Richards v. State Farm Lloyds, 597 S.W.3d 492 (Tex. Mar. 20, 2020)
By Rachelle (Shelley) H. Glazer and Brandon L. King, Thompson & Knight LLP
The Texas Supreme Court has addressed—and rejected—a language-based exception to Texas’s “eight-corners” rule, under which an insurer’s duty to defend is determined by the claims alleged in the petition and the coverage provided in the policy documents. The challenge to the rule comes by virtue of a certified question from the Fifth Circuit.
The facts are tragic: A young boy died in an ATV accident while staying at his grandparents’ house. The boy’s mother filed suit in the Northern District of Texas against the grandparents (the Richards); the Richards asked State Farm to defend the suit pursuant to their homeowner’s insurance policy. State Farm initially defended the suit under a reservation of rights but later sought a declaration that it had no duty to defend the Richards; this was so, according to State Farm, pursuant to two policy exclusions.
The first exclusion, the “motor-vehicle exclusion,” “exclude[d] coverage for bodily injury arising from the use of an ATV while off the Richards’ premises.” To prove up this exclusion, State Farm attached a vehicle crash report that demonstrated the ATV accident occurred while off the Richard’s premises. The second exclusion, the “insured exclusion,” barred coverage for bodily injury to residents of the Richards’s household; to prove up this exclusion, State Farm attached the Richards’s admission that they were the decedent’s grandparents and an order from a SAPCR appointing the Richards as joint-managing conservators.
The eight-corners rule, of course, would normally bar a court’s consideration of the above-mentioned extrinsic evidence in determining whether State Farm had a duty to defend the Richards in the underlying lawsuit. Under the rule, the only two documents relevant to determining whether an insurer has a duty to defend are (1) the plaintiff’s petition and (2) the insurance policy. Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., 279 S.W.3d 650, 654 (Tex. 2009) (“Under the eight-corners rule, the duty to defend is determined by the claims alleged in the petition and the coverage provided in the policy.”).
Applying a language-based exception, however, the Northern District held that the eight-corners rule is inapplicable if the policy does not contain language requiring the insurer “to defend all actions against its insured no matter if the allegations of the suit are groundless, false or fraudulent.” In the words of the district court:
In this case, the policy does not require plaintiff to defend all actions against its insured no matter if the allegations of the suit are groundless, false or fraudulent. Rather, the duty to defend arises only if suit is brought to which the coverage applies. Thus, the eight-corners rule is not applicable, B. Hall Contracting, Inc. v. Evanston Ins. Co., 447 F. Supp. 2d 634, 645 (N.D. Tex. 2006), rev’d on other grounds, 273 F. App’x 310 (5th Cir. 2008), and plaintiff contends that the court can consider evidence outside Meals’s pleading to determine whether the Richards’s policy provides coverage for Meals’s claims. Plaintiff does not contest the facts pleaded by Meals; rather, it says that additional facts show that there is no coverage.
Holding that the extrinsic evidence triggered the policy’s exclusions, the district court granted summary judgment for State Farm; the Richards appealed.
The Fifth Circuit declined to answer whether the district court’s exception was permissible under state law; it instead certified the following question to the Supreme Court of Texas: “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?”
The Supreme Court of Texas answered this narrow question in the negative. In a unanimous opinion authored by Justice Blacklock, the court held that an insurer cannot “contract away the eight-corners rule altogether merely by omitting from its policy an express agreement to defend claims that are ‘groundless, false or fraudulent.'”
Although the high court’s answer is unremarkable—indeed, no other court has ever applied this language-based exception—the failure to weigh in on the viability of a different but well-established extrinsic-evidence exception will leave Texas courts guessing. For some time, federal courts and intermediate Texas appellate courts have applied a well-established exception—the “Northfield exception”—to the eight-corners rule: Consideration of extrinsic evidence is permissible “when (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 which does not overlap with the merits of or engage the truth or falsity of any facts alleged in the underlying case.'” This exception originates from the Fifth Circuit’s decision in Northfield Insurance Co. v. Loving Home Care, Inc., 363 F.3d 523, 531 (5th Cir. 2004), and has been applied many times since.
The Texas Supreme Court has thrice entertained—and rejected—opportunities to adopt the Northfield exception. In each of those cases, the court discussed the exception but ultimately declined to adopt it because, as presented, the facts wouldn’t have merited its application to begin with. Richards is no different; the Court acknowledged the Northfield exception’s “widespread use” but declined to weigh in on its viability given the Fifth Circuit’s narrowly crafted certified question. Texas practitioners will have to continue to wait for the right case to land before the Texas Supreme Court to know whether the Northfield exception will become more than an Erie guess.
 Richards v. State Farm Lloyds, 597 S.W.3d 492, 495 (Tex. Mar. 20, 2020).
 See State Farm Lloyds v. Richards, 784 F. App’x 247 (5th Cir. 2019) (unpublished).
 Richards, 784 F. App’x at 248–49.
 Id. at 249–50.
 Id. at 253.
 Richards, 597 S.W.3d at 498.
 Id. at 496.
 See, e.g., Ooida Risk Retention Grp., Inc. v. Williams, 579 F.3d 469, 476 (5th Cir. 2009) (applying exception); Star-Tex Resources, L.L.C. v. Granite State Ins. Co., 553 F. App’x 366, 373 (5th Cir. 2014) (unpublished) (applying exception); Tex. Political Subdivisions Prop./ Cas. Joint Self Ins. Fund v. Pharr-San Juan-Alamo ISD, No. 13-17-00655-CV, 2019 WL 4678433, at *5 (Tex. App.—Corpus Christi Sept. 26, 2019, pet. filed) (mem. op.).
 See Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., 279 S.W.3d 650, 656 (Tex. 2009); Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 497 (Tex. 2008); GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305, 311 (Tex. 2006).