Under Dairy Road Partners v. Island Ins. Co., 92 Hawai`i 398, 414, 992 P.2d 93, 117 (2000), the Hawai`i Supreme Court determined an insured, but not the insurer, can rely on extrinsic evidence to clarify the underlying allegations and demonstrate the possibility of a claim being covered. The Texas Supreme Court recently departed from this reasoning and held neither the insured nor the insurer can go beyond the eight corners of the underlying complaint and policy to trigger the duty to defend. See Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., No. 06-0867, 2009 Tex. LEXIS 30 (Tex. Sup. Ct. Feb. 13, 2009).
Pine Oaks, a home builder, sought a defense when sued by homeowners alleging their homes suffered water damage because of defective construction. The trial court granted summary judgment for Great American and the court of appeals affirmed, reasoning that the alleged defective work was excluded under the "your work" exclusion. This policy exclusion removed coverage for property damage to the insured's completed work. An exception to the exclusion existed, however, if the damaged work or work out of which the damage arose was performed by a subcontractor.
The underlying complaint contained no allegation of defective work by a subcontractor. Pine Oak submitted extrinsic evidence, however, that the alleged defective work was performed by subcontractors.
The Supreme Court first held that under Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W. 3d 1 (Tex. 2007), a claim of faulty workmanship against a homebuilder was a claim for property damage caused by an occurrence. Further, under Don's Building Supply, Inc. v. OneBeacon Ins. Co., 267 S.W. 3d 20 (Tex. 2008), the actual injury rule, under which property damage occurs during the policy period if actual physical damage to property occurred during the policy period, applied. So far, so good.
The Supreme Court, however, strictly adhered to the eight-corners rule and determined there was no duty to defend. Faulty workmanship by a subcontractor was not alleged in the underlying petition. In deciding the duty to defend, the trial court should not consider extrinsic evidence from either the insurer or the insured that contradicts the allegations of the underlying petition. Therefore, even though the pleading in the underlying case was apparently contradicted by extrinsic evidence, strict application of the eight-corners rule prevented a duty to defend.
