Houston, Texas (March 23, 2020) - On March 20, 2020, the Texas Supreme Court issued its greatly anticipated decision in Richards v. State Farm Lloyds, the case that examined whether an exception to the eight-corners rule existed. As most insurance practitioners expected, the answer was a resounding “No.”
In Texas, the eight-corners rule traditionally has governed the determination of an insurer’s duty to defend – meaning that the duty is determined solely by the allegations in the petition and the policy language. Generally, extrinsic evidence is not permitted. This rule was first applied in 1956 and remains a vital tenet of Texas insurance law.
Richards v. State Farm Lloyds
In the Richards case, a 10-year-old child was killed when his all-terrain vehicle (ATV) overturned. At the time of the accident, he was under the care of his grandparents, Janet and Melvin Richards. The child's mother filed suit against the Richards in state court, alleging that they negligently caused the child's death by allowing him to operate the ATV without a helmet, safety gear, or supervision. The Richards demanded a defense from their homeowners’ insurer, State Farm Lloyds (State Farm). State Farm then filed a declaratory judgment action in the United States District Court for the Northern District of Texas.
State Farm filed a motion for summary judgment on coverage, relying on evidence extrinsic to the underlying state court suit. Relying on his own 2006 B. Hall Contracting v. Evanston Ins. Co. decision, Judge John McBryde of the Northern District granted State Farm’s summary judgment, finding that State Farm could rely on extrinsic evidence. Judge McBryde held that the eight-corners rule was triggered by policy language requiring an insurer to defend any suit "even if the allegations of the suit are groundless, false, or fraudulent." The Richards' policy did not have such language, and instead provided that "the duty to defend arises only if suit is brought to which coverage applies." As such, according to Judge McBryde, the eight-corners rule was not applicable.
On appeal, the United States Court of Appeals for the Fifth Circuit noted that there was no controlling Texas Supreme Court (Court) case law on the issue, and certified the following question to the Court:
Is the policy-language exception to the eight-corners rule articulated in B. Hall Contracting Inc. v. Evanston Ins. Co., 447 F. Supp. 2d 634 (N.D. Tex. 2006) a permissible exception under Texas law?
The Texas Supreme Court Opinion
On March 20, 2020, the Court held that State Farm could not escape the eight-corners rule by virtue of the omission of the “groundless, false or fraudulent” language in its policy. The Court noted that this language had “rarely, if ever, been important to Texas courts’ analysis of the contractual duty to defend.” In fact, the Court pointed out that Texas courts routinely applied the eight-corners rule “without looking for a groundless-claims clause.”
In dicta, the Court confirmed insurers’ ability to contract around the eight-corners rule, stating that “if an insurance policy contained language inconsistent with the eight-corners rule, the policy language would control.” In fact, it noted that a big insurer like State Farm surely knew how to do so.
Interestingly, the Court expressly disclaimed any holding relative to the Northfield exception to the eight-corners rule (wherein extrinsic evidence is permissible provided that it does not contradict a pleaded fact and relates solely to coverage). See Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523, 528 (5th Cir. 2004). Whether the Court would approve of the Northfield exception had been a longstanding question. In its own words, the Court had only “twice acknowledged its widespread use” to date. Though this question remains unanswered in certain terms, Richards v. State Farm Lloyds at least confirms what has long been the case – in the event that an insurer wishes to contract around the eight-corners rule, it must do so with clear unequivocal language, rather than relying on the omission of standard policy language.
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