Texas Supreme Court Affirms That Insurer’s Duty to Defend Is Determined Solely by Pleadings & Language in Insurance Policy

In late March, the Texas Supreme Court affirmed a longstanding industry rule, known as the “eight-corners rule,” in an insurance defense case, Richards v. State Farm Lloyds. The rule prohibits the consideration of evidence considered to be extrinsic to the insurance policy and pleadings in a case in determining an insurer’s duty to defend. While the Texas Supreme Court has historically refused to consider an exception to the rule, some appellate and federal courts in Texas have provided for a limited exception when the petition in a lawsuit does not allege facts sufficient to determine whether there is coverage; only so long as the evidence does not contradict any of the facts.

In this particular case, however, State Farm Lloyds argued that the eight-corners rule should not apply unless an insurance policy affirmatively includes a groundless-claims clause. The Texas Supreme Court disagreed, upholding the eight-corners rule as a default and pointing out that, while parties can contract around the eight-corners rule (and in that case, the policy language would control), in the absence of language to this effect, the eight-corners rule continues to apply.

The Case

The case involved a 10-year old child who, while under the supervision of his grandparents, was killed while riding an ATV. The child’s mother filed a lawsuit against the grandparents, who then demanded that their homeowner’s insurance, State Farm Lloyds, defend against the lawsuit. However, State Farm Lloyds argued that a policy exclusion applied, and submitted what was considered to be extrinsic evidence with its motion for summary judgment to support its argument that the accident occurred off of the insured residents’ property and therefore the company did not have a duty to defend.

United States District Court for the Northern District of Texas & Fifth Circuit Decisions

The United States District Court for the Northern District of Texas granted State Farm’s motion, holding that the eight-corners rule was not applicable because there was no policy language requiring the insurer to defend any lawsuit, even if the allegations are false. Instead, the policy provided that a duty to defend only arose if a lawsuit to which coverage applies is brought. However, on appeal, the Fifth Circuit noted the Texas Supreme Court’s strong resistance to exceptions to the eight-corners rule. and concluded that there is no case law concerning whether there is (specifically) a policy language exception to the eight-corners rule.

Texas Supreme Court’s Decision

Upon consideration, the Texas Supreme Court found that the district court’s policy-language exception to the eight-corners rule is not a permissible exception under Texas law. The Court reiterated that, while parties can contract around the eight-corners rule, and, if they do, the policy language would control, in this particular case, they did not. According to the Court, State Farm, instead, claimed that, unless there is language in the policy indicating that the eight-corners rule affirmatively applies, then it does not, which the Court disagreed with. The Court pointed out that the eight-corners rule has been considered to be a settled feature of Texas law since 1956 and, as a result, those who write insurance contracts rely on the fact that Texas courts will employ the eight-corners rule.

This decision reinforces the fact that an insurer’s duty to defend is determined solely based on the pleadings and the language of the insurance policy unless parties contract otherwise.

Contact Our Texas Insurance Defense Attorneys If You Have Any Questions

If one of your insureds is facing a liability lawsuit, the Brownsville insurance defense attorneys of Colvin, Saenz, Rodriguez & Kennamer, L.L.P. have the experience that you need. Our lawyers have defended a number of major insurance companies against a range of claims. Contact us today to find out more.

Resources:

txcourts.gov/media/1446200/190802.pdf

courtlistener.com/opinion/4659468/state-farm-lloyds-v-janet-richards/

https://www.rcclaw.com/a-new-wave-of-insurance-defense-litigation-arrives-with-the-coronavirus/