In responding to a certified question from the Fifth Circuit in Richards v. State Farm Lloyds, the Texas Supreme Court held that the “policy-language exception” to the eight-corners rule articulated by the federal district court is not a permissible exception under Texas law. See Richards v. State Farm Lloyds, 19-0802, 2020 WL 1313782, at *1 (Tex. Mar. 20, 2020). The eight-corners rule generally provides that Texas courts may only consider the four corners of the petition and the four corners of the applicable insurance policy when determining whether a duty to defend exists. State Farm argued that a “policy-language exception” prevents application of the eight-corners rule unless the insurance policy explicitly requires the insurer to defend “all actions against its insured no matter if the allegations of the suit are groundless, false or fraudulent,” relying on B. Hall Contracting Inc. v. Evanston Ins. Co., 447 F. Supp. 2d 634, 645 (N.D. Tex. 2006). The Texas Supreme Court rejected the insurer’s argument, citing Texas’ long history of applying the eight-corners rule without regard for the presence or absence of a “groundless-claims” clause.
The underlying dispute in Richards concerned whether State Farm must defend its insureds, Janet and Melvin Richards, against claims of negligent failure to supervise and instruct after their 10-year old grandson died in an ATV accident. The Richardses asked State Farm to provide a defense to the lawsuit by their grandson’s mother and, if necessary, to indemnify them against any damages. To support its argument that no coverage under the policy existed, and in turn, it had no duty to defend, State Farm relied on: (1) a police report to prove the location of the accident occurred off the insured property; and (2) a court order detailing the custody arrangement of the deceased child to prove the child was an insured under the policy. The federal district court held that the eight-corners rule did not apply, and thus extrinsic evidence could be considered regarding the duty to defend, because the policy did not contain a statement that the insurer would defend “groundless, false, or fraudulent” claims. In light of the extrinsic police report and extrinsic custody order, the district court granted summary judgment to State Farm.
On appeal, the Fifth Circuit certified the question regarding the existence of any “policy-language exception” to the eight-corners rule under Texas law. The Texas Supreme Court rejected the existence of such an exception, noting that the “presence or absence of a groundless-claims clause has rarely, if ever, been important to Texas courts’ analysis of the contractual duty to defend,” and that Texas Supreme Court has “never held or suggested that the eight-corners rule is contingent on a groundless-claims clause.” Richards, 2020 WL 1313782, at *5. “The eight-corners rule merely acknowledges that, under many common duty-to-defend clauses, only the petition and the policy are relevant to the initial inquiry into whether the petition’s claim fits within the policy’s coverage,” which “is how Texas courts have long interpreted contractual duties to defend.” Id. at *6 (emphasis in the original). The Texas Supreme Court even lectured that “[i]f any party is familiar with the overwhelming precedent to that effect, it is a large insurance company.” Id.
This decision illustrates the continued efficacy of the eight-corners rule in Texas, and that exceptions to that long-standing rule will not be created lightly. This ruling also has relevance to the impending flood of COVID-19-related insurance claims under liability policies; Texas courts will not allow insurance companies to rely on extrinsic evidence under the so-called “policy-language exception” to avoid their duty to defend. Simply put, in determining an insurer’s duty to defend, only the petition and the policy may be considered, and if any potential for coverage exists, the duty to defend will be activated.