At oral argument in the case of State Farm Lloyds v. Janet Richards,[1] the Texas Supreme Court heard from both sides on whether or not Texas courts should recognize a policy-language based exception to the eight-corners rule, applied when evaluating whether an insurer can introduce extrinsic evidence to contest its duty to defend the insured for a third-party liability claim. The so-called eight-corners rule allows a court to refer only to the relevant policy terms and factual allegations in the complaint against the insured in determining the insurer’s duty to defend. The case, arising out of a fatal ATV crash, had bounced back to state court when the Fifth Circuit Court of Appeals certified the question to the Texas high court.
The certified question centered on a provision in the policy that required the insurer to defend the insureds in any suit “for damages because of bodily injury to which this coverage applies.” However, the policy lacked the usual provision that states the insurer would defend “all actions against its insured no matter if the allegations of the suit are groundless, false or fraudulent.” In policies with the groundless suit language, the insurer’s duty to defend is held to be broader than the duty to indemnify.
Echoing the argument that had been made to the Fifth Circuit, the insurer contended that because of the lack of the groundless suit language, the insurer’s duty to defend was not broader than, but rather coexistent with, its duty to indemnify, and that State Farm, as a result, only had to defend suits on claims that are actually covered by the policy terms. Accordingly, State Farm argued it was permitted to present a variety of outside documents to show that a pair of policy exclusions foreclosed coverage. Counsel for the insureds countered that the Texas high and midlevel courts have consistently refused to recognize any eight-corners rule exception, and that the “settled expectations of the insurance community, insured community, and the court” is that the lack of the groundless suit language did not matter.
The justices appeared wary over whether the lack of the groundless suit language was enough to allow the insurer to deviate from a rule one judge described as “simple and straightforward and easy to apply as a matter of policy.” Counsel for the insurer brought up the long-relied upon concept of freedom of contract, arguing there was nothing in the policy preventing the insurer from bringing in extrinsic evidence as to whether exclusions apply. One justice expressed concern that a ruling in the insurer’s favor would make it pointless for insurers to initially defend policyholders while reserving their rights to challenge coverage. The insurer, in turn, pointed out that a declaratory judgment in the insurer’s favor would still be necessary to allow it to move forward to deny coverage.
The recent trend to allow the use
of extrinsic evidence in limited circumstances in duty-to-defend cases, while
not completely eroding the eight-corners rule, has shown how courts are now more
receptive to allowing reasonably-tailored exceptions to the rule when
uncertainty or ambiguity in the pleadings can be cured by outside evidence.
[1] State Farm Lloyds v. Janet Richards et al., case number 19-0802.