Subject to Exceptions? Texas Supreme Court Accepts Challenge to “Eight Corners” Rule

By William McMichael, Martin, Disiere, Jefferson & Wisdom LLP

Last March, the Texas Supreme Court issued its opinion in Richards v. State Farm Lloyds, unanimously ratifying the “Eight Corners” Rule as a settled feature of Texas law.[1] With its ruling, the Court rejected attempts to conflate the duty to defend with the duty to indemnify and affirmed that extrinsic evidence ought not impact on an insurer’s evaluation of its defense obligations (except in those rare cases where the policyholder fraudulently manipulates a claim in an effort to obtain coverage).[2] However, the Court set the stage for future challenge to this consensus when Justice Blacklock noted the “Eight Corners” Rule could “possibly” be “subject…to exceptions.”[3]

Which exceptions? How many exceptions? It appears we may soon find out.

Love it or hate it, the beauty of pure “Eight Corners” analysis is its simplicity: A carrier has a duty to defend its insured unless the eight corners of the petition and the policy provide clear evidence that the policy will never afford coverage for the alleged loss.[4] Such paradigm is understood to afford significant protection for policyholders, as it obligates insurers to afford a defense even when coverage is questionable.

While Texas courts generally apply strict “Eight Corners” analysis when evaluating the duty to defend, the Supreme Court never ruled on whether Texas law requires strict application. As such, certain Texas state courts, and federal courts applying Texas law, felt no such restraint and occasionally considered extrinsic evidence when evaluating the duty to defend.[5] Most notably, the Fifth Circuit’s holding in Northfield allowed courts to consider extrinsic evidence if (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 that does not overlap with the merits of or engage the truth or falsity of any facts alleged in the underlying case.[6]

Federal courts have applied Northfield analysis favorably.[7] Yet because the Texas Supreme Court never addressed its application on the merits, Northfield contributed to create a split among the Texas Courts of Appeals as to whether the “Eight Corners” Rule is “subject to exceptions.”[8] This split created an atmosphere of confusion for policyholders and insurers alike, leaving parties to support whatever argument best suited their position in a particular case.

The atmosphere of confusion will hopefully come to an end when the Texas Supreme Court takes up BITCO Gen. Ins. Co. v. Monroe Guar. Ins. Co. later this year. In BITCO, the Fifth Circuit has been asked to review whether the United States District Court for the Western District of Texas erred in granting summary judgment on an insurer’s duty to defend after applying the Northfield analysis.[9] The Texas Supreme Court rendered its opinion in Richards after the District Court granted summary judgment and, in doing so, called into question whether Texas law allows such analysis.[10] Accordingly, the Fifth Circuit certified two questions to determine – once and for all – whether Texas law allows courts to consider of extrinsic evidence in Northfield-like circumstances and, if so, how such analysis ought to be applied.[11]

It is unclear how the Court will rule. Given its prior comments,[12] it appears likely that the Court recognizes Northfield-type analysis as an exception to the “Eight Corners” Rule. Affirming Northfield would serve to ratify the growing consensus among courts applying Texas law and protect insurers from defending in matters where extrinsic evidence makes clear they will never have a duty to indemnify. Such holding would also align nicely with the Court’s recent holding in Loya, wherein the Court recognized the first explicit exception to the “Eight Corners” Rule.[13]

However, adopting such exception would certainly seem to conflict (if only in spirit) with the reasoning undergirding the Court’s defense of the “Eight Corners” Rule in Richards. Indeed, some justices are likely to resist attempts to erode pure “Eight Corners” analysis, as affirming Northfield may allow insurers to deny a defense even in circumstances where the policyholder did nothing to jeopardize their right to receive policy benefits. Furthermore, given the Court’s clear preference for “bright line rules” over the last 30 years, it is unlikely the Court will favor any holding that requires it to analyze whether the evidence justified the denial of defense.

Regardless of how the Court rules, one thing is clear: The questions presented in BITCO are “important and determinative question[s] of Texas law.”[14] As such, the eyes of the Insurance Section now look to Austin and await a decision that is sure to shape coverage litigation for decades.

William McMichael is a trial lawyer at Martin, Disiere, Jefferson & Wisdom LLP who focuses on insurance coverage and bad faith litigation. His representative experience involves advocating on behalf of primary and excess insurance carriers in front of courts and industry regulators across the nation, including in Texas, Oklahoma, New Mexico, Louisiana, California, Florida, Missouri, North Dakota, Utah, and Vermont.

[1] 597 S.W.3d 492, 498-99 (Tex. 2020) (citing Heyden Newport Chem. Corp. v. S. Gen. Ins. Co., 387 S.W.2d 22, 24 (Tex. 1965)).

[2] Loya Ins. Co. v. Avalos, 610 S.W.3d 878, 882 (Tex. 2020).

