Insurance Law Blog

May 7, 2020
Dear Colleague,
While much of the insurance-related headlines in 2020 have related to COVID-19 claims, the Supreme Court of Texas has issued two very important opinions addressing the oft-disputed issue of whether an exception to the eight-corners rule exists in evaluating the duty to defend.
On March 20, 2020, the Supreme Court issued its opinion in Richards v. State Farm Lloyds, rejecting arguments that the eight-corners rule did not apply to insurance policies that did not include an obligation to defend claims even if they were “groundless, false or fraudulent”—i.e., a “policy language” exception to the rule.[1] For the full details and commentary of the Richards opinion, please see the following link.

The Supreme Court of Texas heard oral argument in Richards on January 8, 2020. Just over a week later, on January 17, 2020—and likely with the issue fresh on its mind—the Supreme Court of Texas agreed to review Avalos v. Loya Insurance Co., where the Court of Appeals of San Antonio declined to recognize a “fraud” exception to the eight-corners rule.[2] For the full details and commentary of the Avalos Court of Appeals opinion, please see the following link.

The Court heard oral argument in Avalos on February 26, 2020 and then issued its opinion on May 1, 2020.[3] In the case, Loya Insurance Company (“Loya”) sold an automobile liability insurance policy to Karla Flores Guevara. Guevara’s husband, Rodolfo Flores, was explicitly excluded from coverage by a named driver exclusion. While moving Guevara’s car, Flores collided with another car carrying Osbaldo Hurtado Avalos and Antonio Hurtado (the “Hurtados”). The Hurtados, Guevara, and Flores agreed to tell both the responding police officer and the insurer that Guevara was driving the car rather than Flores.[4]

The Hurtados sued Guevara, asserting that their damages resulted from Guevara’s negligent operation of her vehicle. Guevara sought coverage from Loya, which agreed to defend and appointed counsel to represent her. Early in discovery, “Guevara disclosed the lie to her attorney and identified Flores as the driver.”[5] In response to this disclosure, Loya cancelled Guevara’s scheduled deposition, denied coverage, and withdrew from the defense.[6] The Hurtados subsequently obtained a $450,343.34 judgment against Guevara.[7]

Guevara assigned her rights against Loya to the Hurtados, who then filed suit against Loya for breach of contract for denying coverage for Guevara. Loya filed counterclaims for breach of contract, fraud, and a declaratory judgment that it owed no coverage and had no duty to defend because Flores, an excluded driver, was driving at the time of the accident. Loya then deposed Guevara, who recanted her initial statement that she, rather than Flores, was driving. Loya moved for summary judgment, asserting that it owed no coverage or duty to defend. Attached to that motion as evidence were excerpts of Guevara’s depositions.[8]

The trial court granted summary judgment for Loya, stating at the hearing that the Hurtados were “‘asking this Court to ignore every rule of justice and help [them] perpetuate a fraud.’”[9] On appeal to the Court of Appeals of San Antonio, the Hurtados argued that the summary judgment was improper under the eight-corners rule because Loya had a duty to defend as a matter of law based on the terms of the insurance policy and the face of the pleadings in the underlying suit in which they alleged Guevara was driving at the time of the accident. The court of appeals reversed the trial court’s judgment, holding that, “‘as logically contrary as it may seem,’” the insurer had a duty to defend under the eight-corners rule.[10] The Supreme Court of Texas specifically noted that one justice that had concurred in the appellate court’s decision urged the Court to “adopt a narrow exception to the eight-corners rule for instances of undisputed fraud and collusion designed solely to create a duty to defend.”[11]

In evaluating the issue, the Supreme Court of Texas first explained that, while it had never recognized that an exception to the eight-corners rule existed, it had suggested “twice before that collusive fraud by the insured might provide the basis for an exception.”[12]  While the Court did not look to extrinsic evidence in those cases, it determined that this particular case presented the proper circumstance. In particular, with respect to “falsity,” the Court explained that no dispute existed as to who was actually driving the vehicle that collided with the Hurtados.[13] Likewise, with respect to “collusion,” there was no dispute that the Hurtados agreed with Guevara and her husband to make false statements about who was driving in order to trigger Guevara’s insurance coverage and Loya’s duty to defend.[14] In fact, Guevara’s own admissions under oath conclusively established that the Hurtados and Guevaras “conspired to lie about who was driving to trigger insurance coverage.”[15]

Recognizing that the eight-corners rule is a “creature of contract,” the Court concluded that the rule “does not bar courts from considering such extrinsic evidence regarding collusive fraud by the insured in determining the insurer’s duty to defend.”[16] The Court explained that the defense of third-party claims is a “valuable benefit granted to the insured by the policy.”[17] While an insurer must defend even “if the third party suing the insured makes allegations that are groundless, false, or fraudulent,”[18] the Court drew a sharp distinction that this rule “applies to fraudulent allegations against the insured by third parties.”[19] Continuing:

