SUPREME COURT OF TEXAS REJECTS “POLICY LANGUAGE EXCEPTION” TO “EIGHT-CORNERS RULE” IN DETERMINING DUTY TO DEFEND
As a matter of first impression for Texas courts, last Friday the Supreme Court of Texas rejected a “policy language exception” to the eight-corners rule as presented to them in a certified question from the Fifth Circuit. But in doing so, the Supreme Court of Texas left open questions regarding application of another extrinsic exception to the eight-corners rule. In Richards v. State Farm Lloyds, No. 19-0802, 2020 WL 1313782 (Tex. Mar. 20, 2020), a ten-year-old boy died in an all-terrain vehicle (ATV) accident while under his paternal grandparents’ supervision. The boy’s mother sued the grandparents and they sought a defense from State Farm. State Farm provided a defense subject to a reservation of rights and then filed a declaratory judgment action to address the coverage issues.
Under the eight-corners rule, Texas courts traditionally examine the four corners of the petition and compare the factual allegations to the four corners of the policy in order to determine if the insurer has a duty to defend. Here, the petition failed to state sufficient facts to support application of the policy’s “motor-vehicle” and “insured” exclusions. Extrinsic evidence, however, revealed the ATV accident took place on a public recreational trail and not on the grandparent’s property which would trigger the “motor-vehicle exclusion.” Independently, a family law court order revealed the boy qualified as an “insured” under the policy as a resident relative, thereby triggering the “insured exclusion.” State Farm asserted a “policy language exception” to Texas’ eight-corners rule arguing that because its policy no longer contained language requiring a defense even if “the allegations of the suit are groundless, false or fraudulent” then extrinsic evidence could be considered and it had no duty to defend. In response, the grandparents argued the eight-corners rule prohibited the district court from considering any extrinsic evidence, including the crash report and family law court order, when determining State Farm’s duty to defend the lawsuit.
The federal district court relied on a “policy language exception” that it previously adopted holding the eight-corners rule did not prohibit consideration of the extrinsic evidence because the rule applies only to insurance policies which explicitly require the insurer to defend “all actions against its insured no matter if the allegations of the suit are groundless, false or fraudulent.” The insured appealed and the Fifth Circuit certified the following question to the Supreme Court of Texas:
Is the policy-language exception to the eight-corners rule in B. Hall Contracting Inc. v. Evanston Ins. co., 447 F.Supp. 2d 634, 635 (N. D. Tex. 2006) a permissible exception under Texas law?
The Supreme Court of Texas recognized that no other court had applied the “policy language exception” to allow extrinsic evidence in determining the duty to defend. It also recognized the parties could “contract around the eight-corners rule.” But, it rejected the argument advanced here by the trial court and State Farm claiming that extrinsic evidence could be considered to deny a duty to defend by simply omitting the policy requirement that State Farm had to defend even if the claims are “groundless, false of fraudulent.” Accordingly, the Texas Supreme Court answered the certified question in the negative finding the “policy-language exception” is not a permissible exception under Texas law.
Editor’s Note: Significantly, the Supreme Court of Texas discussed in great detail another extrinsic evidence exception to the eight-corners rule applied by the Fifth Circuit and other federal courts in Texas, the Northfield exception, which historically allows extrinsic evidence 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 of any facts alleged in the underlying case.” Northfield Ins. co. v. Loving Home Care, Inc., 363 F.3d 523,531 (5th Cir. 2004). The Court also noted that there is a split in authority among the Texas courts of appeal on whether the Northfield exception applies even though the Supreme Court of Texas has twice acknowledged its widespread use. The high court noted: “The Fifth Circuit did not request this Court’s opinion on the Northfield exception. Instead, it asked 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. We address only the question certified.” We get the sense the Supreme Court of Texas is ready to address this issue as well, but it didn’t get the opportunity to do so in this case. We will continue to monitor this and other cases for related developments.