Texas Supreme Court Recognizes First-Ever Exception to the Eight-Corners Rule
Ask any attorney about an insurer’s defense obligations in Texas and you are bound to hear of the eight-corners rule. Under the eight-corners rule, “an insurer’s duty to defend is determined by the  plaintiff’s pleadings, considered in light of the policy provisions, without regard to the truth or falsity of those allegations.” GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305, 308 (Tex. 2006). Thus, Texas courts have long held that an insurer’s defense obligations are determined strictly by comparing the policy’s coverage to the allegations of the underlying complaint. If there is any possibility of coverage after reviewing the underlying complaint, the insurer has a duty to defend—regardless of the existence of any extrinsic evidence that would negate coverage. Just recently, however, the Supreme Court of Texas recognized (for the first time) an exception to this rule in Loya Ins. Co. v. Avalos, 18-0837, 2020 WL 2089752 (Tex. May 1, 2020).
The Avalos Case
In Avalos, Loya Insurance Company issued Karla Flores Guevara an automobile liability insurance policy that explicitly excluded Mrs. Guevara’s husband, Rodolfo Flores, from coverage. While moving the insured’s car, Mr. Flores collided with another car driven by the Hurtados. Knowing there was no insurance for Mr. Flores, the Hurtados, Mrs, Guevara, and Mr. Flores agreed to tell the police and Loya that Mrs. Guevara was driving the car at the time of the accident.
The Hurtados sued Guevara falsely alleging that she was driving at the time of the accident, and Guevarra sought coverage from Loya. Loya initially provided Guevara a defense. However, early in discovery, Guevara told her lawyer that the uninsured Flores was actually driving the car at the time of the collision. After learning this information, Loya withdrew the defense and denied coverage to Guevara. On a motion for summary judgment in the underlying lawsuit, the trial court awarded the Hurtados a $450,343.34 judgment against Guevara. After the judgment, Guevara assigned her rights against Loya to the Hurtados, who then filed a coverage action.
During her deposition in the coverage suit, Guevara admitted that she was not driving her car at the time of the accident. Loya then moved for summary judgment, which the trial court granted. The Hurtados appealed, arguing that summary judgment was improper because under the eight-corners rule the trial court could only consider the allegations in the underlying petition, which alleged that Guevara was driving at the time of the collision. The court of appeals agreed with the Hurtados and reversed the trial court’s summary judgment after finding the trial court could not consider extrinsic evidence when determining Loya’s duty to defend Guevara. Loya then appealed to the Texas Supreme Court.
The Supreme Court of Texas reversed the court of appeals holding that “[c]ourts may consider extrinsic evidence regarding collusion to make false representations of facts for the purpose of invoking an insurer’s duty to defend.” The Court reasoned that an “insurer has not agreed to undertake, and the insured has not paid for, a duty to defend the insured against fraudulent allegations brought by the insured itself.” Thus, there is 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.”
The Potential Impact of the Avalos Case
This ruling marks the first time the Texas Supreme Court has ever acknowledged an exception to the eight-corners rule, and it could pave the way for new coverage disputes and declaratory judgment actions over an insurer’s duty to defend. The Avalos case opens the door to insurers seeking discovery on possible collusive conduct by policyholders. It also raises questions about what constitutes collusion. Often times policyholders will retain coverage counsel that may talk to a third-party claimant’s attorney about coverage issues and policy triggers. At what point do those conversations cross the line to collusion? If an amended pleading suddenly triggers coverage following such a conversation, insurers are almost certain to raise issues of collusion. These are just a few of the issues that Texas courts will be grappling with following Avalos.