In July of 2020, the United States Court of Appeals for the Fifth Circuit revisited and affirmed its prediction that Texas courts will not allow extrinsic evidence to determine an insurer’s duty to defend where such evidence engages the truth or falsity of facts alleged in the pleadings. Notably, the Texas Supreme Court acknowledges that some [federal] courts use a narrow exception to the eight-corners rule where extrinsic evidence goes solely to an issue of coverage and does not overlap with the merits or liability issues. See State Farm v. Richards, 597 S.W.3d 492at 496-97, 500 (Tex. 2020). [1] The Texas Supreme Court has not weighed in on whether this exception is valid under Texas law. Id.
Jayden Meals died in an all-terrain vehicle accident while under the temporary care of his grandparents, the Richards. Jayden’s mother, Amanda Meals, sued the Richards in Texas state court, alleging they were negligent in allowing Jayden to operate the ATV at his young age, without instruction, supervision, or a helmet or other protective gear. The Richards sought a defense from State Farm Lloyds under their homeowner’s insurance policy. 966 F.3d 389, 391. That insurance policy required State Farm to provide a defense “[i]f a claim is made or a suit is brought against an insured for damages because of bodily injury … to which this coverage applies, caused by an occurrence”, and an “occurrence” included “an accident” that “results in … bodily injury.” Id.
State Farm defended the suit under a reservation of rights, but sought a declaration in federal court that it had no duty to defend or indemnify the Richards based on two exclusions State Farm asserted barred coverage. Id. The “motor-vehicle exclusion,” exempted from coverage bodily injury “arising out of the … use … of … a motor vehicle owned or operated by or loaned to any insured.” Id. at 391-92. The policy defined “motor vehicle” to include an “all-terrain vehicle … owned by an insured and designed or used for recreational or utility purposes off public roads, while off an insured location.” Id. The policy defined “insured location” to mean “the residence premises.” Thus, the policy excluded coverage for bodily injury arising from the use of an ATV while off the Richards’ premises. In support of its summary-judgment motion, State Farm attached a vehicle crash report and the Richards’ admissions indicating the crash occurred off their premises.
The other exclusion—the “insured exclusion”—excluded coverage for bodily injury to any insured. The policy defined “insured” to mean “you and, if residents of your household: a. your relatives; and b. any other person under the age of 21 who is in the care of a person described above.” State Farm attached to its summary judgment motion the Richards’ admission that they were Jayden’s grandparents, as well as a court order appointing them as joint-managing conservators to show that Jayden was a “resident of [the Richards’] household.” The Richards argued in a cross motion for summary judgment that State Farm could not rely on extrinsic evidence to prove a policy exclusion. The federal district court disagreed and found the extrinsic evidence satisfied both exclusions and granted summary judgment for State Farm.
The Court of Appeals reversed because, under the very narrow exception to the eight-corners rule that court has recognized, the extrinsic evidence must “go[ ] 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.” See Ooida Risk Retention Group, Inc. v. Williams, 579 F.3d 469, 476(5th Cir. 2009). Meals’ live pleading in the underlying tort suit alleged “Jayden was killed because [the Richards] allowed Jayden to operate the ATV on their property.” 966 F.3d at 395. Considering these allegations, the extrinsic evidence State Farm introduced problematically “overlapped with the merits of or engaged the truth or falsity of [ ] facts alleged in the underlying case.” Ooida, 579 F.3d at 476.
With regard to the “insured exclusion”, State Farm introduced extrinsic evidence showing Jayden was an “insured” under the policy, meaning his bodily injury would not be covered. Specifically, State Farm introduced the Richards’ admission that they were Jayden’s grandparents, as well as a court order appointing them as joint-managing conservators to show that Jayden was a “resident of [the Richards’] household.” 966 F.3d at 396. However, the live pleadings alleged, “Jayden resided with his Mother and [maternal] Grandmother, Sharon Culver, at 727 Jones Road, Weatherford, Parker County, Texas, where he had resided for years.” Id. Again, the Court found considering the extrinsic evidence to determine whether Jayden was a “resident of [the Richards’] household,” would impermissibly “engage the truth or falsity of [ ] facts alleged in the underlying case.” Id. citing Ooida, 579 F.3d at 476.
[1] Note, the Court of Appeals certified the following question to the Texas Supreme Court: Is the policy-language exception to the eight-corners rule articulated in B. Hall Contracting, Inc. v. Evanston Ins. Co., 447 F.Supp.2d 634 (N.D. Tex. 2006), a permissible exception under Texas Law? State Farm Lloyds v. Richards, 784 F.App’x 247, 253 (5th Cir.), certified question accepted (Sept. 13, 2019). The Texas Supreme Court answered that question in the negative at Richards v. State Farm, 597 S.W.3d 492, 500 (Tex. 2020). We refer you to our Cozen O’Connor’s previous blog post for a discussion of this issue: https://www.cozen.com/news-resources/publications/2020/texas-supreme-court-reinforces-the-eight-corners-rule-or-does-it
