It’s Not in the Autumn of Life: Spring and Summer Holdings Indicate the Eight-Corners Rule is Here to Stay
by Jeff Allcorn
Amy Stewart PC
Earlier this year, the Texas Supreme Court issued two opinions of great importance to Texas insurance coverage lawyers: one reiterating the continued vitality of a decades-old rule of insurance coverage law and the other recognizing a narrow exception to that rule. That rule is the “eight-corners” rule, first recognized by the Texas Supreme Court in 1965 in Heyden Newport Chemical Corp. v. Southern General Insurance Co., 387 S.W.2d 22 (Tex. 1965). The eight-corners rule requires courts to determine whether an insurer has a duty to defend its insured when the insured is sued by reviewing only the language of the insurance policy and the petition in the lawsuit against the insured.
In Richards v. State Farm Lloyds, 597 S.W.3d 492 (Tex. 2020), decided on March 20, 2020 in response to a question certified by the Fifth Circuit Court of Appeals, the Texas Supreme Court considered whether there is a “policy language exception” to the eight-corners rule. Id. at 496. State Farm argued that the eight-corners rule was adopted because of “groundless claims” clauses, such as “insurer has a duty to defend all actions against its insured no matter if the allegations of the suit are groundless, false or fraudulent[,]” and therefore the rule should not apply in the absence of such a clause. Id. at 497-498. The Court disagreed, stating that “State Farm did not contract away the eight-corners rule altogether merely by omitting from its policy an express agreement to defend claims that are ‘groundless, false or fraudulent.’” Id. at 498. The Court held that the eight-corners rule applies even when “groundless claims” language is omitted from the policy, leaving the 55-year-old legal rule in place. Id. at 500.
Confronted with particularly egregious facts six weeks later, the Court recognized a narrow exception to the eight-corners rule for cases involving collusive fraud in Loya Insurance Co. v. Avalos, No. 18-0837, 2020 WL 2089752, __ S.W.3d __ (Tex. May 1, 2020). In Avalos, Karla Flores Guevara and her husband Rodolfo Flores were involved in a car wreck with another couple. Id. at *1. At the time of the accident, Guevara was the sole insured under an automobile liability policy issued by Loya Insurance Company; Flores was explicitly excluded from the policy’s coverage. Id. Before the police responded to the accident, Guevara and Flores colluded with the other couple to lie to the responding officer and state that Guevara, not Flores, was driving the car. Id. The other couple then sued Guevara for negligence and the insurer agreed to defend her. Id. When Guevara disclosed the lie to her attorney early in the case, the insurer withdrew its defense. Id.
Guevara lost the lawsuit and assigned her rights against her insurer to the other couple. Id. The other couple sued the insurer, arguing that it wrongfully withdrew its defense based on extrinsic evidence of fraud. Id. The district court granted the insurer’s summary judgment that it had no duty to defend Guevara, relying on the insurer’s proffered excerpts from Guevara’s deposition revealing the fraudulent scheme. Id. at *1-2. The other couple appealed, arguing that under the eight-corners rule, the district court was only allowed to analyze the policy and the petition to determine whether the insurer had a duty to defend Guevara, neither of which made any reference to the scheme. Id. at *2. The court of appeals reversed, holding that “as logically contrary as it may seem,” the eight-corners rule applied, and the insurer had a duty to defend. Id.
On review, the Texas Supreme Court reversed, recognizing a narrow exception to the eight-corners rule when there is undisputed evidence that the parties colluded to make false allegations that would invoke the insurer’s duty to defend. Id. at *3. The Court was persuaded by the fact that the evidence in the case conclusively established that Flores was driving the vehicle and that the parties colluded to lie so that Guevara’s insurance would be triggered. Id. The Court held that the exception applies in narrow circumstances when there is “conclusive evidence that groundless, false, or fraudulent claims against the insured have been manipulated by the insured’s own hands in order to secure a defense and coverage where they would not otherwise exist.” Id.
These two holdings, delivered less than two months apart, indicate that the Court is still quite serious about following the longstanding eight-corners rule. While Richards reinforces the long-standing rule, Avalos shows that the Court takes the rule so seriously it was willing to recognize a fraud exception only when it was “conclusively established” that the parties colluded to defraud the insurer—a rare circumstance. Lawyers in Texas can rest assured that the eight-corners rule is here to stay, and likely will be for a long time.
Jeff Allcorn is an associate at Amy Stewart Law, an insurance advocacy boutique. The firm assists corporate policyholders with strategic advice relating to pre-litigation claim negotiations and coverage denials, indemnity and insurance provisions in third-party contracts, insurance procurement and renewal issues, and complex and high-stakes insurance coverage and bad faith litigation.
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