IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

SENTRY INSURANCE, A MUTUAL §

COMPANY, §

 §

Plaintiff- §

counterdefendant, §

 § Civil Action No. 3:04-CV-1043-D

VS. §

 §

DFW ALLIANCE CORP., et al., §

 §

Defendants- §

counterplaintiffs. §

MEMORANDUM OPINION

 AND ORDER 

Treating defendant-counterplaintiff DFW Alliance Corporation’s

(“DFW’s”) March 1, 2007 motion “for new trial” as a Fed. R. Civ. P.

59(e) motion to alter or amend the judgment, see St. Paul Mercury

Insurance Co. v. Fair Grounds Corp., 123 F.3d 336, 339 (5th Cir.

1997), the court denies the motion.

DFW seeks relief from the court’s memorandum opinion and order

granting summary judgment in favor of plaintiff-counterdefendant

Sentry Insurance, A Mutual Insurance Company (“Sentry”). Sentry

Ins. v. DFW Alliance Corp., 2007 WL 507047 (N.D. Tex. Feb. 16,

2007) (Fitzwater, J.). It contends that the court erred in

holding——based solely on the facts alleged in the underlying

complaint, which the court accepted as true——that Sentry had

demonstrated based on the “known loss” doctrine that it was

entitled to summary judgment that it had no duty to defend DFW.

DFW does not disagree with the court’s application of the “eight

 

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corners rule” in addressing whether the “prior publication”

exclusion applied to relieve Sentry of the duty to defend DFW in

the underlying litigation. It argues, however, that adherence to

the “eight corners rule” when applying the “known loss” doctrine

was error. DFW maintains that a “known loss” bar to the duty to

defend is distinct from the threshold question whether a duty to

defend from the “eight corners rule” exists in the first instance.

It points to the rule that an insurer has no duty to indemnify

until the liability of the insured is actually established through

adjudication of the merits of the underlying case, arguing that, in

the same way, having established the duty to defend by the “eight

corners rule,” such a defense is barred only upon actually

establishing a known loss.

At the outset, the court notes that it did not hold in its

memorandum opinion and order that DFW had established under the

“eight corners rule” that Sentry had a duty to defend. In Sentry’s

summary judgment motion, it argued that any duty to defend DFW was

barred by the “prior publication” doctrine or, alternatively, by

the “known loss” doctrine. The conclusion that either doctrine

applied would have relieved Sentry of a duty to defend.

Accordingly, the court conducted its analysis of both the “prior

publication” doctrine and the “known loss” doctrine under the

standard applicable to duty-to-defend cases: the “eight corners

rule.” 

 

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DFW’s citations to Lennar Corp. v. Great American Insurance

Co., 200 S.W.3d 651 (Tex. App. 2006, pet. pending), and Burch v.

Commonwealth County Mutual Insurance Co., 450 S.W.2d 838 (Tex.

1970), for the proposition that Sentry was required to establish a

“known loss” are therefore inapposite, because neither addresses

the duty to defend. As DFW acknowledges, the standard for whether

there is a duty to indemnify is different from the standard for

whether there is a duty to defend. See, e.g., Comsys Info. Tech.

Servs. Inc. v. Twin City Fire Ins. Co., 130 S.W.3d 181, 190 (Tex.

App. 2003, pet. denied) (“Unlike the duty to defend, the duty to

indemnify is based on facts proven, not on pleadings.” (citing

Pilgrim Enters., Inc. v. Maryland Cas. Co., 24 S.W.3d 488, 492

(Tex. App. 2000, no pet.)). In duty-to-indemnify cases it is

appropriate for the court to consider evidence outside the “eight

corners.” Id. But an insurer’s duty to defend is determined by

the “eight corners rule,” which requires that the court examine

solely the allegations in the pleadings of the underlying lawsuit

in light of the policy provisions, regardless of the truth of the

allegations. GuideOne Elite Ins. Co. v. Fielder Rd. Baptist

Church, 197 S.W.3d 305, 308 (Tex. 2006); Two Pesos, Inc. v. Gulf

Ins. Co., 901 S.W.2d 495, 499 (Tex. App. 1995, no writ); Feed

Store, Inc. v. Reliance Ins. Co., 774 S.W.2d 73, 74-75 (Tex. App.

1989, writ denied) (under the “eight corners rule,” court “cannot

consider anything outside (a) the policy and (b) the pleadings,

 

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even if there is evidence tending to show the suit is utterly

specious.”)

DFW cites no Texas case that holds that application of the

“eight corners rule” is improper in the context of the “known loss”

doctrine. The only cases this court could locate that have

addressed the evidence that was properly considered in assessing

the “known loss” doctrine in the context of a duty-to-defend case

did, in fact, limit their inquiry by the “eight corners rule.” See

Warrantech Corp. v. Steadfast Ins. Co., 210 S.W.3d 760, 766 (Tex.

