On September 18, 2019, a Texas federal court vacated its prior ruling and entered summary judgment for the insured, finding that after a hacker impersonating the customer convinced the insured to wire $1 million out of the customer’s account, the insurer had a duty to defend its insured against claims by its customer because the potential for coverage existed. See Quality Sausage Company, LLC, et al. v. Twin City Fire Insurance Co., Civil Action No. 4:17-CV-111 (S.D.TX) (Dkt. No. 110). The prior order was based on disputed extrinsic evidence, which the court considered in deciding the duty to defend, even though Texas’ narrow exception to the “eight corners” rule is limited to only undisputed extrinsic evidence.
The case arose from fraudulent wiring instructions received by HMI from a hacker pretending to be HMI’s client, Gregory Geib. The instructions directed HMI to transfer $1 million from Geib’s account to a bank account controlled by the fraudster. After the fraud was discovered and the funds lost, Geib’s attorney sent a formal demand letter to HMI seeking compensation for the loss and citing HMI’s “failure to employ proper controls and failure to take reasonable care in safeguarding the [client’s] assets.” HMI sought coverage and a defense under its D&O and crime coverage insurance with Twin City Fire Insurance Co. Twin City denied the claim.
HMI sued Twin City for breach of the duty to defend and duty to indemnify. HMI subsequently settled the underlying demand from its customer, Geib, and moved for summary judgment on the duty to defend. Twin City also moved for summary judgment on the duty to defend, arguing that certain exclusions applied. On August 24, 2018, the court denied both motions for summary judgment on the duty to defend, finding that fact issues existed regarding the application of the exclusions. Essentially, the Court applied an exception to the eight corners rule to look beyond the four corners of the Demand Letter and the four corners of the Policy, and found fact issues existed based upon the extrinsic evidence.
Upon Twin City’s motion for reconsideration, the court analyzed its prior order in light of the Fifth Circuit’s recent “emphasis on the narrow applicability of the exception to the eight-corners rule” in State Farm Lloyds v. Richards, No. 18-10721, 2019 WL 4267354 (5th Cir. Sept. 9, 2019) (unpublished). The Court held that its prior ruling was in error because the exception to the eight corners rule does not apply when, as in this case, the extrinsic evidence is disputed. Applying the eight corners rule, the application of the exclusion(s) relied upon by Twin Cities was indeterminable from the face of the demand letter. Further, the Court held that because coverage potentially existed based upon the demand letter, the insurer had a duty to defend as a matter of law. Thus, the Court vacated the portion of its prior order stating that fact issues existed, and granted summary judgment to HMI on the duty to defend.
The Quality Sausage decision is an important reminder of the breadth of an insurer’s duty to defend. The decision likewise illustrates how the broad duty to defend significantly limits the extrinsic evidence exception to the eight corners rule by curtailing the consideration of any disputed extrinsic evidence. Finally, the decision serves as a reminder to policyholders that they should not be dissuaded from pursuing their claim for a defense by an aggressive coverage denial, especially where, as here, they need only show a potential for coverage to trigger the insurer’s duty to defend.