Insurance Law Blog

March 21, 2020
Dear Colleague,
We remain OPEN (albeit working remotely and practicing social distancing, occasionally meeting for happy hour via video conferencing . . .). We are ready, able and willing to assist in your insurance coverage needs, including those implicated by the COVID-19 pandemic. We are currently monitoring all developments with respect to insurance coverage for business interruption, cessation of operations, etc. If you have questions, please do not hesitate to contact us. Stay safe during this time!

Now, for some other current developments or BREAKING NEWS . . .
As we noted in our September 2019 blog, the Fifth Circuit certified a question to the Supreme Court of Texas, asking—again—for guidance as to whether an exception to the “eight corners” rule exists.[1] In State Farm Lloyds v. Richards, the issue was whether a so-called “policy language” exception would allow an insurer to look beyond the allegations in the pleading in evaluating whether there was a duty to defend.[2] We had hoped that the Court would not limit itself to the narrow question certified. The Court, however, apparently did not read our Blog (or chose to politely ignore it) and answered only the specific certified question. While providing some general guidance, the Court has still left open the elephant-in-the-room issues as to whether or to what extent extrinsic evidence is admissible in evaluating the duty to defend.
A.        Certified Question of Whether the “Policy Language” Exception to the “Eight Corners” Rule Exists

In Richards, the U.S. District Court for the Northern District held that the “eight corners” rule did not apply based on the “policy language” exception.[3] The underlying case involved the tragic death of a 10-year-old in an ATV accident at his grandparents’ house.[4] The boy was under the temporary care of his grandparents at the time of the accident. Subsequently, the boy’s mom sued the grandparents, who sought coverage for the lawsuit from their insurer, State Farm Lloyds (“State Farm”). State Farm initially agreed to provide a defense, but then filed a declaratory judgment action arguing that it had no duty to defend based on exclusions to the policy.[5]

The first exclusion was a “motor-vehicle exclusion” that precluded coverage for bodily injury “‘arising out of the . . . use . . .  of . . . a motor vehicle owned or operated by or loaned to any insured.’”[6] The term ‘“motor vehicle’” was defined to include an “‘all-terrain vehicle’ . . . owned by an insured and designed or used for recreational or utility purposes off public roads, while off an insured location.”[7] Further, the policy defined the term ‘“insured location’ to mean ‘the residence premises.’”[8] To support its motion for summary judgment, State Farm included a crash report to show that the accident did not occur on the grandparents’ premises. State Farm also attached admissions by the grandparents that the accident did not occur at their premises.

State Farm also relied on the ‘“insured exclusion,” which:

excludes coverage for bodily injury to any insured “within the meaning of part a. or b. of the definition of insured.” The policy defines “insured” to mean “you and, if residents of your household: a. your relatives; and b. any other person under the age of 21 who is in the care of a person described above.” State Farm thus attached the [grandparents’] admission that they were [the boy’s] grandparents, as well as an order . . . appointing them as joint-managing conservators in order to show that [the boy] was a “resident of [the grandparents’] household.”[9]

Over the insureds’ objections, the court allowed State Farm to rely on the extrinsic evidence it submitted in conjunction with its summary judgment briefing. Finding that the extrinsic evidence established that the policy would not provide coverage—and, thus, there would be no duty to defend—the court ruled in favor of State Farm. The district court referenced and relied upon the “policy language” exception to the “eight corners” rule in making its determination.[10] In particular, the district court noted that the policy before it did not contain specific language requiring the insurer to defend “all actions against its insured no matter if the allegations of the suit are groundless, false or fraudulent.”

On appeal, State Farm made no effort to defend the analysis of the district court.[11] The Fifth Circuit began its analysis by surveying the current jurisprudence regarding the application and scope of the duty-to-defend rule and circumstances where extrinsic evidence was allowed or disallowed in making the defense determination. Recognizing that “there is no controlling Texas Supreme Court caselaw determining whether there is a policy-language exception to the eight-corners rule” and that the issue “involves important and determinative questions of Texas law,” the Fifth Circuit certified to the Supreme Court of Texas the question of whether Texas courts should recognize the “policy-language exception to the eight-corners rule.”[12]

B.        Answer of the Certified Question

The Supreme Court of Texas accepted the certified question on September 13, 2019 and answered the certified question on March 20, 2020.[13] The Court acknowledged that the Fifth Circuit “did not request this Court’s opinion on the Northfield exception” but rather “only if the federal district court was correct in B. Hall that the eight-corners rule is inapplicable unless the policy includes a groundless-claims clause.”[14] The Court recognized that parties can contract around the “eight corners” rule, but clarified that the question at hand was whether State Farm actually had contracted around the rule by “declining to expressly agree that State Farm must defend claims ‘even if groundless, false or fraudulent.’”[15]

