The "eight-corners rule" for determining the duty to defend is well entrenched in Texas law—a liability insurer's duty to defend a lawsuit against its insured is determined solely by reference to the facts alleged in the underlying complaint and the terms of the insurance policy without reliance on extrinsic evidence. See, e.g., GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305 (Tex. 2006). Efforts to weaken the rule's grip, however, continue unabated.
A case currently pending in the Fifth Circuit Court of Appeals exemplifies two prongs of these efforts. In State Farm Lloyds v. Richards, No. 4:17-CV-753-A, 2018 U.S. Dist. LEXIS 81374, 2018 WL 2225084 (N.D. Tex. May 15, 2018) (McBryde, J.), the trial court granted summary judgment for the insurer on the grounds that the eight-corners rule does not apply where the operative insurance policy does not promise a defense "even if the allegations of the suit are groundless, false or fraudulent." In defending the judgment on appeal, the insurer relies on an alternative ground—that an exception to the eight-corners rule allows reliance on extrinsic evidence that "concerns discrete and independent coverage issues and does not touch on the merits of the underlying suit." Appellee's Brief, No. 18-10721 (5th Cir. Sept. 12, 2018).
Is the Eight-Corners Rule Obsolete?
The eight-corners rule or some variant (sometimes called the "four-corners" or "complaint-allegation" rule) is applied in many American jurisdictions but is not the law in all states. See, e.g., Montrose Chem. Corp. v. Superior Court, 861 P.2d 1153, 1159-60 (Cal. 1993) (insurer may seek summary adjudication of duty to defend where "extrinsic evidence … presents undisputed facts which conclusively eliminate a potential for [coverage]"). And it has long had its critics in Texas and elsewhere. See, e.g., Preferred Risk Ins. Co. v. Gill, 507 N.E.2d 1118 (Ohio 1987) ("[W]here the insurer does not agree to defend groundless, false, or fraudulent claims, an insurer's duty to defend does not depend solely on the allegations of the underlying tort complaint."); but see Cincinnati Ins. Co. v. Colelli & Assoc., Inc., 767 N.E.2d 717 (Ohio 2002) (reversing lower court's holding predicated on Gill, limiting that opinion "to its facts," [i.e., a conviction for the aggravated murder of a child characterized as negligence in parents' civil lawsuit]).
One of the strongest proponents of abandoning the rule in Texas has been federal district Judge John McBryde, now the senior judge in the Fort Worth Division of the Northern District of Texas. He has relied on extrinsic evidence to negate coverage since at least 1991, and in 2006, he held that the eight-corners rule arose from, and is dependent on, the "groundless, false or fraudulent" language of older (pre-1996) commercial general liability policies, so does not apply to newer policies omitting that language. B. Hall Contracting, Inc. v. Evanston Ins. Co., 447 F. Supp. 2d 634 (N.D. Tex. 2006), rev'd on other grounds, 273 Fed. Appx. 310 (5th Cir. 2008). This holding was predicated in large part on the Texas Supreme Court's reference to the older policy language in Fielder Road Baptist Church as support for the eight-corners rule. Id. (citing 197 S.W.3d at 310). Because the policy at issue in B. Hall did not include the "false or fraudulent" language and imposed "a duty to defend those suits seeking damages to which the insurance provided by the policy applies," the court held the eight-corners rule did not apply. Id. at 644-45 (emphasis in original). The Fifth Circuit reversed the judgment on other grounds without mentioning the lower court's holding on the eight-corners rule. 273 Fed. Appx. at 311 (although "district court's grant of summary judgment rests on several grounds," court remands for further evidence on the meaning of the policy term "membrane roofing").
Judge McBryde then reprised his B. Hall analysis (without citing the opinion) and expanded his discussion of the rule's demise, in GuideOne Specialty Mut. Ins. Co. v. Missionary Church of Disciples of Jesus Christ, 806 F. Supp. 2d 923 (N.D. Tex. 2011), rev'd, 687 F.3d 676 (5th Cir. 2012). In that case, however, the Fifth Circuit rejected the lower court's analysis of the eight-corners rule and held that "even if an insurance policy employs the same language for the duty to defend and the duty to indemnify, Texas courts define the duty to defend more broadly than the duty to indemnify." Id. at 684.
The language of GuideOne's policy "gives no reason to depart from Texas's time-honored manner of interpreting insurers' duty to defend." Id. The court vacated the district court's judgment and rendered judgment that GuideOne had a duty to defend the church against negligent-entrustment claims arising out of an automobile accident, disregarding extrinsic evidence that the insured vehicle was not being used for church-related travel at the time of the accident. Undeterred, Judge McBryde cited and relied on B. Hall in Richards (another negligent-entrustment case) to find no duty to defend or indemnify, without citing the Fifth Circuit's opinion in Missionary Church.
