by Tamara Bruno
A Year in the Life of the Eight-Corners Rule: Recent Developments in the Duty to Defend
One of the most well-known, frequently cited, and seemingly fixed legal principles in Texas insurance case law is, of course, the “eight-corners” rule – also known as the “complaint allegation” rule – which for some seventy-five years has governed an insurer’s duty to defend its insured. At its core, the eight-corners rule analysis is simple: insurers must compare the allegations in the live pleading to the insurance policy without regard to the truth, falsity, or veracity of the allegations.
Texas courts have, however, added complexities to this simple framework. This article outlines recent opinions on the eight-corners rule demonstrating these complexities.
1. An Exception to the Eight-Corners Rule
The Texas Supreme Court has never recognized an exception to the eight-corners rule, and has in fact passed on a few opportunities to adopt or reject an eight-corners rule exception. But Texas federal courts, led by the Fifth Circuit, have articulated an exception “when the extrinsic evidence goes solely to a fundamental issue of coverage which does not overlap with the merits of or engage the truth or falsity of any facts alleged in the underlying case.” Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523, 531 (5th Cir. 2004). Texas courts continue to recognize this exception while applying it narrowly, as shown in some recent opinions:
- Allstate County Mutual Insurance Company v. Wootton, 2016 WL 1237872 (Tex. App.—Houston [14th Dist.] Mar. 29, 2016, no. pet. h.): In this case, the underlying plaintiff was injured during an accident in which he was riding as a passenger in a truck driven by his son and owned by the construction company insured. The insurer argued that the auto policy’s employment-related exclusions precluded coverage. In his petition, the plaintiff did not address whether he or his son were employees of the insured, or whether the accident arose out of or in the course of their employment with the insured. The court found the underlying petition did not fall within what it characterized as the “Narrow Exception described by the Supreme Court of Texas as a potential exception to the eight-corners rule.” The court held that, under these circumstances, it was not impossible to discern whether the auto policy’s coverage was potentially implicated.
- Evanston Insurance Company v. Lapolla Industries, Inc., 93 F. Supp. 3d 606 (S.D. Tex. 2015), aff’d, 2015 WL 9460301 (5th Cir. Dec. 23, 2015): In this case, the insured argued that it was impossible to tell from the underlying complaint whether the plaintiff’s personal injuries were caused by either physical contact with or vapors from allegedly defective insulation manufactured by the insured. The insured asked the court to look beyond the allegations in the underlying complaint to deposition testimony by two of the plaintiffs stating they physically touched the insulation. The District Court and Fifth Circuit refused, holding that the underlying complaint alleged only damages from vapors and said nothing to suggest damages from physical contact.
- Shanze Enterprises, Inc. v. American Casualty Company of Reading, PA, 2015 WL 8773629 (N.D. Tex. Dec. 15, 2015): In this case, the insured asked the court to consider extrinsic evidence relating to whether the trademark infringement claim in the underlying suit could be characterized as a covered “personal and advertising injury” under the policy. The court declined, finding it could determine from the complaint’s allegations whether the plaintiff in the underlying suit had alleged its trademark was infringed in such a way that triggered the insurer’s duty to defend under the policy, and so it was not initially impossible to determine whether coverage was potentially implicated.
- See also Burks v. XL Specialty Insurance Company, 2015 WL 6949610 (Tex. App.—Houston [14th Dist.] Nov. 10, 2015, no pet.): In this case, the insured asked the court to consider two other derivative action complaints against the insured to show they were related to the bankruptcy claim at issue for the purposes of triggering coverage under the “interrelated claims” provision of the insured’s D&O policy. The court agreed, finding the rationale for the eight-corners rule did not apply to the question of whether claims were “interrelated” under the policy: “[The insured] is not trying to contradict any allegations in the plan agent’s complaint. Thus, the eight-corners rule does not bar him from proving coverage under the interrelated-claims provision by referring to complaints from prior claims.”
2. Insufficient Facts to Determine Whether Coverage Exists
The Texas Supreme Court has been definitive that an insurer must defend its insured where the pleadings do not have sufficient facts to determine whether coverage exists. See, e.g., Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 491 (Tex. 2008). As the Fifth Circuit has also put it: “When in doubt, defend.” Gore Design Completions, Ltd. v. Hartford Fire Ins. Co., 538 F.3d 365, 369 (5th Cir. 2008).
