Supreme Court of Texas Addresses Exceptions to the Eight-Corners Rule

Texas law determines an insurer’s duty to defend using the “eight-corners” rule, which compares the third-party plaintiff’s pleadings in the suit against the insured to the relevant provisions in the policy, without reference to extrinsic evidence. See, e.g., GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305, 308 (Tex. 2006). Carriers have long sought exceptions to the eight-corners rule, and proposed exceptions have recently garnered the Supreme Court of Texas’s attention.

In 2020, the Court rejected a broad proposed exception based on policy language in Richards v. State Farm Lloyds, 597 S.W.3d 492 (Tex. 2020), but recognized a narrow exception in Loya Ins. Co. v. Avalos, 610 S.W.3d 878 (Tex. 2020), reh'g denied (Oct. 2, 2020), allowing extrinsic evidence that the insured and the third party suing the insured fraudulently colluded to try to secure coverage. This year, the Court will take up Bitco General Insurance Corp. v. Monroe Guaranty Insurance Co., Case No. 21-0232. In Bitco, the Court will consider whether Texas law recognizes an exception to the eight-corners rule when the pleadings are inconclusive on whether there is a duty to defend and the extrinsic evidence does not overlap with the merits or engage the truth or falsity of any facts alleged in the underlying case.

Richards v. State Farm Lloyds—Rejecting a Policy Language Exception

Richards arose out of the death of a ten-year-old boy in an ATV accident under the supervision of his paternal grandparents. After the mother sued the grandparents for negligent supervision, the grandparents sought a defense under their homeowner’s policy. State Farm denied coverage based on two exclusions. First, it argued a motor-vehicle exception, which applied to vehicles operated off the insured’s premises, barred coverage, relying on a police report showing the location of the accident. Second, it relied on an exclusion for bodily injury to “insureds,” defined as “you and, if residents of your household . . . any other person under the age of 21 who is in the care of a person described above.” State Farm submitted a court order establishing the grandparents as the boy’s joint managing conservators.

Over the grandparents’ objections based on the eight-corners rule, the district court considered this evidence and concluded State Farm had no duty to defend. The court held the eight-corners rule applied only to policies requiring the insurer to defend “all actions against its insured no matter if the allegations of the suit are groundless, false or fraudulent,” a provision the grandparents’ policy lacked. The grandparents appealed to the Fifth Circuit, which certified the question to the Supreme Court of Texas.

The Supreme Court held a “groundless, false or fraudulent” claims provision is not needed for the eight-corners rule to apply. Tracing the history of the eight-corners rule, the Court explained it had applied the rule since 1956 without requiring a groundless-claims clause. The duty to defend arises from an insurance contract, and the eight-corners rule aims to effectuate the parties’ agreement on this duty. The policy in Richards required State Farm to defend when “a claim is made or a suit is brought against an insured . . . to which this coverage applies.” Given the long history of applying the eight-corners rule, and State Farm’s sophistication and ability to create policy language to contract around the eight-corners rule, the Court held omitting a “groundless, false or fraudulent” clause was insufficient to trigger the duty to defend using extrinsic evidence.

Loya Insurance Co. v. Avalos—Recognizing an Exception for the Insured’s Collusive Fraud

In Avalos, Loya Insurance sold an auto policy to Guevara, expressly excluding Guevara’s husband, Flores, from coverage. Driving Guevara’s car, Flores had a collision with Avalos. Avalos, Guevara, and Flores agreed to tell both the police and Guevara’s insurer that Guevara was driving, rather than Flores. Avalos sued Guevara. Guevara later admitted to her attorney furnished by the insurance company that Flores was driving. The insurer withdrew its defense and denied indemnity coverage. Avalos won a $450,000 summary judgment against Guevara, who then assigned her rights under the policy to Avalos.

Avalos sued Loya Insurance for denying coverage. Loya Insurance won summary judgment, but the court of appeals reversed, holding that “as logically contrary as it may seem,” the insurer had a duty to defend under the eight-corners rule.

The Supreme Court held an exception to the eight-corners rule applies when there is collusive fraud by the insured. The Court explained the duty to defend applies when a third party makes fraudulent allegations against the insured, but the insurer has not contracted to defend against fraudulent allegations its own insured procures. While recognizing this exception, the Court cautioned that an insurer who withdraws or denies a defense based on extrinsic evidence of an insured’s collusive fraud risks substantial liability if the insurer ends up being wrong.

BITCO General Insurance Corp. v. Monroe Guaranty Insurance Co.—Can Extrinsic Evidence Be Considered When the Pleadings Are Inconclusive?

Both BITCO and Monroe provided liability policies to 5D, a drilling company. 5D was sued because it purportedly negligently drilled a well and then abandoned the stuck drill bit in the hole. 5D requested a defense from both BITCO and Monroe. BITCO agreed to provide a defense. Monroe refused, arguing its policy provided coverage only if the property damage occurred within its policy period—October 6, 2015 to October 6, 2017. BITCO sued Monroe, seeking a declaratory judgment that Monroe also had a duty to defend.

The third-party plaintiff’s petition did not specify when the drill bit became stuck. BITCO and Monroe stipulated the drill bit became stuck in November 2014, but disputed what legal effect could be given to this stipulation. The district court granted summary judgment to BITCO, concluding the eight-corners rule prohibited the court from considering the stipulation. No. SA-18-CV-00325,  Bitco Gen. Ins. Corp. v. Monroe Guar. Ins. Co., No. SA18CV00325FBESC, 2019 WL 3459248 (W.D. Tex. July 31, 2019), report and recommendation adopted, No. SA-18-CA-325-FB, 2019 WL 11838850 (W.D. Tex. Sept. 27, 2019).

The court addressed the Fifth Circuit’s decision in  Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523, 528 (5th Cir. 2004), which suggested Texas law might recognize an exception to the eight-corners rule when “[a] it is initially impossible to discern whether coverage is potentially implicated and [b] when the extrinsic evidence goes solely to a fundamental issue of coverage which does not overlap with the merits of or engage the truth or falsity of any facts alleged in the underlying case.” The court concluded Monroe failed to satisfy the second part of the Northfield exception because the extrinsic evidence was relevant to both coverage and the merits.

On appeal, the Fifth Circuit certified a question to the Supreme Court of Texas. It explained that the “date of an occurrence is a frequently encountered ‘gap’ in third party pleadings,” that can be “key to the question of the duty to defend the underlying suit.” Specifically, the Fifth Circuit certified the questions of whether Texas law recognizes the Northfield exception and whether a court can consider extrinsic evidence of the date of an occurrence under the Northfield exception. The Supreme Court of Texas accepted the certified question, and the case appears headed for a fall 2021 oral argument.