App. 2006, pet. filed) (“Application of the fortuity doctrine in

the duty-to-defend context is resolved by the eight-corners rule;

‘we focus only on those facts that are alleged in the pleadings in

the underlying lawsuit.’” (quoting Burlington Ins. Co. v. Tex.

Krishnas, Inc., 143 S.W.3d 226, 230 (Tex. App. 2004, no pet.)));

Tex. Krishnas, Inc. 143 S.W.2d at 230 (“Coverage is precluded in

situations that involve a known loss as well as a loss in progress

. . . . Again, because we are dealing with the duty to defend, not

the duty to indemnify, we focus only upon those facts that are

alleged in the pleadings in the underlying lawsuits.” (citations

omitted)); Scottsdale Ins. Co. v. Travis, 68 S.W.3d 72, 75-76 (Tex.

App. 2001, pet. denied) (looking to allegations of underlying

complaint to determine whether insured’s conduct began before

inception of insurance policy); E & L Chipping Co. v. Hanover Ins.

Co., 962 S.W.2d 272, 276 (Tex. App. 1998, no pet.) (“In seeking to

 

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determine the applicability of [the “known losses” or “losses in

progress”] doctrines to the instant case, we turn once again to the

eight corners rule. In so doing, we restrict our review to the

insurance policy and the underlying pleadings, and again point out

that the facts, as pleaded, evidence property damage occurring

during the policy period as required by the policy.”)

Furthermore, the fact that DFW disputed whether it had

knowledge of any known loss is irrelevant to the court’s inquiry.

“When reviewing the pleadings, the facts alleged by the underlying

plaintiff must be accepted as true for the purposes of determining

coverage.” Koenig v. First Am. Title Ins. Co. of Tex., 209 S.W.3d

870, 873 (Tex. App. 2006, no pet. h.) (citing Nat’l Union Fire Ins.

Co. of Pittsburgh, Pa. v. Merchs. Fast Motor Lines, Inc., 939

S.W.2d 139, 141 (Tex. 1997)). “‘The duty to defend is not affected

by facts ascertained before suit, developed in the process of

litigation, or by the ultimate outcome of the suit.’” Trinity

Universal Ins. Co. v. Cowan, 945 S.W.2d 819, 829 (Tex. 1997)

(quoting Am. Alliance Ins. Co. v. Frito-Lay, Inc., 788 S.W.2d 152,

154 (Tex. App. 1990, writ dism’d)). The actual outcome of the

underlying litigation should not be considered. Koenig, 209 S.W.3d

at 873 (citing State Farm Lloyds v. Kessler, 932 S.W.2d 732, 736

(Tex. App. 1996, writ denied)). 

By its present motion, DFW essentially asks the court to apply

an exception to this duty-to-defend case and require that Sentry

 

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establish, by evidence beyond the pleadings and insurance policy,

that it did not have this duty. Because DFW was ultimately

absolved of all liability in the underlying litigation, its

argument for departing from a strict application of the “eight

corners rule” has some appeal. But this court is obligated in this

diversity case to apply Texas law, not to extend it in

circumstances where it is unable to predict that the Supreme Court

of Texas would do so. The Texas Supreme Court has not yet

recognized an exception to the “eight corners rule” in the context

of the duty to defend. See, e.g., Northfield Ins. Co. v. Loving

Home Care, Inc., 363 F.3d 523, 530 (5th Cir. 2004); GuideOne Elite

Ins. Co., 197 S.W.3d at 306-07; Landmark Chevrolet Corp. v.

Universal Underwriters Ins. Co., 121 S.W.3d 886, 890 (Tex. App.

2003, pet. filed). This court has no reliable basis to predict

that the Texas Supreme Court would make an exception to the “eight

corners rule” in cases, like this one, where the outcome of the

trial is different from the factual allegations of the underlying

complaint. See Northfield Ins. Co., 363 F.3d at 531 (making Erie

guess that the Texas Supreme Court would not recognize any

exception to the strict “eight corners rule”). Although in some

instances the rule, as here, redounds to the benefit of the

insurer, it would appear that in operation it more frequently

benefits the insured, who is entitled to a defense regardless of

the truth of the allegations in the underlying complaint. For

 

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example, the Texas Supreme Court has rejected the use of

“overlapping [extrinsic] evidence as an exception to the

eight-corners rule because it poses a significant risk of

undermining the insured’s ability to defend itself in the

underlying litigation.” GuideOne Elite Ins. Co., 197 S.W.3d at

309. Texas may therefore decide that an unflinching rule that in

most instances achieves its intended effect should not be altered

on the basis of sporadic instances where it does not.

The court concludes that DFW’s other arguments do not warrant

altering or amending the judgment or merit discussion.

Accordingly, DFW’s motion March 1, 2007 motion to alter or

amend the judgment is denied.

SO ORDERED.

March 6, 2007.

_________________________________

SIDNEY A. FITZWATER

UNITED STATES DISTRICT JUDGE

 

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