Is Eight Enough, Part 2 – Texas Supreme Court Justices Signal Skepticism of Extrinsic Evidence Exception

February 9th, 2020 By Eric S. Peabody

On January 8, 2020, the Texas Supreme Court heard argument on a certified question from the U.S. Court of Appeals for the Fifth Circuit in State Farm Lloyds v. Richards, 784 Fed. App’x 247 (5th Cir. 2019), certified question accepted (Sept. 13, 2019), which asks: Is extrinsic evidence permissible—and the strict eight-corners rule inapplicable—in determining the duty to defend if the policy does not require defense of groundless, false or fraudulent allegations? Jeff Glass previously blogged about this certified question here. On oral argument, the justices appeared skeptical.

The underlying case involved an ATV death and the alleged negligent supervision of the minor driver by his grandparents, the Richardses. The Richardses’ homeowners’ policy excluded coverage arising out of the use of a “motor vehicle,” defined in part as an ATV “while off an insured location.” Although it was undisputed that the accident occurred off the Richardses’ premises, the liability lawsuit omitted this detail. State Farm brought a declaratory action on its duty to defend, arguing in part that the extrinsic evidence of the accident location was admissible because the policy did not require the carrier to defend suits with groundless, false, or fraudulent allegations—the basis of the eight-corners rule.  Without that language, the duty to defend is co-extensive with the duty to indemnify, State Farm argued.

The justices’ questions indicate that they find the proposition dubious:

  • “Why would the omission of this clause upend what is the settled expectation of carriers and insureds about the breadth of the duty to defend?” (Bland, J.)
  • Justice Green asked why the court shouldn’t adhere to the eight-corners rule because it is “simple and straightforward and easy to apply as a matter of policy.”
  • Justice Boyd questioned whether allowing extrinsic evidence would encourage insurers to simply deny coverage rather than initially defending their policyholders while reserving their rights to challenge their coverage obligations in court.

There were also suggestions during argument that a change of this magnitude should be made explicit in the policy and undergo approval by the Texas Department of Insurance rather than coming from an extracontractual, judicially imposed rule.

Notably, just this month the Texas Supreme Court  granted review in Loya Insurance Company v. Avalos, 2018 WL 3551260 (Tex. App. – San Antonio, July 25, 2018), an extrinsic evidence case involving allegations of fraud and collusion by the insured. The case presents the following issue for the Court to decide:

Issue 1: Texas law holds that the eight-corners rule prohibits consideration of evidence extraneous to the claimant’s pleadings against the insured in determining the duty to defend and requires the claimant’s pleading to be considered true even if they are groundless, false, or fraudulent. However, the eight-corners rule should permit consideration of undisputed, extrinsic evidence of the insured’s fraud and collusion designed to fabricate coverage where none exists. Did the court of appeals erred in disallowing uncontroverted evidence of the insured’s fraud and collusion to reverse a summary judgment granted to the insurer?

Takeaways: While courts routinely defy crystal-ball predictions, the court seemed wary of a wholesale extrinsic evidence exception to the eight-corners rule based on policy language.  Will we see less skepticism where fraud is concerned?  Stay tuned.