Richards v. State Farm Lloyds
Supreme Court of Texas (March 20, 2020)
Opinion by Justice Blacklock (linked here)
The “eight-corners rule” for determining the duty to defend is well entrenched in Texas law: A liability insurer’s duty to defend a lawsuit against its insured is determined solely by reference to the facts alleged in the underlying complaint and the terms of the insurance policy, without reliance on extrinsic evidence. See, e.g., GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305, 308 (Tex. 2006). Efforts to weaken the rule’s grip, however, have continued unabated. Answering a question certified by the Fifth Circuit, the Texas Supreme Court in Richards held the eight-corners rule applies even where the operative insurance policy does not expressly promise a defense “even if the allegations of the suit are groundless, false or fraudulent.”

One of the strongest proponents of abandoning the eight-corners rule for most cases has been federal district judge John McBryde, now Senior Judge in the Fort Worth Division of the Northern District of Texas. He has relied on extrinsic evidence to negate coverage since at least 1991. In 2006 he held that the eight-corners rule arose from, and is dependent on, “groundless, false or fraudulent” language of older (pre-1996) CGL policies, and therefore does not apply to newer policies omitting that language. B. Hall Contracting, Inc. v. Evanston Ins. Co., 447 F.Supp.2d 634, 645 (N.D. Tex. 2006), rev’d on other grounds, 273 F.App’x 310 (5th Cir. 2008). The Fifth Circuit reversed the judgment in that case without mentioning the lower court’s holding on the eight-corners rule. Judge McBryde has reprised his B. Hall analysis in subsequent cases and expanded his discussion of the rule’s demise, most recently in Richards. That case arose out of the death of a ten-year-old boy in an ATV accident and a negligent-supervision lawsuit by his mother against his paternal grandparents. State Farm, which provided homeowner’s insurance to the grandparents, filed suit seeking a declaratory judgment that it had no duty to defend or indemnify them because the accident did not occur on their property and the claim triggered an “insured v. insured” exclusion. Judge McBryde granted summary judgment for State Farm, admitting and relying on extrinsic evidence over the insureds’ objections.

On appeal, the Fifth Circuit acknowledged that neither it nor the Texas Supreme Court had recognized the district court’s view of the eight-corners rule, and certified this question to the Texas court: “Is the policy-language exception to the eight-corners rule articulated in B. Hall … a permissible exception under Texas law?” The Texas Supreme Court’s answer was a resounding “No.” The Court confirmed that “parties can contract around the eight-corners rule,” but held State Farm did not do so merely by omitting the promise to “defend claims ‘even if groundless, false or fraudulent.’’’ The Court insisted the rule “is not a judicial amendment to the parties’ agreement,” but is grounded in the promise “to defend the policyholders if ‘a claim is made or a suit is brought against an insured because of bodily injury … to which this coverage applies.’” Moreover, the Court said “Texas courts have long interpreted contractual duties to defend” by applying the eight-corners rule, and noted, “If any party is familiar with the overwhelming precedent to that effect, it is a large insurance company.”

Finally, the Court acknowledged that the Fifth Circuit and some Texas courts have applied a more narrow exception to the eight-corners rule, which allows reliance on extrinsic evidence that “concerns discrete and independent coverage issues and does not touch on the merits of the underlying suit.” This exception traces its roots to dicta in Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523, 531 (5th Cir. 2004). The viability and scope of the so-called Northfield exception has been the subject of numerous cases and commentaries over the years, but, as it has done in several previous cases, the Court again declined to resolve that controversy. “The Fifth Circuit did not ask for our opinion on that practice, so we express none.”

Stay tuned.