The "eight-corners" rule for determining a liability insurer's duty to defend under Texas law, which generally precludes reference to extrinsic evidence, has survived an assault on two fronts after rulings by the Texas Supreme Court and the Fifth Circuit Court of Appeals in the Richards case.
In March of this year, the Texas Supreme Court, answering a certified question from the Fifth Circuit, rejected a "policy-language exception to the eight-corners rule" that would have made the rule dependent on language in older policies promising a defense "even if the allegations of the suit are groundless, false, or fraudulent." Richards v. State Farm Lloyds, 597 S.W.3d 492, 500 (Tex. 2020). The court declined to address other possible exceptions to the rule, including the so-called Northfield exception previously articulated by the Fifth Circuit. See Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523, 527 (5th Cir. 2004).
The case thus returned to the Fifth Circuit, which reversed the district court's judgment improperly expanding the "very narrow" scope of the exception and remanded for further proceedings. State Farm Lloyds v. Richards, No. 18-10721, 2020 WL 4048034, *5 (5th Cir. July 20, 2020) (exception allows reliance only on extrinsic evidence that "concerns discrete and independent coverage issues and does not touch on the merits of the underlying suit").
State Farm Lloyds v. Richards: Facts of the Case
The Richards case arose out of the death of a 10-year-old boy in an ATV accident and a negligent-supervision lawsuit by his mother against his paternal grandparents. State Farm, which issued homeowners insurance to the grandparents, filed suit seeking a declaratory judgment that it had no duty to defend or indemnify them because the accident did not occur on their property and the claim triggered an "insured versus insured" exclusion.
Senior District Judge John McBryde granted summary judgment for State Farm, admitting and relying on extrinsic evidence over the insureds' objections. State Farm Lloyds v. Richards, 2018 WL 2225084 (N.D. Tex. May 15, 2018). Judge McBryde grounded his holding on a policy-language analysis he had articulated in a series of opinions discussed in a previous Expert Commentary. See "Eight-Corners Rule under Siege" (August 2019).
The Northfield Exception
In defending the Richards judgment on appeal, State Farm's briefing relied primarily on the Northfield exception, which was mentioned by the district court in a footnote. See 2018 WL 2225084 at *3 n. 3. Nevertheless, the Fifth Circuit at oral argument devoted significant attention to Judge McBryde's policy-language analysis and ultimately decided to seek the Texas court's resolution of that issue (784 Fed. Appx. 247 (5th Cir. 2019)).
Judge McBryde's analysis was soundly rejected by the Texas Supreme Court. The court confirmed that "parties can contract around the eight-corners rule" but held State Farm did not do so merely by omitting the promise to "defend claims 'even if groundless, false, or fraudulent.''' The court insisted the rule "is not a judicial amendment to the parties' agreement" but is grounded in the promise "to defend the policyholders if 'a claim is made or a suit is brought against an insured because of bodily injury … to which this coverage applies.'"
Moreover, the court said, "Texas courts have long interpreted contractual duties to defend" by applying the eight-corners rule and noted that "[If] any party is familiar with the overwhelming precedent to that effect, it is a large insurance company." (597 S.W.3d at 500.)
With its certified question answered, the Fifth Circuit noted that the Texas Supreme Court had "recently—and for the first time—applied [an] exception to the eight-corners rule," which allows reference to "conclusive evidence" of collusion between the insured and a third-party "to secure a defense and coverage where they would not otherwise exist." (2020 WL 4048034 at *4) (quoting Loya Ins. Co. v. Avalos, 2020 WL 2089752, *3 (Tex. May 1, 2020)). See "Texas Recognizes Collusion as Exception to Eight-Corners Rule" (May 2020).
No collusion had been alleged against the Richards, so the court turned to the remaining issue—whether summary judgment could be affirmed based on the "very narrow" Northfield exception, which it has held, applies to the following.
[W]here 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.
363 F.3d at 531.
The court held the extrinsic evidence on which State Farm relied to establish its cited exclusions—the location of the accident and the residence of the child driver—did not satisfy this standard because "it is too entwined in the merits" and contradicts facts alleged by the underlying plaintiffs. (2020 WL 4048034 at *5.)
The court reversed the district court's holding that State Farm did not have a duty to defend the Richards. And, because the underlying lawsuit remains pending, the duty to indemnify is not yet justiciable. The case was, therefore, remanded to the district court.
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