Texas Supreme Court Holds Courts Apply Eight Corners Rule to Determine the Duty to Defend Even If The Policy Does Not Include Language Requiring a Defense For Groundless Claims
Matthew M. Buschi
In an expressly narrow opinion, the Texas Supreme Court pronounced today, March 20, 2020, that when Texas Courts analyze an insurance company’s duty to defend, the eight corners rule applies even in the absence of magic words in the policy to the effect that the insurer is required to defend “all actions against its insured no matter if the allegations of the suit are groundless, false or fraudulent.”
The eight-corners rule stems from the rules of judicial construction of contracts known as the “four corners rule,” which requires courts to interpret a contract based solely on what is in the contract itself, within the “four corners” of the document, unless the document itself is ambiguous. The “eight corners” in this analysis are the four corners of the petition (the lawsuit) and the four corners of the insurance policy. In essence, Texas Courts look to what the allegations are in the lawsuit, and then look at the policy to determine whether those types of claims are covered and thus give rise to a duty for the insurance company to defend the insured in that lawsuit. This analysis is to be done without regards to consideration of the actual merits of the allegations in the lawsuit, and without extrinsic evidence related to the merits. The rule requires that “the insurer’s duty to defend [is determined] by the third-party plaintiff’s pleadings, considered in light of the policy provisions, without regard to the truth or falsity of those allegations.” Of course, having to determine the merits of the suit before an insurance company is required to defend the suit likely defeats the purpose of obtaining a policy in which the insurance company is to defend the insured in a lawsuit.
However, one federal district court applying Texas law in State Farm Lloyds v. Richards, No. 4:17-CV-753-A, 2018 WL 2225084, at *3 (N.D. Tex. May 15, 2018) had found that unless the policy itself includes the language requiring an insurer to defend “all actions against its insured no matter if the allegations of the suit are groundless, false or fraudulent” the eight corners rule was not applicable to determine the duty to defend and therefore the court could consider extrinsic evidence going to the merits of the case and use that evidence in determining whether the claims in the lawsuit are covered under the policy. The Fifth Circuit asked the Texas Supreme Court to answer whether the “policy language exception” stated by the federal district court was a permissible exception to the eight corners rule. Today, the Texas Supreme Court announced that it was not. The Supreme Court, however, limited its ruling solely to question of whether the absence of the language requiring defense no matter if the allegations are groundless. The Court announced without question that insurance companies can contract around the “eight corners” rule, but it cannot do so simply by excluding that particular language from its policies.
This opinion, at very least, can give some comfort to insureds, whether of homeowner policies, general liability policies, or D&O policies, that absence of this language requiring the insurance company to defend no matter if the allegations are groundless, will not itself allow the insurer to deny a defense.
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