In November, the Texas Supreme Court accepted a certified question from the Fifth Circuit directly calling into question the continued vitality of the well-known “eight corners rule,” under which a liability insurer can only consider the four corners of the live pleading and the four corners of its policy in deciding whether to defend its insured. As we noted in this blog when the Texas Supreme Court accepted the certified question, the case involved an ATV accident in which Jayden Mills, the young driver, was killed. His mother sued the Richardses, alleging they were negligent in failing to supervise and instruct Jayden.
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.
The Texas Supreme Court made short work of State Farm’s argument. As the unanimous opinion put the matter:
[I]f an insurance policy contained language inconsistent with the eight-corners rule, the policy language would control. But the question here is not whether parties can contract around the eight-corners rule. They can. The question is whether these parties have contracted around it by declining to expressly agree that State Farm must defend claims “even if groundless, false or fraudulent.”
Richards, et al. v. State Farm Lloyds, No. 19-0802, slip op. at 6 (Tex. Mar. 20, 2020). The Court found that the “eight corners rule” survived, in full, despite the removal of “groundless, false or fraudulent” from the insuring agreement.
The unanimous Court appears to have marshaled two arguments in support of its conclusion. First, the Court noted that its analysis of an insurer’s duty to defend had never depended upon the presence of “groundless, false or fraudulent” in the insuring agreement, and to support this point the Court listed several decisions in which it had ruled on whether a duty to defend existed without referring to “groundless, false or fraudulent.” Second, the Court stated:
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. . . . If any party is familiar with the overwhelming precedent to that effect, it is a large insurance company. State Farm . . . is well aware of the courts’ longstanding interpretive approach to contractual duties to defend, and it knows how to contract around that approach. It did not do so merely by omitting the words “groundless, false or fraudulent,” or similar words, from this policy.
Id. at 10.
The Court’s second point might better be stated as admonition: “Insurers, you can draft language to allow the duty to defend to be determined using extrinsic evidence. What you have done here is not enough.” Or, more succinctly (and colorfully), “Is this all you’ve got? You’re not getting out from under a rule everyone knows by name by cutting four words from your policy.” Learned Hand this ain’t, but it is a recognition that long and well-settled precedent is not to be overcome by nibbling at the edges of one contractual provision.
The Court’s ruling on the eight corners rule may not have come as a surprise, but its recurring reference to the Fifth Circuit’s “Northfield exception” is intriguing. The “Northfield exception” refers to a passage in Northfield Ins. Co. v. Loving Home Care Inc., 363 F.3d 523, 531 (5th Cir. 2004), that allows a court to consider 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 which does not overlap with the merits of or engage the truth or falsity of any facts alleged in the underlying case.”
The intrigue comes from the Court’s Sphinx-like equivocation about the exception. Early in its opinion the Court states that applicability of the “Northfield exception” is outside the scope of the question presented, so that it takes no position on whether the exception is a correct statement of Texas law. (See, e.g., Richards, slip op. at 5: “The Fifth Circuit did not request this Court’s opinion on the Northfield exception.”) Later, however, the Court states:
Given 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.
Id. at 9 (emphasis added). What understanding? Does the Northfield exception apply or not? The Court does not say.
For now, the eight corners rule remains a sacrosanct fixture of Texas coverage law. Will the Northfield exception become part of Texas law? “[P]ossibly.”
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