In State Farm Lloyds v. Richards, the federal appellate court asked the Texas Supreme Court to decide whether Texas law recognizes a limited exception to the so-called eight-corners rule applied when evaluating an insurer’s duty to defend its insured for a third-party liability claim.[1]
Under the eight-corners rule (referred to as the four corners rule in some jurisdictions), an insurer’s duty to defend is measured by the allegations of the complaint and the language of the policy. Evidence outside of these materials is not considered. Some jurisdictions have recognized certain exceptions to this rule, however, Texas state courts have consistently applied the eight-corners rule without exception. The Fifth Circuit Court of Appeals recently certified a question to the Texas Supreme Court, seeking clarification of whether a policy-language exception to the eight-corners rule, as articulated in a 2006 decision by a Texas federal court, is permissible under Texas law.
Specifically, in B. Hall Contracting, Inc. v. Evanston Ins. Co.,[2] the U.S. District Court for the North District of Texas ruled that the eight-corners rule is inapplicable when the policy in question does not require the insurer to defend “all actions against its insured no matter if the allegations of the suit are groundless, false or fraudulent.” The court reasoned that policies with such language define the duty to defend more broadly than the duty to indemnify, whereas, if the policy instead imposes a duty to defend only suits seeking damages to which the insurance provided by the policy applies, such language makes the duty to pay and the duty to defend coextensive and the eight-corners rule is inapplicable.
The homeowner’s policy before the Fifth Circuit in Richards did not contain the pertinent language, but rather provided that the duty to defend arose only if a suit is brought seeking damages to which the coverage applies. After initially offering to defend the insureds for a bodily injury claim brought by their grandson’s parents, the insurer sought a judicial declaration that two different exclusions precluded coverage. On summary judgment, the insurer sought to introduce evidence outside the eight corners of the complaint and the policy to establish that the exclusions applied. The district court granted summary judgment to the insurer, because it found, pursuant to B. Hall, the policy-language exception to the eight-corners rule applied, and the insureds appealed.
On appeal, the Fifth Circuit acknowledged that there is no controlling Texas Supreme Court case law determining whether Texas law recognizes a policy-language exception, or other exception, to the eight-corners rule. The Fifth Circuit noted, however, that it had previously articulated a different, two-prong exception to the rule, applicable when:
- It is initially impossible to discern whether coverage is potentially implicated, and
- The extrinsic evidence goes solely to a fundamental issue of coverage that does not overlap with the merits of, or engage the truth or falsity of, any facts alleged in the underlying case
But, the court pointed out that the Texas Supreme Court had not expressly adopted that exception.
The Fifth Circuit ultimately declined to make an Erie guess as to whether the Texas Supreme Court would approve the policy-language exception to the eight-corners rule, and thus, certified the question to that court for consideration. How that question is answered may determine whether Texas joins a growing number of jurisdictions where courts, in recent years, have allowed the eight-corners rule to give way when uncertainty or ambiguity in the pleadings can be cured by extrinsic evidence.
[1] State Farm Lloyds v. Richards, — Fed.Appx. –, 2019 WL 4267354 (5th Cir. Sept. 9, 2019)
[2] 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)