Interpreting an insurance policy is sometimes difficult at best. Different people will read the same words in an insurance policy and believe the words say different things. What is important to an insurance lawyer is how the Courts read and interpret insurance policies. The Northern District of Texas, San Angelo Division, issued an opinion in May of 2020 that deals with this topic. The case is styled, National Liability & Fire Insurance Company v. John Young d/b/a Rio Restaurant Group, et al.
In this case, National is being asked by Young to defend a lawsuit. National asserts it does not have a duty to defend or indemnify. Under Texas law, the “eight corners rule” governs whether an insurer has a duty to defend or indemnify in an underlying lawsuit.
The opinion should be read to get the facts of the case. This writing looks at how the Courts look at cases under the eight corners rule.
Under Texas law, where “the four corners of a petition allege facts stating a cause of action which potentially falls within the four comers of the policy’s scope of coverage, the insurer has a duty to defend.” There is no duty to defend where all the facts alleged in a petition fall outside the policy’s scope, but the Court must “resolve all doubts regarding duty to defend in favor of the duty.”
The eight-comers rule is “a settled feature of Texas law.” In its Motion for Summary Judgment, National relied heavily on a district court’s proposed exception to the eight-comers rule that would allow district courts to consider extrinsic evidence where the policy does not include an express agreement to defend claims that are “groundless, false or fraudulent.” The Texas Supreme Court has held that the omission of groundless-claims clauses does not give rise to an exception to the eight-comers rule. Thus, the omission of a groundless-claims clause from the insurance policy that is at issue here cannot support an exception to the eight-comers rule.
The Fifth Circuit, interpreting Texas law, has periodically applied an exception to the eight-comers rule when (1) “it is initially impossible to discern whether coverage is potentially implicated;” and (2) “the extrinsic evidence goes solely to a fundamental issue of coverage which does not overlap with the merits of or engage the truth or falsity of any facts alleged in the underlying case.” But while the Texas Supreme Court has acknowledged this exception, that court has never addressed the exception.
Where a panel of the Fifth Circuit has ruled on a specific question or issue and such holding has not been superseded by either Texas case law or a change in statutory authority, this court is bound by such interpretation of Texas Law. Neither Texas case law nor a change in statutory authority has displaced the Fifth Circuit’s exception. Thus, the Fifth Circuit’s decisions creating and applying the exception are binding on this Court.
Under Texas law, an insurer “owes no duty to defend 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.” This exception does not apply to this case.
This case does not fit within the framework of the narrow exception to the eight-comers rule that the Texas Supreme Court recently carved out. In a previous case, the Texas Supreme Court held that “an insurer owes no duty to defend 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.” But here, National does not allege that the insured-John Young or Rio conspired to manipulate a groundless, false, or fraudulent claim against National. Rather,National attacks the alleged “gamesmanship of the underlying plaintiffs in amending their original petition after this coverage action was filed.” Moreover, National lacks “conclusive evidence” that any manipulation occurred. Thus, the exception does not apply here.
Artful pleading, in which National effectively alleges that the plaintiffs in the underlying lawsuit engaged, does not give rise to an exception to the eight-comers rule. If an insurer knows the underlying plaintiffs’ allegations to be untrue, its duty is to establish such facts in defense of its insured, rather than as an adversary in a declaratory judgment action.