The insurer has not agreed to undertake, and the insured has not paid for, a duty to defend the insured against fraudulent allegations brought about by the insured itself. Thus, an insurer owes no duty to defend when there is conclusive evidence that groundless, false, or fraudulent claims against the insured have been manipulated by the insured’s own hands in order to secure a defense and coverage where they would not otherwise exist.[20]

As a result, the Court held that extrinsic evidence was admissible regarding whether the insured and a third party suing the insured colluded to make false representations of fact in that suit for the purpose of securing a defense and coverage where they would not otherwise exist.[21]

The Court also rejected the Hurtados’ contention that an insurer must pursue a declaratory judgment action to determine its duty to defend before withdrawing from the defense of the insured.[22] In reaching this decision, the Court explained that, while it has “encouraged insurers to utilize declaratory judgment actions for prompt resolution of disputes, [it has] not mandated that course.”[23] If an insurer has “conclusive evidence” of an insured lying to get coverage, it would—according to the Court—be a waste of judicial resources to require the insurer to seek a judicial determination of coverage.[24] Moreover, the Court reasoned that the fact that “an insurer that breaches its duty to defend by withdrawing can be held liable for substantial damages and attorneys’ fees,” “will help ensure that an insurer withdraws its defense without first securing a declaratory judgment only in clear-cut cases.”[25]


While certainly an interesting development in the coverage world, the ruling should not be much of a surprise, especially when evaluated under the facts and circumstances of the case. Hopefully, insurers will not read this holding to be more than it is. Put simply, the Supreme Court found that a very narrow exception to the eight-corners rule exists when there is conclusive proof of collusion and insurance fraud by the insured and third-party claimant.

There is no dispute that, in representing insureds in coverage matters, coverage attorneys will often contact the third-party claimant’s counsel to discuss the particular claims being asserted. This is part of being an effective advocate for the insured to maximize the benefits contractually owed under the policy. For example, if an insured is sued for construction defects that caused resulting damage, a pleading may not include the relevant factual details important for an insurer’s coverage determination. In particular, the pleading may not include allegations that the insured used subcontractors. The pleading may not distinguish between the resulting damage and the defective workmanship. If an insured’s advocate reaches out to the third-party claimant's attorney to request revisions to the pleading to include true and accurate facts, this does not—and should not—run afoul of the rule established in Avalos. To that extent, because an insurer can have a duty to indemnify, even if there is no duty to defend, such amendments are one way to alert an insurer to the fact that there likely is a covered claim.

What Avalos addresses, however, goes beyond advocating for a client. In that case, there was no dispute that the insured and third-party claimant colluded, presented false information to the police and in a pleading filed with the court, and then sought to essentially “stick” it to the insurer. While we believe that the Supreme Court of Texas was spot-on in its analysis in this particular case under these particular facts, we also believe that the Court was careful to limit the analysis to the egregious circumstances presented before the Court. Notably, the Court did not even mention the so-called Northfield exception that is sometimes applied by the Fifth Circuit and federal district courts.

Stay tuned, as the extrinsic evidence issue is sure to continue percolating in state and federal courts.

Lee Shidlofsky

Douglas P. Skelley

Rebecca DiMasi

Blake Crawford
Senior Counsel
[1] See Richards v. State Farm, No. 19-0802, --- S.W.3d ---, 2020 WL 1313782, at *6 (Tex. Mar. 20, 2020).
[2] 592 S.W.3d 138 (Tex. App.—San Antonio 2018) pet. granted Jan. 17, 2020, rev’d, Loya Ins. Co. v. Avalos, No. 18-0837, --- S.W.3d ---, 2020 WL 2089752 (Tex. May 1, 2020).
[3] Loya Ins. Co. v. Avalos, No. 18-0837, --- S.W.3d ---, 2020 WL 2089752 (Tex. May 1, 2020).
[4] Id. at *1.
[5] Id.
[6] Id.
[7] Id.
[8] Id.
[9] Id. at *2.
[10] Id. (quoting Avalos v. Loya Ins. Co., 592 S.W.3d 138, 145 (Tex. App.—San Antonio)).
[11] Id.
[12] Id. (citing Pine Oak Bldrs., Inc. v. Great Am. Lloyds Ins. Co., 279 S.W.3d 650 (Tex. 2009); GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305, 307, 311 (Tex. 2006)). 
[13] Id. at *3.
[14] Id.
[15] Id.
[16] Id. at *2, *4.
[17] Id. at *4.
[18] Id. at *2 (citing Richards v. State Farm Lloyds, No. 19-0802, --- S.W.3d ---, 2020 WL 1313782, at *4 (Tex. Mar. 20, 2020)).
[19] Id. at *4.
[20] Id.
[21] Id. at *5.
[22] Id. at *4–5.
[23] Id. at *4 (citing Excess Underwriters at Lloyd’s v. Frank’s Casing Crew & Rental Tools, Inc., 246 S.W.3d 42, 46 (Tex. 2008)).
[24] Id.
[25] Id.
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