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Under the “eight-corners rule,” an insurer’s duty to defend is determined by comparing the allegations in the complaint with the terms and conditions of an insurance policy. 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 March 20, 2020, the Texas Supreme Court published an opinion rejecting an attempt to create an exception to the eight-corners rule in Richards v. State Farm Lloyds, 63 Tex. Sup. J. 614, 2020 Tex. LEXIS 236 (Tex. 2020). Richards concerned an insurer’s duty to defend an automobile collision suit. The U.S. District Court for the Northern District of Texas trial court granted summary judgment in favor of the insurer, which had denied coverage based on extrinsic evidence regarding the place of the collision and residency of the injured party.
The district court held that the eight-corners rule did not apply because the subject policy did not include a provision agreeing to defend “groundless, false or fraudulent” claims. On appeal, the U.S. Court of Appeals for the Fifth Circuit certified the question to the Texas Supreme Court.
The Texas Supreme Court reversed the district court’s ruling. The court declined to find this exception in the eight-corners rule and rejected the assertion that the eight-corners rule is predicated on the inclusion of a groundless-claims clause. The court noted that the duty to defend has never turned on the presence or absence of a groundless-claims clause. The court stated that parties are free to contract out of the eight-corners rule but that the policy language here failed to do so.
The holding in Richards was limited to the question of whether the absence of a groundless-claims clause affects application of the eight-corners rule.
In one of the earliest Texas opinions to consider a proposed exception to the eight-corners rule, International Serv. Ins. Co. v. Boll, 392 S.W.2d 158, 160 (Tex. Civ. App.–Houston 1965, writ ref’d n.r.e.), the court evaluated an auto insurer’s duty to defend an auto accident suit brought against the insured, who was the father of the driver. The underlying suit did not identify the driver by name, but extrinsic evidence established that the driver was the insured’s son, in which case the claim would not be covered. The court admitted the extrinsic evidence concerning the driver’s identity and found no duty to defend. The extrinsic evidence did not contradict any allegation of the underlying facts.
In Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523, 531 (5th Cir. 2004), the Fifth Circuit (applying Texas law) ventured an Erie guess and speculated that the Texas Supreme Court, if it were to recognize an exception to the eight-corners rule, would do so only if both these conditions are met: (1) it is initially impossible to discern whether coverage is potentially implicated, and (2) the extrinsic evidence goes solely to a fundamental issue of coverage which does not concern the truth or falsity of any facts alleged in the underlying case.
In 2006, the Texas Supreme Court acknowledged the Northfield opinion but issued a narrow ruling in GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305 (Tex. 2006), disallowing extrinsic evidence intended to controvert factual allegations in the underlying complaint. The GuideOne opinion examined the liability insurer’s duty to defend a church where a church member filed a sexual misconduct lawsuit against the church and a youth minister. The insurer sought to admit extrinsic evidence regarding the youth minister’s dates of employment as they did not align with the policy period. The court excluded the evidence on the grounds that it contradicted the underlying complaint’s allegation that the youth minister assaulted the claimant during the policy period. However, the court acknowledged the possibility that an exception to the eight-corners rule might apply under different facts. In both GuideOne and Richards, the court issued rulings upholding the eight-corners rule based on the record before it but did not take a position on other potential exceptions.
If you have any questions or would like more information, please contact Kristin Ingulsrud at [email protected].