In July of 2012, in a case involving diversity jurisdiction, the Fifth Circuit Court of Appeals affirmed the use of the "eight-corners" rule in examining an insurance carrier's duty to defend the insured under a commercial general liability policy. The "eight corners" rule requires courts to examine only the pleadings and the liability insurance policy to determine whether a duty to defend the insured exists. Stated another way, the courts are not permitted to examine extrinsic evidence to determine whether a duty to defend exists.
In affirming the "eight corners" rule as a centerpiece of Texas jurisprudence, the Fifth Circuit Court was examining a case that arose out of an underlying automobile accident involving a car owned by one member of a church that was being driven by another during a break for lunch while they were working on the church property. The driver of the other car involved in the accident sued the church for personal injuries.
After the underlying personal injury suit was filed, in a separate lawsuit, the insurance company for the church sued the church in federal court asking for a declaration that it had no duty to defend or indemnify the church under the Commercial General Liability policy it had issued to the church.
Because the CGL Policy in question removed the "false, fraudulent or groundless" language common with most other CGL policies, the insurance company argued that the parties had actually intended to contract around the "eight corners rule." In other words, the insurer argued that the modified language meant that its duty to defend was co-extensive with, rather than independent from its duty to indemnify. The lower court agreed with the insurance company and went beyond the "eight corners" of the insurance policy and the underlying petition by considering the extrinsic evidence presented by the parties.
The Fifth Circuit noted that the Supreme Court of Texas has never held that the "eight-corners" rule (a judge made rule) applies only to policies containing the "false, fraudulent or groundless" language and further noted that Texas has had an "unwavering commitment" to the "eight corners rule." As such, the Fifth Circuit rejected the lower court's examination of the evidence relating to the merits of the underlying case to determine the duty to defend and noted that an examination of that evidence would defeat the very purpose of the "eight corners rule."
Although the Fifth Circuit's 2012 opinion makes it appear that the "eight corners" is an absolute, that is actually not the case. Texas has carved out at least one limited exception to the rule. In an earlier opinion in 2011, the Houston Court of Appeals held that the "eight corners" rule exists for the protection of the insured, and if a defendant claiming additional insured status is actually a total stranger to the insurance policy that would not be entitled to a defense under any set of facts, extrinsic evidence is admissible to prove that fact.
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Over the years, I have represented a variety of businesses, ranging from the commercial contractor to the large petrochemical plant, in the resolution of insurance coverage and commercial disputes, as well as construction defect claims and general liability suits brought by contractors and employees. At my website, I write a business litigation blog, complete with movie and television references, and I also write an insurance coverage blog. I invite you to read my blogs and comment on any posts that interest you.
