On January 8, 2014, the Fifth Circuit announced its latest guidance on an issue of great importance to insurance carriers doing business in Texas. In Star-Tex Resources, L.L.C. v. Granite State Ins. Co., 2014 WL 60192 (5th Cir. 2014) (Tex.), the Circuit reaffirmed its view that there is an exception to the “eight corners” rule, the standard by which Texas insurers must determine whether they owe a duty to defend lawsuits against their insureds. The Star-Tex decision provides new hope for insurers faced with ambiguous pleadings, as it adopts one of the more expansive views of the exception in the past few years.
By way of background, Texas has long adhered to the “eight corners” rule for determining an insurer’s duty to defend. GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305, 308 (Tex. 2006). Under the “eight corners” rule, an insurer’s duty to defend is determined by comparing the factual allegations of the petition with the insurance policy. Id. Ordinarily, nothing outside of the four corners of the petition and the four corners of the policy can be considered. Id. Although the Texas Supreme Court has not expressly recognized an exception to the “eight corners” rule, it also has not foreclosed the possibility that one exists. See Pine Oak Builders, Inc. v. Great American Lloyds Ins. Co., 279 S.W.3d 650, 654 (Tex. 2009). The Fifth Circuit has on several occasions opined that the Texas Supreme Court would recognize an exception to the rule in certain circumstances. See, e.g., Colony Nat. Ins. Co. v. Unique Indus. Prod. Co., 487 Fed.Appx. 888, 892 (5th Cir. 2012) (Tex.); GuideOne Specialty Mut. Ins. Co. v. Missionary Church of Disciples of Jesus Christ, 687 F.3d 676, 686 (5th Cir. 2012) (Tex.).
Star-Tex Resources reaffirms the Fifth Circuit’s prior opinions that an exception to the “eight corners” rule exists. In Star-Tex, the plaintiff brought a personal injury lawsuit against Star-Tex, a car dealership, for an auto accident involving one of Star-Tex’s employees. Star-Tex, 2014 WL 60192 at *1. Star-Tex notified its commercial general liability insurer, Granite State, and requested a defense. Id. In its written claim notice, Star-Tex acknowledged that its employee was driving the car. Id. The Granite State policy did not cover auto accidents involving cars driven by insured employees because it contained an “auto exclusion” that precluded coverage for bodily injury liability arising out of the use of any automobile operated by an insured, which included Star-Tex employees while performing their duties. Id. at *2. The petition, however, did not allege that the employee was driving the vehicle. Id. at *4. It only indicated that the accident was “caused by the negligence” of the employee. Id. Applying the “eight corners” rule, the panel could not determine that the employee was driving the car based solely on the petition. Id. Although it was reasonable to infer that the employee was driving, there were other reasonable inferences that could be drawn. Id.
This uncertainty in the petition often works in the favor of the insured. However, in Star-Tex, the duty to defend analysis did not end there. The court recognized that there is an exception to the “eight corners” rule which allows a court to look beyond the pleadings “when it is initially impossible to discern whether coverage is potentially implicated and when 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.” Id. at *5. The court also observed that the exception is more likely to be applicable when a policy exclusion is at issue. Id. Based on the undisputed evidence that the employee was driving the vehicle, the court held that Granite State owed no duty to defend the lawsuit. Id. In addition, the court held that Granite State did not have to pay any judgment or settlement arising from the lawsuit because the same facts that precluded a duty to defend also foreclosed any possible duty to indemnify. Id.
The Star-Tex ruling is significant because it takes a relatively broad view of the type of evidence that may be considered when determining an insurer’s duty to defend. The court’s interpretation – that any fact that does not establish (or undermine) the plaintiff’s right to recover does not “overlap with the merits . . . of any facts alleged in the underlying case” – may broaden the application of the exception for future cases. However, the decision may be limited by the fact that coverage turned on an exclusion. In addition, the Fifth Circuit’s case law on this issue has been inconsistent on the issue, and it will be interesting to see how the courts reconcile the Star-Tex decision with other Fifth Circuit decisions that have taken a more restrictive view of the exception. Nonetheless, the Star-Tex decision is a tool that can be used by insurers to examine the duty to defend in Texas.