This article appears online at law.com published on April 21, 2020.
The eight-corners rule is an obvious, self-explanatory rule. It says what it means, and it means what it says, right?
Maybe. It’s complicated.
Under the eight-corners rule, an insurer’s duty to defend its insured is determined by comparing the claims asserted in the “four corners” of the petition with the language in the “four corners” of the insured’s insurance policy. If these “eight corners” overlap – even slightly – then the insurer must defend its insured without regard to the truth or falsity of the allegations in the petition.
The Texas Supreme Court first applied the eight-corners rule in 1965 in Heyden Newport Chemical Corporation v. Southern General Insurance Company and has repeatedly affirmed it, generally prohibiting courts from considering evidence outside of the “eight corners”—even if extrinsic evidence contradicts the allegations of the underlying petition. As a result, most appellate courts and commentators consider the “eight-corners rule” a settled feature of Texas law.
But is it really that settled?
In the 2004 case Northfield Insurance Company v. Loving Home Care, Incorporated, the United States Court of Appeals for the Fifth Circuit, applying Texas law, adopted an exception to the “eight-corners rule” and allowed extrinsic evidence to bear on the duty to defend. Under the Northfield exception, courts may consider extrinsic when (1) “it is initially impossible to discern whether coverage is potentially implicated” and (2) “the extrinsic evidence goes solely to a fundamental issue of coverage which does not overlap with the merits or engage the truth or falsity of any facts alleged in the underlying case.”
At least three Texas appellate courts (Houston [14th Dist.], Texarkana, and Waco) have adopted some version of the Northfield exception, while at least three other appellate courts (Amarillo, Dallas, and Houston [1st Dist.]) have declined to follow it. The Texas Supreme Court has twice acknowledged the Northfield exception, but has never affirmed or rejected it.
With a split in authority and no definitive guidance from the Texas Supreme Court, where does the eight-corners rule’s prohibition on extrinsic evidence stand today? Is extrinsic evidence admissible, or are parties stuck with only the “eight corners” of the petition and the policy?
In March of this year, the Texas Supreme Court accepted a certified question from the Fifth Circuit to address another potential exception to the eight-corners rule. In Richards v. State Farm Lloyds, a child died in an all-terrain vehicle accident while under the supervision of his grandparents. The child’s mother sued the grandparents for negligent supervision and alleged that the accident occurred on or near the grandparents’ residence.
The grandparents requested that their homeowner’s insurer, State Farm, defend them from the lawsuit. State Farm agreed to provide a defense under a reservation of rights and then filed suit in the United States District Court for the Northern District of Texas, seeking a declaration that it had no duty to defend under two exclusions to the policy.
First, the policy excluded coverage for “bodily injury” arising from the use of an ATV “while off an insured location.” State Farm argued that the accident arose from the grandparents’ use of the ATV “off an insured location”—a public recreational trail. As proof, State Farm submitted the police report, which had not been included in the underlying petition.
Second, the policy excluded coverage for “bodily injury” to “any other person under the age of 21 who is in the care of” the named insureds. As proof that the deceased was a minor “in the care of” his grandparents, State Farm submitted a court order from a suit affecting the parent-child relationship, which was also had not been included in the underlying petition.
State Farm moved for summary judgment on the basis of the two exclusions. In response, the grandparents argued that the eight-corners rule prohibited the district court from considering any extrinsic evidence, including the crash report and the order.
In considering the proffered evidence, United States District Judge John H. McBryde cited his prior decision in B. Hall Contracting Incorporated v. Evanston Insurance Company and determined that the eight-corners rule only applied to insurance policies that explicitly required the insurer to defend “all actions against its insured no matter if the allegations are groundless, false or fraudulent.” Because the policy at issue did not contain such a “groundless-claims clause,” the district court granted summary judgment for State Farm, considered the proffered evidence, and found that the eight-corners rule did not apply. The grandparents appealed, and the Fifth Circuit certified the following question to the Texas Supreme Court:
Is the policy-language exception to the eight-corners rule articulated in B. Hall Contracting… Incorporated v. Evanston Insurance Company a permissible exception under Texas law?
The Texas Supreme Court framed the question as not whether parties can contract around the eight-corners rule (they can), but whether the Richards parties actually did so given the absence of a “groundless-claims clause” in the policy. Noting that a large insurance company like State Farm “knows how to contract around” the duty to defend, the Court held that State Farm “did not do so merely by omitting the words ‘groundless, false or fraudulent,’ or similar words, from this policy.” In so holding, the Texas Supreme Court rejected the district court’s application “groundless-claim clause” exception.
The Texas Supreme Court refused to resolve any matters or foreclose any arguments beyond the violability of the “groundless-claims clause” exception. The Court expressly reserved to comment on “whether other policy language or other factual scenarios may justify the use of extrinsic evidence” in determining the duty to defend.
Given the limited effect of the Court’s holding, Richards does little to shed light on the bigger issue—can courts consider ever extrinsic evidence in determining the duty to defend and, if so, when?
Maybe. It’s complicated.
Ryan Valdez is an attorney with the law firm of Cantey Hanger LLP. His practice focuses on commercial litigation, appellate and insurance. For more information call 817-877-2847 or visit www.canteyhanger.com.