In two recent decisions, the Supreme Court of Texas clarified the scope of the state’s law regarding whether a liability insurance company has a duty to defend a lawsuit brought by a third party against the insured.
State Farm Lloyds v. Richards and Loya Insurance Company v. Avalos, which reached different outcomes based upon the facts of the cases, addressed whether there are exceptions to the state’s “eight-corners rule.” That rule states that, when analyzing whether an insurer has a duty to defend, a court may refer only to the relevant policy terms and the factual allegations in the lawsuit against the insured (i.e., the four corners of the policy and the four corners of the complaint).
In the Richards decision on March 20, the court rejected the insurer’s argument that, for the eight-corners rule to apply, a policy must include a clause requiring it to defend the insured “no matter if the allegations of the suit are groundless, false, or fraudulent.” The lower court had agreed with the insurer that the absence of this language in the subject homeowners’ policy at issue meant the insurer could rely on extrinsic evidence to prove two policy exclusions applied and relieved the insurer of its duty to defend the insureds in a lawsuit arising from a fatal motor vehicle accident.
Specifically, the insurer sought to use a police accident report and a court order to deny coverage based upon a “motor vehicle exclusion” and an exclusion for injury sustained by an insured. Answering a question certified by the US Fifth Circuit Court of Appeals, the Supreme Court of Texas declined to adopt the insurer’s proposed exception to the eight-corners rule for policies that do not contain a provision that the insurer will defend the insured “no matter if the allegations of the suit are groundless, false, or fraudulent.”
On May 1, the same court addressed a related issue in the Avalos decision, but held in favor of the insurer. Avalos involved the issue of whether an auto liability insurer had a duty to defend its insured in a personal injury lawsuit brought by parties injured in an accident involving the insured’s vehicle. The insured and her husband, who was not an insured under the subject policy, undisputedly lied to the police and said the insured was driving the vehicle in order to obtain coverage and a defense in the lawsuit. The court held the insurer could use extrinsic evidence to prove its insured committed fraud to obtain coverage, thereby negating its duty to defend. An intermediate appellate court reversed, holding pursuant to the eight corners rule that the insurer could not rely on outside evidence, even though the fraud was undisputed.
The Supreme Court of Texas reversed and reinstated the trial court’s grant of summary judgment to the insurer. The court adopted a limited “collusive fraud” exception to the eight-corners rule and held that, under the circumstances, the insured’s false statement to the police was admissible. Notably, however, the court expressly stated this exception is a narrow one and that unless insurers discover clear evidence of fraud, they should still err on the side of defending their insureds.
These decisions provide guidance to policyholders and insurance companies regarding the scope of the eight-corners rule under Texas law. In sum, insurers cannot rely upon evidence outside of the insurance policy and the underlying lawsuit against the insured in order to deny coverage except under narrow circumstances, such as where there is undisputed evidence of fraud.
If you have any questions regarding the content in this alert, please contact Sanjeev Devabhakthuni, counsel, at sdevabhakthuni@barclaydamon.com or another member of the firm’s Insurance Coverage & Regulation Practice Area.