Texas Finds a Chink in the Eight Corners Rule
The eight-corners rule of insurance contract interpretation about duty to defend directs Texas courts to determine a liability insurer’s duty to defend its insured based on:
- the pleadings against the insured and
- the terms of the insurance policy.
For many years plaintiffs’ lawyers have taken advantage of the rule and with careful pleading have required an insurer to defend a suit that was probably not covered by the insurance policy.
In Loya Insurance Company v. Osbaldo Hurtado Avalos And Antonio Hurtado As Assignees of Karla Flores Guevara, No. 18-0837, Supreme Court of Texas (May 1, 2020) the Texas Supreme Court, in the face of an obvious fraud, was asked to create an exception to the eight corners rule.
Loya Insurance Company (the insurer) sold an automobile liability insurance policy to Karla Flores Guevara. Guevara’s husband, Rodolfo Flores, was explicitly excluded from the policy’s coverage. While moving Guevara’s car, Flores collided with another car carrying Osbaldo Hurtado Avalos and Antonio Hurtado (collectively, the Hurtados).
The Hurtados, Guevara, and Flores agreed to tell both the responding police officer and the insurer that Guevara was driving the car rather than Flores so their injuries could be paid for by the insurer.
The Hurtados sued Guevara sought coverage from the insurer, claiming damages resulting from Guevara’s negligent operation of her vehicle. The insurer furnished an attorney to defend Guevara. Early in the discovery process, Guevara disclosed the lie to her attorney and identified Flores as the driver. The insurer responded to this information by denying her both a defense and coverage. The trial court granted the Hurtados’ motion for summary judgment and rendered judgment against Guevara, awarding the Hurtados $450,343.34.
Guevara assigned her rights against the insurer to the Hurtados. The Hurtados then sued the insurer, alleging its denial of a defense and coverage was negligent, breached the insurance contract, breached the duty of good faith and fair dealing, and violated the Texas Deceptive Trade Practices-Consumer Protection Act (DTPA). The insurer deposed Guevara, who recanted her initial statement that she, rather than Flores, was driving.
The trial court granted summary judgment for the insurer, remarking at the hearing on the motion that the Hurtados were “asking this Court to ignore every rule of justice and help [them] perpetuate a fraud.” The court of appeals reversed the trial court’s judgment, holding that, “as logically contrary as it may seem,” the insurer had a duty to defend under the eight-corners rule. One justice concurred in the judgment, urging the Supreme Court to adopt a narrow exception to the eight-corners rule for instances of undisputed fraud and collusion designed solely to create a duty to defend.
The duty to defend is a creature of contract arising from a liability insurer’s agreement to defend its insured against claims or suits seeking damages covered by the policy. Generally, only the four corners of the policy and the four corners of the petition against the insured are relevant in deciding whether the duty applies. Under this eight-corners rule, a court should not consider extrinsic evidence from either the insurer or the insured that contradicts the allegations of the underlying petition.
Twice the Supreme Court noted that collusive fraud by the insured might provide the basis for an exception. As to falsity, there is no dispute on this record regarding who was driving the vehicle that collided with the Hurtados. The evidence shows conclusively that the insured (Guevara) was not driving; an excluded driver (her husband) was.
There is no dispute regarding whether the Hurtados agreed with Guevara and her husband to make false statements about who was driving in order to trigger Guevara’s insurance coverage and the insurer’s duty to defend. To the contrary, given Guevara’s own admissions under oath in this suit, the record shows conclusively that these parties to the underlying case conspired to lie about who was driving to trigger insurance coverage.
Given the contractual foundations of the eight-corners rule the Supreme Court concluded it does not bar courts from considering such extrinsic evidence regarding collusive fraud by the insured in determining the insurer’s duty to defend. Neither Loya nor any insurer agreed to undertake, and the insured does not pay for, a duty to defend the insured against fraudulent allegations brought about by the insured itself. When there is conclusive evidence that groundless, false, or fraudulent claims against the insured have been manipulated by the insured’s own hands in order to secure a defense and coverage where they would not otherwise exist.
When confronted with undisputed evidence of collusive fraud, an insurer need not pursue a declaratory judgment action to determine its duty to defend before terminating its representation.
Hurtados contend the Supreme Court should require an insurer to obtain a declaration that it has no duty to defend its insured before it may withdraw the defense. But an insurer faced with undisputed evidence of collusive fraud should not be required to pursue a declaratory judgment action before withdrawing its defense for two reasons.
First, an insurer in this position could well conclude there is no justiciable controversy between it and its insured. Second, an insurer that breaches its duty to defend by withdrawing can be held liable for substantial damages and attorneys’ fees, which will help ensure that an insurer withdraws its defense without first securing a declaratory judgment only in clear-cut cases. Since the eight corners rule was put in place the state has provided multiple ways for an insured to sue, and obtain damages from, an insurer that wrongfully refuses defense.
These consequences, among others, are adequate to ensure that insurers will seek a favorable declaratory judgment before withdrawing a defense in most cases where there is a real controversy regarding the duty to defend. The Supreme Court, therefore, continues to encourage insurers to take that course.
To address such cases of collusive fraud, the Texas Supreme Court adopted an exception to the eight-corners rule: courts 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. If the insurer conclusively proves such collusive fraud, it owes no duty to defend. An insurer confronted with undisputed evidence of collusive fraud may choose to 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.
It is about time that the state of Texas created an exception to the eight corners rule. Hopefully this decision will lead to others allowing the admission of extrinsic evidence to determine the duty to defend as is the case in California and other states. A careful lawyer drafting a suit can always allege something that will allow for a defense. Consider my blog post on how a murder’s estate got a defense when he shot the plaintiff in: “Four Corners Rule Requires Defense for Person who Shot Plaintiff in the Face” at http://zalma.com/blog/four-corners-rule-requires-defense-for-person-who-shot-plaintiff-in-the-face/
© 2020 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
Read posts from Barry Zalma at https://parler.com/profile/Zalma/posts
Subscribe to e-mail Version of ZIFL, it’s Free! – https://visitor.r20.constantcontact.com/manage/optin?v=001Gb86hroKqEYVdo-PWnMUkV7pkuOtkiv6oakpgK33CNlNAYW-WBlLCOZFtgvpSdcL7R-tsWKfMVqG6fEuvmM7Hh7gUEJ7yKOdgHDbGl_cGAU%3D