Texas Supreme Court to Review Judge McBryde’s Exception to the Eight-Corners Rule

By Jeffrey C. Glass, Hanna & Plaut, LLP

The Fifth Circuit Court of Appeals recently certified to the Texas Supreme Court, and the latter accepted, a question that could end up undermining the “eight corners” rule.  State Farm Lloyds v. Richards, 18-10721, 2019 WL 4267354, at *3 (5th Cir. Sept. 9, 2019), certified question accepted (Sept. 13, 2019)

Jayden Meals was killed in an all-terrain vehicle accident while under the temporary care of his grandparents, the Richards. Jayden’s mother sued the Richards in state court alleging they were negligent in failing to supervise and instruct Jayden. The Richards sought a defense from State Farm Lloyds under their homeowner’s policy. State Farm initially defended under a reservation of rights, but later sought a declaration, in federal court, that it had no duty to defend or indemnify the Richards, arguing the motor vehicle exclusion and the exclusion for bodily injury to an insured. State Farm filed a summary judgment motion in the coverage case relying on extrinsic evidence to show that 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.

The federal district judge, John McBryde of the Northern District, Ft. Worth Division, considered 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.”  Id. slip op. at *2 (citing State Farm Lloyds v. Richards, No. 4:17-CV-753-A, 2018 WL 2225084, at *3 (N.D. Tex. May 15, 2018)). Interestingly, the Fifth Circuit noted that “State Farm makes no attempt to defend the district court’s analysis.” Id.

The Fifth Circuit, construing the district court’s holding as recognizing an exception to the eight corners rule, outlined some of the Supreme Court decisions that declined to recognize any exception to the rule, including GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305, 308 (Tex. 2006), Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., 279 S.W.3d 650, 654 (Tex. 2009), and Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 497 (Tex. 2008). The Court also noted that the Texas Supreme Court had cited with approval the Fifth Circuit’s prediction that if the Supreme Court adopted an extrinsic evidence exception, “it would do so only ‘when it is initially impossible to discern whether coverage is potentially implicated and 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.'” 2019 WL 4267354, at *3 (quoting Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523, 531 (5th Cir. 2004)).

From this survey, the Fifth Circuit concluded “there is no controlling Texas Supreme Court case law determining whether there’s a policy-language exception to the eight-corners rule” and certified the following question to the high Texas 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?

Citation of that particular decision is interesting because it was not otherwise discussed in the opinion, but it was also decided by Judge McBryde. It turns out that Judge McBryde has issued a series of decisions, in addition to B. Hall Contracting and the decision under discussion, questioning or rejecting the eight corners rule as it is typically applied in Texas.  See Ohio Casualty Insurance 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).

It is interesting to see how Judge McBryde’s resistance to the eight corners rule will play in the Texas Supreme Court.