State Farm argued that the “eight corners” rule actually developed because of the once common “groundless-claims clauses.”[16] According to State Farm, because that language is not common any longer in policies, the “eight corners” rule should change, “no matter how deeply embedded in the law it has become.”[17] In response, the Richards argued that the “eight corners” rule is not dependent upon the presence of the groundless-claims clause, specifically noting that the Supreme Court of Texas in evaluating the duty to defend has never turned on the presence of such language.[18] Thus, according to the Richards, “[b]ecause the presence or absence of a groundless-claims clause has rarely, if ever, been important to Texas courts’ analysis of the contractual duty to defend, and because Texas courts routinely apply the eight-corners rule without looking for a groundless-claims clause, the . . . federal district court’s ‘policy-language exception’ is erroneous.”[19]

The Supreme Court of Texas agreed with Richards, explaining that State Farm did not contract away the “eight corners” rule altogether by omitting an “express agreement to defend claims that are ‘groundless, false or fraudulent.’” In doing so, the Court recognized that Texas courts of appeal have routinely applied the “eight corners” rule “for many decades, without regard to whether the policy contained a groundless-claims clause.” Continuing, the Court noted that “[g]iven the consistency of Texas appellate decisions on this topic, those who write insurance contracts know courts applying Texas law will employ the eight-corners rule, subject possibly to exceptions such as that found in the Fifth Circuit’s Northfield decision. We can safely presume their agreements are drafted in light of this understanding.”[20]

The Court also specifically recognized that the duty-to-defend is a “creature of contract” and “‘a valuable benefit granted to the insured by the policy.’”[21] Thus, the Court found that the “eight corners” rule is not an amendment to the parties’ agreement, but rather a “purpose . . . to effectuate those agreements, to enforce them consistently and predictably so that parties may write their agreement knowing how courts will interpret them.”[22] The Court determined that State Farm agreed to defend if ‘“a claim is made or a suit is brought against an insured for damages because of bodily injury . . . to which this coverage applies.”’[23] Thus, whether a “claim” has been “made” or a “suit” has been “brought,” requires courts to “naturally look first to the claims made, to the suit brought.”[24] Thus, according to the Court, “the “eight corners” rule merely acknowledges that, under many common duty-to-defend clauses, only the petition and the policy are relevant to the initial inquiry into whether the petition’s claim fits within the policy’s coverage.”[25] Noting that “[t]his is how Texas courts have long interpreted contractual duties to defend” and that “[i]f any party is familiar with the overwhelming precedent to that effect, it is a large insurance company.”[26] Thus, the Court concluded that State Farm did not contract around the “eight corners” rule by simply omitting the words “groundless, false or fraudulent,” or similar words, from its policy.[27]

The Supreme Court of Texas recognized that “it is often the case that the petition states a claim that could trigger the duty to defend, but the petition is silent on facts necessary to determine coverage.”[28] While recognizing that some courts have “often allow[ed] extrinsic evidence on coverage issues that do not overlap with the merits in order to determine whether the claim is for losses covered by the policy,” the Court declined to express an opinion on that issue, citing to the Fifth Circuit’s limited certified question. The Court also specifically reserved “comment on whether other policy language or other factual scenarios may justify the use of extrinsic evidence” in evaluating the duty to defend.

C.        Analysis

Once again, the Supreme Court of Texas recognized but refused to apply or even endorse that any exception to the “eight corners” rule exists. Interestingly, the Court did recognize—albeit in dicta—that “[t]he varied circumstances under which . . . arguments for the consideration of [the use of extrinsic] evidence may arise are beyond imagination.” The Court also recognized that several courts of appeal have adopted the so-called Northfield exception that allows extrinsic evidence bearing on the duty to defend when (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 that does not overlap with the merits of or engage the truth or falsity of any facts alleged in the underlying case.  Nevertheless, while the Supreme Court of Texas—now for the third time—acknowledged its “widespread use,” it specifically declined to rule on whether the Northfield exception is Texas law. Accordingly, uncertainty will continue as to this issue, at least until the Court decides to squarely address the issue in a case in which it deems appropriate.

Stay tuned. We will keep you posted in future blogs.


Lee Shidlofsky

Douglas P. Skelley

Rebecca DiMasi

Blake Crawford
Senior Counsel
[1] State Farm Lloyds v. Richards, 784 F. App’x 247 (5th Cir. 2019).
[2] Id. at 252.
[3] No. 4:17-cv-753-A, 2018 WL 2225084 (N.D. Tex. May 15, 2018).
[4] Richards, 784 Fed. App’x at 248.
[5] Id.
[6] Id. at 248–49.
[7] Id. at 249.
[8] Id.
[9] Id.
[10] Id.
[11] Id. at 250.
[12] Id. at 253.
[13] Richards v. State Farm Lloyds, No. 19-0802, 2020 WL ____ (Tex. Mar. 20, 2020) (slip op.).
[14] Id. at pp. 5–6.
[15] Id. at p. 6.
[16] Id. at p. 7.
[17] Id.
[18] Id.
[19] Id. at pp. 7–8.
[20] Id. at p. 8.
[21] Id. at p. 9 (quoting Pine Oak Bldrs., Inc. v. Great Am. Lloyds Ins. Co., 279 S.W.3d 650, 655 (Tex. 2009)).
[22] Id. at p. 10.
[23] Id.
[24] Id.
[25] Id.
[26] Id.
[27] Id.
[28] Id. at p. 11.
Copyright © 2020 Shidlofsky Law Firm, All rights reserved.