The Texas Supreme Court has never directly addressed the argument that the eight-corners rule is no longer applicable to all policies, although the argument has been presented in at least one case. See Zurich Am. Ins. Co. v. Nokia, 268 S.W.3d 487 (Tex. 2008) (applying eight-corners rule despite the insurer's invitation to adopt B. Hall analysis). And the court has held the prohibition of extrinsic evidence applies to policyholders as well as insurers. See Pine Oak Bldrs., Inc. v. Great Am. Lloyds Ins. Co., 279 S.W.3d 650 (Tex. 2009). The rule does not, however, preclude reference to separate contracts that are "incorporated into an insurance policy by an explicit reference clearly indicating the parties' intention to include that contract as part of their agreement," such as an "insured contract" by which a third party is made an additional insured. In re Deepwater Horizon, 470 S.W.3d 452 (Tex. 2015) (quotation omitted); see also ACE Am. Ins. Co. v. Freeport Welding & Fabricating, Inc., 699 F.3d 832 (5th Cir. 2012) (determining additional-insured status precedes applying eight-corners rule).
As noted above, the insurer in Richards seeks to uphold the judgment without defending the court's primary basis for its ruling, relying instead on a footnote in the court's opinion. See 2018 WL 2225084 at *3 n.3 (trial court notes State Farm "does not dispute the facts alleged" in the underlying petition, but "provides other facts to establish that there is no coverage, … which is a permissible exception to the eight-corners rule"). In its brief on appeal, State Farm describes the B. Hall analyses as "interesting interpretations of Texas law" but insists the Richards judgment can be upheld without considering those issues. At oral argument, State Farm's counsel admitted the Texas Supreme Court likely "would not follow the B. Hall rule."1 It remains to be seen if the Fifth Circuit will address that argument in disposing of the case; one focus of oral argument was whether the court should certify a question to the Texas Supreme Court concerning a potential exception to the eight-corners rule.
Is There an Exception to the Rule?
State Farm's primary argument in Richards is that the judgment can be affirmed because of an exception "allowed" by Texas courts "for the last 50 years," which "permit[s] insurers to introduce evidence of noncoverage … if it concerns discrete and independent coverage issues and does not touch on the merits of the underlying suit." Appellee's Brief at 3. In the Fielder Road Baptist Church case, the Texas Supreme Court acknowledged that, while it "has never expressly recognized an exception to the eight-corners rules, other courts have … drawn a very narrow exception." 197 S.W.3d at 308.
The court quoted the Fifth Circuit's observation that "if [the Texas Supreme Court] were to recognize an exception … it would probably do so … 'when it is initially impossible to discern whether coverage is potentially implicated and when 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." Id. at 309 (quoting Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523 [5th Cir. 2004] [emphasis in original]).
The Fifth Circuit in Northfield considered it "unlikely" the Texas Supreme Court would "allow for a limited exception" to the rule. Without deciding whether to allow any exception, the court in Fielder Road found "the circumstances of the case presented no reason to create an exception to the eight-corners rule." Id. at 306. In any event, the court held, "GuideOne relies on extrinsic evidence that is relevant both to coverage and the merits and thus does not fit the [putative] exception to the rule." The court "reject[ed] the use of overlapping evidence … because it poses a significant risk of undermining the insured's ability to defend itself in the underlying litigation." Id. at 309. In Nokia, the court again declined to decide whether to adopt the exception articulated in Northfield because it was not "initially impossible to determine whether coverage is potentially implicated" from the complaint, so the Nokia case did not "fit within [the] parameters" of the exception. 268 S.W.3d at 498.
The Fifth Circuit subsequently found that, because the Texas Supreme Court in Fielder Road cited the Northfield putative exception "with approval," it supported an "Erie guess" that Texas law recognizes such an exception. Ooida Risk Retention Group, Inc. v. Williams, 579 F.3d 469 (5th Cir. 2009). The court then relied on extrinsic evidence to conclude the "fellow employee" exclusion negated an insurer's duty to defend. In an unpublished per curiam opinion, a Fifth Circuit panel cited Ooida as having "endorsed the exception, which a "subsequent panel … may not overlook or ignore." Star-Tex Resources LLC v. Granite State Ins. Co., 553 Fed. Appx. 366 (5th Cir. 2014). District courts in Texas have thus "recognized and applied such an exception." BITCO Gen. Ins. Corp. v. Monroe Guar. Ins. Co., 2019 WL 3459248, *5 & n.6 (W.D. Tex. July 31, 2019) (Chestney, M.J.) (citing cases).
At oral argument in Richards, Judge Jennifer Elrod asked attorneys for both parties whether the Fifth Circuit should certify a question to the Texas Supreme Court on the existence and scope of any exception to the eight-corners rule. State Farm argued the panel was bound by Ooida's "Erie guess," which rendered certification inappropriate. The appellants, on the other hand, argued the judgment in that case, as in Fielder Road and Nolia, turns on "overlapping evidence" and does not satisfy the "initially impossible to determine" prong of the putative exception. One factor in deciding whether to certify a question might be finding a case in which the issues are more fully developed, and it is clear the duty to defend turns on an exception to the eight-corners rule. If in Richards, as in other cases, the court finds the extrinsic evidence on which the insurer relies would not satisfy the proposed exception, the court could conclude this is not the right case to justify a certified question. In any event, the issue ultimately needs a definitive answer from the Texas Supreme Court.
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