Texas Supreme Court Recognizes Eight-Corners Exception for “Collusive Fraud”
For the first time, the Texas Supreme Court has recognized an exception to the eight-corners rule and allowed the consideration of “extrinsic evidence” when assessing a carrier’s duty to defend its insured under a liability policy. In Cause No. 18-0837, Loya Insurance Company v. Osbaldo Hurtado Avalos et al. (Tex. May 1, 2020), the Texas Supreme Court adopted “an exception to the eight-corners rule” finding a trial court “may consider extrinsic evidence regarding whether the insured and a third party suing the insured colluded to make false representations of fact in that suit for the purpose of securing a defense and coverage where they would not otherwise exist.” Slip op. at 1. In so holding, the Court emphasized that an insurer confronted with undisputed evidence of “collusive fraud” may “withdraw its defense without first seeking a declaratory judgment, though it risks substantial liability if its view of the duty to defend proves to be wrong.” Id. at 1-2.
The Loya case involved a motor vehicle accident in which the tortfeasor/husband was explicitly excluded from the policy’s coverage. Id. at 2. While driving the covered vehicle, the husband collided with another vehicle. Subsequently, the injured claimants, the excluded husband, and the insured wife all agreed to tell the responding police officer and the insurer that the wife was driving the car rather than the excluded husband. Id. In an Opinion by Justice Brett Busby, the Court also emphasized that there was no dispute the parties all agreed “to make false statements about who was driving in order to trigger [the wife’s] insurance coverage and the insurer’s duty to defend.” Id. at 6. Under these circumstances, the Court recognized an exception to the eight-corners rule and allowed consideration of the parties’ “collusive fraud.” Id. (holding “the duty to defend in liability insurance policies applies to fraudulent allegations by third parties” not “fraudulent allegations brought by the insured itself”) (emphasis in original).
Adopting this exception to prevent “collusive fraud” from creating a duty to defend, the Court noted its previous reluctance to adopt a “true facts exception” to the eight-corners rule in GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305, 311 (Tex. 2006). The distinction between a “collusive fraud” and a “true facts” exception to the eight-corners rule likely turns on the communications and intent of the parties – and potentially their lawyers – in working together to plead a case into coverage. This is likely to be an issue in future coverage litigation.