Insurance practitioners in Texas are familiar with the so-called “eight corners rule” applied by Texas Courts to determine whether an insurer has a duty to defend a suit against its insured. The “eight corners rule” is simply summarized:
Under the eight-corners rule, the duty to defend is determined by the claims alleged in the petition and the coverage provided in the policy. The rule takes its name from the fact that only two documents are ordinarily relevant to the determination of the duty to defend: the policy and the pleadings of the third-party claimant. Facts outside the pleadings, even those easily ascertained, are ordinarily not material to the determination and allegations against the insured are liberally construed in favor of coverage.
State Farm Lloyds v. Richards, ___ Fed. Appx. ___, slip op. at 6 (5th Cir., Sept. 9, 2019) (internal quotations and citations omitted).
Rigorous application of the eight corners rule occasionally has led to unusual results. In GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305 (Tex. 1994), a congregant’s suit papers alleged that the church’s youth minister had abused her during the GuideOne policy period. In fact (and outside the pleadings), the minister had left the church before inception of the GuideOne policy. Held: the allegations in the suit papers controlled and GuideOne had a duty to defend. By contrast, in Pine Oak Builders, Inc. v. Great American Ins. Co., 279 S.W.3d 650 (Tex. 2009), homeowners alleged in their petition that Pine Oak defectively built their home, allegations that resulted in their claims being excluded under Pine Oak’s insurance policy. In fact (and also outside the pleadings), the work had been done by a subcontractor, which brought the claim within an exception to the exclusion. Held: the allegations in the suit papers controlled and there was no duty to defend. Despite such outlying decisions, the “eight corners rule” has maintained itself as a fixture in Texas coverage law.
As the Fifth Circuit has noted, it has occasionally tried to engraft exceptions onto the eight corners rule for coverage issues that could be resolved without addressing any fact questions necessary for resolution of the underlying action. See, e.g., Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523 (5th Cir. 2004). The Texas Supreme Court has never disapproved of such efforts but it has never blessed them either.
Enter State Farm Lloyds v. Richards, involving an ATV accident in which Jayden Mills, the young driver, was killed. His mother sued the Richardses, “essentially alleging they were negligent in failing to supervise and instruct Jayden.” Richards, supra, slip op. at 2. The Richardses tendered the suit to State Farm, which provided their homeowners coverage. The State Farm policy provided coverage for bodily injury “to which this insurance applies.” State Farm argued that its policy did not “apply” because extrinsic evidence showed that the circumstances fell within two exclusions in the policy. State Farm argued that because its policy did not include any reference to a duty to defend even if the allegations were “groundless, false or fraudulent,” a phrase that had been included in older liability policies, analysis of the duty to defend was no longer constrained by the allegations in the pleadings.
Relying on analysis it had applied in a prior case, the Northern District of Texas considered the extrinsic evidence offered by State Farm and ruled that the insurer had no duty to defend or indemnify the Richardses. As might be expected, the Richardses appealed. On September 9, the Fifth Circuit certified to the Texas Supreme Court the question of whether there is a policy language exception to the eight corners rule. The Texas Supreme Court accepted certification on September 13, and the parties have filed their main briefs. A number of insurer trade associations have filed an amicus brief. Reply briefing is due on November 19, after which the case will be set for oral argument. The Court should issue its opinion before next summer.
In recent coverage decisions, the Texas Supreme Court has focused on detailed textual analysis, sometimes favoring policyholders, see, e.g. Don’s Building Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20 (Tex. 2008), and other times favoring insurers. See, e.g., Gilbert Tex. Constr. L.P. v. Certain Underwriters at Lloyds London, 327 S.W.3d 118 (Tex. 2011). In Don’s, which also involved a long-standing conflict between the Courts of Appeals, the Supreme Court rejected arguments relating to possible evidentiary difficulties from its ruling in favor of an approach based in equal parts on contract language and precedent from other jurisdictions. Those circumstances do not exist here, but textual differences do. It remains to be seen if that is enough to justify a change in a long-standing doctrine.
For now, this is a case to watch, and perhaps the most significant coverage case in Texas in several years. We will follow it and report further as this case moves through the appellate process.
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