay when the case is based on such issues as nonpayment of a premium [or] cancellation of a policy. . . .” Madden v. Cont’l Cas. Co., 922 S.W.2d 731, 734 (Ark. Ct. App. 1996), cit’g Am. Policyholders’ Ins. Co. v. Cumberland, 373 A.2d 247 (Me. 1977). See Rutland v. State Farm Mut. Auto. Ins. Co., 426 Fed. Appx. 771, 774 (11th Cir. 2011) (unpub’d); Union Ins. Co. v. Soleil Group, Inc., 465 F. Supp.2d 567, 574 n.2 (D.S.C. 2006); Patrons Oxford Mut. Ins. Co. v. Garcia, 707 A.2d 384, 386 (Me. 1998). “The rationale for these exceptions is that the coverage dispute depends entirely on the relationship between the insurer and the insured, not on facts to be determined in the underlying litigation.” Union Insurance, 465 F. Supp.2d at 574 n.2, quot’g Patrons Oxford, 707 A.2d at 386. See Auto-Owners Ins. Co. v. Wier-Wright Enterprises, No. 5:15cv1118, 2017 U.S. Dist. LEXIS 37477, *34-*35 (N.D. Ala. Mar. 16, 2017); Dairyland Ins. Co. v. Sullivan, No. 2:16cv50, 2017 U.S. Dist. LEXIS 30116, *10 (D. Me. Mar. 3, 2017). In such cases, extrinsic evidence may be considered by the court to determine whether the insured and the insurer stood in a contractual relationship at the time of the alleged loss or “occurrence.” See OneBeacon American Ins. Co. v. Johnny’s Selected Seeds, Inc., No. 1:12cv375, 2014 U.S. Dist. LEXIS 53098, *27 (D. Me. Apr. 17, 2014), cit’g North East Ins. Co. v. Young, 26 A.3d 794, 799 (Me. 2011) (add’l cits. omit’d).

Texas very recently joined the growing ranks of states that recognize an exception to the general rule against considering extrinsic evidence to determine liability insurance coverage. In Monroe Guaranty Insurance Company v. BITCO General Insurance Corporation, the Supreme Court of Texas answered two questions certified to it by the U.S. Court of Appeals for the Fifth Circuit: first, whether Texas law permitted consideration of extrinsic evidence to determine whether the duty to defend existed in a situation where the underlying complaint was silent regarding a dispositive fact, and second, whether the date of an alleged occurrence is a type of extrinsic evidence that a court may consider in deciding the duty to defend. See Monroe Guar. Ins. Co. v. BITCO Gen’l Ins. Corp., No. 21-0232, 2022 Tex. LEXIS 148, *2 (Tex. Feb. 11, 2022). Like Virginia, Texas applies the eight-corners rule for determining an insurer’s duty to defend. See id., 2022 Tex. LEXIS 148, *7.

In answering these questions, the Texas Supreme Court observed that the eight-corners rule “is not absolute,” and that Texas law recognized certain exceptions to it. See id., 2022 Tex. LEXIS 148, *8. After noting exceptions to the rule previously adopted in Texas, the Supreme Court answered the first certified question by holding that it “expressly approve[d] the practice of considering extrinsic evidence in duty-to-defend cases. . . .” Id., 2022 Tex. LEXIS 148, *12. If “the underlying petition states a claim that could trigger the duty to defend, and the application of the eight-corners rule, due to a gap in the plaintiff’s pleading, is not determinative of whether coverage exists, Texas law permits consideration of extrinsic evidence provided the evidence (1) goes solely to an issue of coverage and does not overlap with the merits of liability, (2) does not contradict facts alleged in the pleading, and (3) conclusively establishes the coverage fact to be proved.” Id., 2022 Tex. LEXIS 148, *13. In short, if the fact determinative of insurance coverage was not a fact to be decided in the underlying lawsuit, a court could consider extrinsic evidence of that fact to decide the duty to defend. Compare Union Insurance, 465 F. Supp.2d at 574 n.2 (“The rationale for these exceptions is that the coverage dispute depends entirely on the relationship between the insurer and the insured, not on facts to be determined in the underlying litigation”).

Turning to the second certified question, the court next held that “there [was] no categorical prohibition against extrinsic evidence of the date of an occurrence.” Monroe Guar., 2022 Tex. LEXIS 148, *19. In situations where the question of when an occurrence took place (i) went solely to an issue of insurance coverage and did not overlap with the facts determining the insured’s liability, (ii) did not contract the underlying fact allegations, and (iii) would conclusively establish whether there was insurance coverage, extrinsic evidence of the data of the occurrence could be considered in determining the duty to defend. See id.

Given Texas’ firm adherence to the eight corners rule, courts applying Virginia’s identical rule arguably should given considered deference to Monroe Guaranty’s reasoning. The Supreme Court of Virginia has long held, in a different jurisprudential context, that a “litigant has no right to put blinkers [sic] on the court and attempt to restrict its vision only to such parts of the record as the litigant thinks tend to support his view” of the case. Culpeper Nat’l Bank v. Morris, 191 S.E. 764 (Va. 1937), quoted in Byrne v. City of Alexandria, 842 S.E.2d 409, 412 (Va. 2020). The same principle should apply when an underlying plaintiff either inadvertently or deliberately omits to allege the date of the occurrence at issue, thereby raising a question as to the applicability of insurance coverage that cannot be answered by reference to the pleadings. Adoption of some version of the rule permitting reference to extrinsic evidence of the date of the occurrence adopted in Texas, Maine, Alabama, and elsewhere would resolve this problem without doing violence to either the form, or purpose, of the eight-corners rule.

If you have questions on Virginia’s eight-corners rule and its application, please do not hesitate to contact Kevin Streit (kstreit@setlifflaw.com) at 804-377-1270, or Steve Setliff (ssetliff@setlifflaw.com) at 804-377-1261.