The “eight-corners rule” has often been cited in Texas courts by insurance lawyers for the proposition that an insurer’s duty to defend is determined by the claims alleged in the petition and the coverage provided by the policy. The “eight-corners” refers to the four corners of the policy and the four corners of the petition. This rule has been particularly beneficial to policyholders because they are often afforded a defense under their insurance policies against third-party claims even when there is evidence extrinsic to the policy and the petition that might suggest there is no insurance coverage for the alleged injury or damage.
Saving on the cost of a legal defense is a huge benefit to the policyholder and the Texas Supreme Court’s decision issued today in Richards v. State Farm Lloyds, ___ Tex. ___ slip op. (March 20, 2020) is a win for the policyholder.
In Richards, the underlying dispute was whether State Farm must defend its insureds against a personal injury claim brought by an underlying plaintiff. At issue in the underlying case was the death of a minor in an ATV accident while under the supervision of his grandparents. The minor’s mother sued the grandparents, alleging negligent failure to supervise and instruct the minor. The underlying petition further alleged that the accident occurred on the grandparents’ residence. The grandparents looked to their insurer, State Farm, for a defense and indemnity under their homeowner’s policy. State Farm then sued the grandparents and the underlying plaintiff seeking a declaration that it had no duty to defend or indemnify its insured as a result of the accident.
State Farm argued that the policy’s “motor-vehicle exclusion” excluded coverage for bodily injury when the alleged bodily injury arises from use of a motor-vehicle. State Farm further argued that an ATV is a motor-vehicle when used off of the insured’s location. State Farm attempted to argue the exclusion applied to defeat its duty to defend and indemnify, pointing to evidence outside of the eight-corners that the accident actually occurred off the insured’s property. State Farm also attempted to argue that the “insured exclusion” applied because there was, again, extrinsic evidence in a SAPCR order that the grandparents were joint managing conservators of the deceased minor.
The underlying court ruled on summary judgment that the eight-corners rule does not prohibit consideration of the extrinsic evidence because the rule applies only to insurance policies with specific “groundless-claims” language, citing B. Hall Contracting, Inc. v. Evanston Ins. Co., 447 F.Supp. 2d 634 (N.D. Tex. 2006). Specifically, the underlying court found that because the State Farm policy did not contain language explicitly requiring the insurer to defend “all actions against its insured no matter if the allegations of the suit are groundless, false or fraudulent,” extrinsic evidence was permissible when determining the duty to defend and indemnity.
The Fifth Circuit certified the following question to the Texas Supreme Court:
Is the policy-language exception to the eight-corners rule articulated in B. Hall Contracting, Inc. v. Evanston Ins. Co., 447 F.Supp. 2d 634 (N.D. Tex. 2006), a permissible exception under Texas law?
The Texas Supreme Court disagreed with State Farm, answering the certified question in the negative. The Court explained that “State Farm did not contract away the eight-corners rule altogether merely by omitting from its policy an express agreement to defend claims that were ‘groundless, false or fraudulent.’” The Court further noted that “State Farm makes good-faith arguments for its positions, but it is well aware of the courts’ longstanding interpretive approach to contractual duties to defend, and it knows how to contract around that approach…[and] [i]t did not do so merely by omitting the words ‘groundless, false or fraudulent,’ or similar words, from this policy.”
The Court declined to extend its ruling beyond the specific issue certified to it—the ‘policy-language exception’ to the eight-corners rule articulated in B. Hall Contracting. The Court specifically did not address the following issues: (1) cases where a “petition states a claim that could trigger the duty to defend, but…is silent on facts necessary to determine coverage” and (2) “whether other policy language or other factual scenarios may justify the use of extrinsic evidence to determine whether an insurer must defend a lawsuit against its insured.”
Ultimately, the Court’s decision in Richards is a win for policyholders. There remain issues surrounding the eight-corners rule, however, that will continue to be litigated.
If you or your business have been denied a defense and indemnity, contact our lawyers today. We are here to help!