The Fifth Circuit appeared to ignore this rule in Star-Tex Resources, L.L.C. v. Granite State Insurance Company, 553 Fed. Appx. 366 (5th Cir. 2014). In that case, the underlying plaintiff generally alleged he was “seriously injured in an automobile collision caused by the negligence of [the insured’s employee]” who was “under the influence of alcohol and/or drugs at the time of the collision.” Id. at 370. The insurer argued it was reasonable to infer the employee was operating a vehicle at the time of the accident, and so the policy’s auto exclusion applied. Id. The Fifth Circuit determined: “Because the allegations in the underlying complaint—which can charitably be described as terse—lend themselves to multiple reasonable inferences, we cannot determine, based solely on the pleadings, whether there is a potentially covered claim.” The Fifth Circuit also concluded that extrinsic evidence relating to the facts of the accident – specifically that the employee was driving and hit the underlying plaintiff – “goes only to coverage.” Id. at 372.
Recent opinions suggest Star-Tex may be an outlier. In Castle Point National Insurance Company v. Lalo, 2016 WL 1072173 (5th Cir. Mar. 17, 2016), the Fifth Circuit came to the opposite outcome when faced with the question of whether an insurer had a duty to defend a car accident case, or if the policy’s employment exclusion applied. The court found that the underlying complaint “contains no allegation that [the underlying claimant] was an employee of [the insured]; nor does it contain sufficient factual allegations to classify [the claimant] as an employee under the policy,” and therefore the insurer had an obligation to defend the case. Id. at *2-3; see also Allstate County Mutual Insurance Company v. Wootton, 2016 WL 1237872, at *7, n. 7 (Tex. App.—Houston [14th Dist.] Mar. 29, 2016, no. pet. h.) (rejecting the insurer’s request to apply a “broad exception” to the eight-corners rule when the underlying pleading “does not contain sufficient facts to determine whether coverage exists”); In re ATP Oil & Gas Corp., 2016 WL 270049, at *6 (Bankr. S.D. Tex. Jan. 20, 2016) (finding eight-corners rule supports duty to defend where the underlying complaint “does not specify” which party brought injury-causing pollutants onto platform).
3. Merits Determinations in the Duty to Defend Coverage Case
When applying the eight-corners rule without exception, Texas courts are to accept the allegations as pled and not mix merits determinations with the duty to defend analysis. See, e.g., Don’s Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20, 32 (Tex. 2008).
In the recent opinion Markel American Insurance Company v. Verbeek, 2015 WL 5511242 (W.D. Tex. Sept. 17, 2015), appeal filed November 20, 2015, the district court claimed it was expressing no opinion on the underlying claims in deciding the duty to defend, but appears to have done just that. The underlying claimant banks alleged the defendant company officers conspired to fraudulently induce the banks to enter into a credit facility with their company, which then went bankrupt. Each of the underlying lawsuits “expressly exclude[d] any creditor claims” against the company, as the bank was making those claims in the bankruptcy proceedings. The officers’ D&O insurer nonetheless denied coverage under an exclusion for creditor claims. According to the court: “Texas law requires that the undersigned make a finding determining whether claims actually alleged in the underlying lawsuits—fraud and violation of the Texas Securities Act—are supported by factual allegations showing the plaintiff financial institutions were damaged in their capacity as creditors . . . .” The court found they were not, and held that the insurer did not have a duty to defend the officers under the creditor exclusion.
Merits evaluations in coverage cases are problematic not only because they run contrary to the eight-corners rule, but also because they open up the real possibility of inconsistent results. The underlying trial court could come out differently, leaving the insured without a defense and indemnification coverage. Other recent cases also continue to support this view. See, e.g., Underwriters at Lloyd’s, Syndicate 1036 v. Coastal Production Systems, LLC, 2015 WL 1333347 (W.D. Tex. Mar. 23, 2015) (“Underwriters’ argument that the allegations in the second amended petition would not, if proven true, be sufficient to establish course and scope of employment is irrelevant.”); NetSpend Corporation v. AXIS Insurance Company, 2014 WL 3568355, at *6 (W.D. Tex. July 18, 2014), aff’d 609 Fed. Appx. 268 (5th Cir. 2015) (“The policies obligated AXIS to defend a suit even if the claims alleged were ‘groundless.’ If the petition sounded solely in negligence and AXIS’s defense was no more than filing a motion to dismiss citing the economic loss rule, it would still be obligated to provide that defense.”).