Texas Supreme Court Adopts Collusive-Fraud Exception to Eight Corners Rule

Loya Ins. Co. v. Avalos, — S.W.3d –, No. 18-0837, 2020 WL 2089752 (Tex. May 1, 2020)

By Rachelle (Shelley) H. Glazer and Brandon L. King, Thompson & Knight, LLP

The Texas Supreme Court has—for the first time—expressly adopted an exception to the eight-corners rule, to be applied in cases where the insured and a third party fraudulently collude to secure a defense:

[C]ourts may consider extrinsic evidence regarding whether the insured and a third party suing the insured colluded to make false representations of fact in that suit for the purpose of securing a defense and coverage where they would not otherwise exist. If the insurer conclusively proves such collusive fraud, it owes no duty to defend.[1]

Loya’s facts are simple: Loya Insurance Company issued a liability policy to Karla Guevara but expressly excluded her husband, Rodolfo Flores, from coverage. Sure enough, while driving Guevara’s vehicle, Flores got into an accident with another car (carrying the Hurtados). The collusive fraud: “The Hurtados, Guevara, and Flores agreed to tell both the responding police officer and the insurer that Guevara was driving the car rather than Flores.”[2]

The Hurtados sued Guevara and sought coverage from Loya due to Guevara’s operation (read: Flores’s) of the vehicle. Loya provided an attorney to defend Guevara, to whom Guevara later revealed that Flores was driving the car at the time of the accident. As a result, Loya denied Guevara a defense (and coverage). Guevara assigned her rights against the insurer to the Hurtados, who filed suit against Loya under a variety of theories. After the truth came out during Guevara’s deposition, Loya moved for summary judgment and attached as evidence (extrinsic) the deposition transcripts. The trial court granted summary judgment for Loya.

On appeal, however, the San Antonio Court of Appeals reversed—even so, one justice penned a concurrence, urging the Texas Supreme Court to adopt an exception in cases where collusive fraud is present.[3]

And so it did; in a unanimous opinion authored by Justice Busby, the Texas Supreme Court adopted for the first time an extrinsic evidence exception to the eight corners rule: “[W]e conclude [the eight corners rule] does not bar courts from considering such extrinsic evidence regarding collusive fraud by the insured in determining the insurer’s duty to defend.”[4] The Court additionally held that—in cases where there is “undisputed evidence” of collusive fraud—an insurer “need not pursue a declaratory judgment action to determine its duty to defend before terminating its representation.”[5]

[1] Id. at *1.

[2] Id.

[3] Avalos v. Loya Ins. Co., 592 S.W.3d 138, 147 (Tex. App.—San Antonio 2018) (“I believe an exception to the eight-corners rule should exist in a situation like this one where the undisputed evidence shows the insured participated in collusion and fraud ‘solely to create a duty to defend.'”) (Angelini, J. concurring), rev’d, 2020 WL 2089752

[4] 2020 WL 2089752, at *3.

[5] Id.