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In State Farm Lloyds v. Richards, No. 19-0802 (3/20/2020), the Supreme Court of Texas answered a certified question from the U.S. Fifth Circuit Court of Appeals on the “eight-corners rule,” rejecting a federal district court’s recognition of an exception to the rule.
The eight-corners rule is an analytical tool that Texas courts have long used to evaluate whether a liability insurer has a duty to defend an insured against a claim or lawsuit asserted against it. The rule generally provides that the insurer’s duty to defend is determined based solely on the allegations in the underlying petition and the terms of the insurance policy, without considering any other “extrinsic” evidence.
State Farm argued that the eight-corners rule should only apply if the policy includes a groundless-claims clause, providing that the insurer will defend the a potentially-covered claim asserted against the insured, even if the allegations are “groundless, false or fraudulent.” State Farm prevailed in federal district court, obtaining a ruling that the eight-corners rule did not apply because the policy did not include a groundless-claims clause. The court therefore considered extrinsic evidence showing an exception to coverage applied and held that State Farm had no duty to defend.
The Fifth Circuit certified the narrow question whether Texas recognizes the policy-language exception recognized by the district court, and the Supreme Court of Texas held that it does not. The court emphasized that insurers are free to draft their policies to effectively preclude application of the eight-corners rule, but merely omitting a groundless-claims clause from the policy did not have that effect.
When the Supreme Court of Texas accepted the Richards case, many anticipated that the Court would finally answer the question whether Texas recognizes any exceptions to the eight-corners rule. For well over a decade, federal courts in Texas have assumed – based on an “Erie guess” of Texas law – that Texas would recognize an exception that allows consideration of extrinsic evidence relating only to coverage, and which does not overlap with the facts of the underlying lawsuit. The Supreme Court of Texas has never addressed the issue or expressly recognized any exceptions to the eight-corners rule, and Texas courts of appeals are split on the matter. But the Supreme Court avoided answering that question, leaving it for another day.
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