Claimant/Named Insured Limited to $30K Statutory Minimum when Houston First Court Declines to Find a “Separation of Insureds” Implied in Auto Policy
A closer look at Texas Farm Bureau Mutual Ins. Co. v. Minchew.
By Jeffrey C. Glass, Hanna & Plaut, LLP
I recently wrote about a question, certified to the Texas Supreme Court by the Fifth Circuit Court of Appeals, regarding the continuing validity of the “eight corners” rule, the long-standing rule under which a liability insurer’s duty to defend is determined solely by the four corners of the petition against the insured in light of the four corners of the insurance policy. Jeffrey C. Glass, Texas Supreme Court to Review Judge McBryde’s Exception to the Eight-Corners Rule, State Bar of Texas, Insurance Law Section, Oct. 15, 2019. The U.S. District Court decision under Fifth Circuit review was one of a series of decisions authored by Judge John McBryde finding that because the eight-corners rule originally derived from policy language requiring the carrier to defend claims even “if the allegations of the suit are groundless, false or fraudulent,” policies without such language were not subject to the rule. State Farm Lloyds v. Richards, 4:17-CV-753-A, 2018 WL 2225084, at *1 (N.D. Tex. May 15, 2018). On March 20, 2020, the Supreme Court issued its decision rejecting this interpretation and affirming the continuing viability of the eight-corners rule under modern CGL policies. Richards v. State Farm Lloyds, 19-0802, — S.W.3d –, 2020 WL 1313782 (Tex. Mar. 20, 2020).
The underlying suit was a state court action involving Jayden Meals, who was killed in an all-terrain vehicle accident while under the care of his grandparents, the Richards. Jayden’s mother sued the Richards in state court alleging they were negligent in failing to supervise him and the Richards sought a defense from State Farm Lloyds under their homeowner’s policy. State Farm filed a declaratory judgment suit in federal court, asserting it had no duty to defend or indemnify the Richards under the policy’s motor vehicle exclusion and the exclusion for bodily injury to an insured. In the coverage case, State Farm filed a summary judgment motion relying on evidence outside the eight corners of policy and petition (“extrinsic evidence”) showing the accident occurred off-premises, as required by the motor vehicle exclusion, and that Jayden was a resident of the insured household and thus an insured under the insured exclusion.
Judge McBryde decided to consider the extrinsic evidence and granted summary judgment for State Farm, holding the eight-corners rule does not apply to policies that do not include language requiring the insurer to defend all actions against the insured even “if the allegations of the suit are groundless, false or fraudulent.” State Farm v. Richards, 2018 WL 2225084, at *3. On appeal, the Fifth Circuit, noting “State Farm makes no attempt to defend the district court’s analysis,” certified the following question to the Supreme Court:
Is the policy-language exception to the eight-corners rule articulated in B. Hall Contracting Inc. v. Evanston Ins. Co., 447 F. Supp. 2d 634 (N.D. Tex. 2006), a permissible exception under Texas law?
State Farm Lloyds v. Richards, 18-10721, 2019 WL 4267354, at *3 (5th Cir. Sept. 9, 2019). The B. Hall Contracting decision was not otherwise discussed in the opinion, but it was also decided by Judge McBryde, one of a series of similar decisions.
Noting the paramount influence of policy language on coverage questions, the Supreme Court wrote that parties can contract around the eight-corners rule but the question is “whether these parties have contracted around it by declining to expressly agree that State Farm must defend claims ‘even if groundless, false or fraudulent’.” 2018 WL 2225084, at *4. The Court agreed with the policyholder that the District Court’s “policy-language exception” was erroneous because Texas decisions applying the eight-corners rule rarely addressed, much less relied on, the presence or absence of a groundless-claims clause. Id. Thus, “State Farm did not contract away the eight-corners rule . . . by omitting . . . an express agreement to defend claims that are ‘groundless, false or fraudulent’.” Id. The Court surveyed the origins and settled nature of the eight-corners rule and some of the many cases in which it was applied without resort to the groundless-claims clause, concluding it “can safely presume” policies are drafted “in light of this understanding.” Id.
Noting the eight-corners rule is an interpretation of the intent of policy contracts, not an amendment of them, the Court also attempted to textually derive the rule from the basic insuring clause, which triggers coverage if “a claim is made or a suit is brought against an insured for damages because of bodily injury . . . to which this coverage applies.” Id. at *5–6. That attempt is necessarily weak since that policy text simply does not address many facets of eight corners interpretation, including limiting the scope of what the “claim” is to a single petition (exclusive of evidence of the facts underlying it), as well as the rule requiring courts to resolve doubts about coverage in favor of policyholders. E.g., Heyden Newport Chem. Corp. v. Southern Gen. Ins. Co., 387 S.W.2d 22, 26 (Tex.1965) (doubt as to whether complaint’s allegations are within the coverage “will be resolved in insured’s favor”).
In key asides, the Court three times cited or mentioned court-sanctioned exceptions to the eight-corners rule, including two mentions of the Fifth Circuit’s Northfield decision, which predicted the Supreme Court would accept extrinsic evidence if a) it is impossible to determine whether coverage is implicated or b) the extrinsic evidence goes solely to a fundamental issue of coverage which does not overlap with the merits of the underlying suit. Id. at *3, 5, 6 (citing Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523, 531 (5th Cir. 2004)). The Court “reserved comment” on those and other exceptions as being outside the scope of the certified question and limited its holding to the following: “the ‘policy-language exception’ to the eight-corners rule articulated by the federal district court in B. Hall Contracting—under which the eight-corners rule does not apply unless the policy contains a groundless-claims clause—is not a permissible exception under Texas law.” Id. at 6.
 See Ohio Cas. Ins. Co. v. Cooper Machinery Corp., 817 F. Supp 45, 48 (N.D. Tex. 1993) (McBryde, J., stating, in dicta, that the insurer is entitled to contest, in a declaratory judgment action, facts alleged in the underlying suit that relate to coverage); McLaren v. Imperial Cas. and Indem. Co., 767 F. Supp. 1364, 1374 (N.D. Tex. 1991), aff’d, 961 F.2d 213 (5th Cir. 1992), cert. denied, 113 S. Ct. 1269 (1993) (McBryde, J., stating similar dicta); Blue Ridge Ins. Co. v. Hanover Ins. Co., 748 F. Supp. 470, 473 (N.D. Tex. 1991) (same).