[3] Richards, 597 S.W.3d at 499 (emphasis added).

[4] GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305, 308-09 (Tex. 2006) (“Facts outside the pleadings, even those easily ascertained, are ordinarily not material…and allegations against the insured are liberally construed in favor of coverage.”) (citing Nat’l Union Fire Ins. Co. v. Merchants Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997)).

[5] See, e.g., Weingarten Realty Mgmt. Co. v. Liberty Mut. Fire Ins. Co., 343 S.W.3d 859, 865 (Tex. App.—Houston [14th Dist.] 2011, pet. denied) (“[W]e are persuaded of the need for a very narrow exception to the eight-corners rule. … Under this exception, the extrinsic evidence must go strictly to an issue of coverage without contradicting any allegation in the third-party claimant’s pleadings material to the merits of that underlying claim.”); Urethane Int’l Prod. v. Mid-Continent Cas. Co., 187 S.W.3d 172, 176 (Tex. App.—Waco 2006, no pet.) (“An exception to [the eight-corners] rule occurs when the petition in the underlying lawsuit does not allege facts sufficient for a determination of whether those facts, even if true, are covered by the policy.”) (quotations and brackets omitted); Tucker v. Allstate Texas Lloyds Ins. Co., 180 S.W.3d 880, 884-85 (Tex. App.—Texarkana 2005, no pet.) (“[W]here the terms of the policy are ambiguous, or where the petition in the underlying suit does not contain factual allegations sufficient to enable the court to determine whether the claims are within the policy coverage, the court may consider extrinsic evidence to assist it in making the determination.”); but see also AIX Specialty Ins. Co. v. Shiwach, No. 05-18-01050-CV, 2019 WL 6888515, at *7 (Tex. App.—Dallas Dec. 18, 2019, pet. denied) (“Although the Fifth Circuit and multiple intermediate appellate courts have expressly recognized a limited exception to this rule, permitting consideration of extrinsic evidence when relevant only to the coverage issue, the Texas Supreme Court and this Court have not yet done so.”); USAA Texas Lloyd’s Co. v. Doe, No. 04-15-00673-CV, 2017 WL 2791327, at *3 (Tex. App.—Amarillo June 28, 2017, pet. denied) (“The duty to defend is not affected by facts discovered before suit, developed in the course of litigation, or by the outcome of the suit.”); AccuFleet, Inc. v. Hartford Fire Ins. Co., 322 S.W.3d 264, 273 (Tex. App.—Houston [1st Dist.] 2009, no pet.) (“We decline to create an exception to the eight corners rule….”).

[6] Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523, 531 (5th Cir. 2004).

[7] Ooida Risk Retention Grp., Inc. v. Williams, 579 F.3d 469, 476 (5th Cir. 2009); Primrose Operating Co. v. Nat’l Am. Ins. Co., 382 F.3d 546, 557 (5th Cir. 2004) (looking to extrinsic evidence, the parties’ stipulation that some polluting spills occurred after a certain date that overlapped with coverage, to conclude that there was a duty to defend); Century Sur. Co. v. Dewey Bellow Operating Co., No. H-08-1901, 2009 WL 2900769, at *8 (S.D. Tex. Sept. 2, 2009) (concluding that an exclusion applied and no duty to defend existed after looking to extrinsic evidence found in a counterclaim because “the underlying petition does not contain facts that allow the court to determine when Dewey knew of an ‘occurrence’ and when it reported that ‘occurrence[ ]’ ”); Boss Mgmt. Serv., Inc. v. Acceptance Ins. Co., No. H-06-2397, 2007 WL 2752700, at *11-12 (S.D. Tex. Sept. 17, 2007).

[8] Supra at n.5; Richards, 597 S.W.3d at 499-500.

[9] See Appellant’s Brief in BITCO Gen. Ins. Co. v. Monroe Guar. Ins. Co., 2020 WL 957298 (5th Cir. Feb. 19, 2020).

[10] Richards, 597 S.W.3d at 500 (“We…reserve comment on whether other policy language or other factual scenarios may justify the use of extrinsic evidence to determine whether an insurer must defend a lawsuit against its insured. The varied circumstances under which such arguments for the consideration of evidence may arise are beyond imagination. We do not purport to resolve any matters or foreclose any arguments not directly raised in this certified question.”)

[11] BITCO Gen. Ins. Corp. v. Monroe Guar. Ins. Co., — Fed. Appx. –, 2021 WL 955155, at *1 (5th Cir. Mar. 12, 2021), certified question accepted (Mar. 19, 2021).

[12] Richards, 597 S.W.3d at 499-500; Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 497 (Tex. 2008); GuideOne, 197 S.W.3d at 308-09.

[13] Loya Ins. Co., 610 S.W.3d at 882.

[14] BITCO Gen. Ins. Co., 2021 WL 955155, at *1.