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In Texas, an insurer’s duty to defend is governed by the “eight-corners rule.” Application of the eight-corners rule takes the allegations of the claim at face value, without regard to the truth or falsity of the allegations, and it necessarily excludes consideration of extrinsic evidence.
On May 1, 2020, the Texas Supreme Court found a rare exception to the eight-corners rule in Loya Ins. Co. v. Avalos, 2020 Tex. LEXIS 373 (2020).
Loya addressed whether an insurer owed a duty to defend its insured in an automobile coverage suit. The decision in Loya was issued less than two months after Richards v. State Farm Lloyds, 63 Tex. Sup. J. 614, 2020 Tex. LEXIS 236 (2020). In Richards, the Texas Supreme Court rejected an insurer’s argument that, because the policy lacked a “groundless claims” provision, the eight-corners rule does not apply.
In Loya, the automobile policy expressly excluded the insured’s husband from the liability coverage. At the time of the accident, the husband was driving, and he injured third parties. In order to secure coverage, the parties agreed to tell the insurer and the police that the insured had been driving. The claimant named only the insured, and not the husband, as defendant in the lawsuit. When the insurer discovered the misrepresentation, it withdrew defense and denied coverage. The third parties obtained a judgment against the insured, and the insured assigned her rights against her insurer to the third parties.
The third parties sued the insurer for breach of contract and breach of the implied covenant of good faith and fair dealing. The trial court granted summary judgment for the insurer, based on the insurer’s introduction of evidence of the misrepresentation by the insured, her husband, and the underlying plaintiff. The third parties appealed, arguing that the summary judgment violated the eight-corners rule and that notwithstanding the evidence of fraud, the insurer owed the insured a defense. The appellate court reversed the summary judgment, and one justice, in his concurrence, urged the Texas Supreme Court to adopt the trial court’s narrow exception to the eight-corners rule.
The Texas Supreme Court reversed the appellate court and reinstated the trial court’s summary judgment, finding an exception to the eight-corners rule to admit extrinsic evidence for the limited purpose of showing collusion between the insured and a third party to commit fraud. Under this exception, courts can consider extrinsic evidence regarding collusive fraud by the insured in determining the insured’s duty to defend. The Court noted that the duty to defend extends to fraudulent allegations by third parties, and not to fraud committed by the insured. The Court also noted that insurers need not seek declaratory relief before withdrawing coverage, because remedies are available to insureds who wish to challenge coverage decisions.
If you have any questions or would like more information, please contact Kristin Ingulsrud at [email protected].