Richards v. State Farm Lloyds

• Decision Date: 20 March 2020
• Docket Number: No. 19-0802,19-0802
• Parties: Janet RICHARDS, Melvin Richards, and Amanda Culver Meals, Appellants, v. STATE FARM LLOYDS, Appellee
• Court: Texas Supreme Court

597 S.W.3d 492

Janet RICHARDS, Melvin Richards, and Amanda Culver Meals, Appellants,

v.STATE FARM LLOYDS, Appellee

No. 19-0802

Supreme Court of Texas.

Argued January 8, 2020

OPINION DELIVERED: March 20, 2020

Nolan C. Knight, Michael W. Huddleston, Munsch Hardt Kopf & Harr PC, Dallas, Mark A. Haney, W. Kelly Puls, Puls + Haney, PLLC, Fort Worth, Russell W. King, King Law Offices, P.C., Dublin, for Appellants.

Jana Richard, Mark A. Lindow, Theodore Christian Schultz, Lindow Stephens Treat LLP, San Antonio, Michael L. Hurst, Hermes Law, P.C., Dallas, for Appellee.

Laura A. Foggan, Wade C. Crosnoe, Thompson, Coe, Cousins & Irons, LLP, Austin, for Amici Curiae Complex Insurance Claims Litigation Association, National Association of Mutual Insurance Companies, The American Property and Casualty Insurance Association.

R. Brent Cooper, Robert J. Witmeyer, Cooper & Scully, P.C., Dallas, for Amicus Curiae Cooper & Scully, P.C.

Justice Blacklock delivered the opinion of the Court.

This opinion addresses a question of Texas law certified from the United States Court of Appeals for the Fifth Circuit. Article V, section 3-c of the Texas Constitution gives this Court jurisdiction to answer such questions.¹

The underlying dispute concerns whether State Farm must defend its insureds, Janet and Melvin Richards, against personal injury claims brought by Amanda Meals. The certified question asks about the "eight-corners rule," under which an insurer's "duty to defend is determined by the claims alleged in the petition and the coverage provided in the policy." Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co. , 279 S.W.3d 650, 654 (Tex. 2009). The "four corners" of the petition and the "four corners" of the policy together comprise the "eight corners" that give the rule its name. Courts applying the eight-corners rule determine "the insurer's duty to defend [ ] by the third-party 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 Rd. Baptist Church , 197 S.W.3d 305, 308 (Tex. 2006).

Though governed by state law, disputes over an insurer's duty to defend often find their way to federal court, as this one did. According to one federal district court applying Texas law, the eight-corners rule does not apply unless the policy includes language requiring the insurer to defend "all actions against its insured no matter if the allegations of the suit are groundless, false or fraudulent." State Farm Lloyds v. Richards , No. 4:17-CV-753-A, 2018 WL 2225084, at *3 (N.D. Tex. May 15, 2018). The Fifth Circuit has asked whether the district court's "policy-language exception" to the eight-corners rule is "a permissible exception under Texas law." State Farm Lloyds v. Richards , 784 F. App'x 247, 253 (5th Cir. 2019), certified question accepted (Sept. 13, 2019). As explained below, we answer that it is not.

I. Background

Ten-year-old Jayden Meals died in an all-terrain vehicle (ATV) accident while under the supervision of his paternal grandparents. Jayden's mother, Amanda Meals, sued the grandparents, Janet and Melvin Richards, alleging negligent failure to supervise and instruct Jayden. Meals's petition alleged Jayden was under the defendant-grandparents’ "supervision" and alleged the accident occurred "[o]n or near the Defendants’ residence." The grandparents had a homeowner's insurance policy with State Farm Lloyds, which provided

If a claim is made or a suit is brought against an insured for damages because of bodily injury or property damage to which this coverage applies, caused by an occurrence, we [State Farm] will:

1. pay up to our limit of liability for the damages for which the insured is legally liable; and

2. provide a defense at our expense by counsel of our choice. We may make any investigation and settle any claim or suit that we decide is appropriate.

The grandparents asked State Farm to provide a defense to the lawsuit and, if necessary, to indemnify them against any damages for which they are liable. Under a reservation of rights, State Farm agreed. State Farm then sued the grandparents and Meals in the Northern District of Texas, seeking a declaration that it had no duty to defend against the claims or indemnify the grandparents.

State Farm moved for summary judgment on the grounds that Meals's claims did not fall within the policy's coverage. State Farm argued first that the policy's "motor-vehicle exclusion" applied. Under the policy's terms, the motor-vehicle exclusion applies when the alleged "bodily injury" arises from "use" of a "motor vehicle owned or operated by or rented or loaned to any insured." An ATV used "while off an insured location" is a "motor vehicle" for purposes of the policy. State Farm argued that this exception is applicable because the bodily injury arose from the use of the grandparents’ ATV on a public recreational trail, not on the grandparents’ property. To prove the accident's location, State Farm submitted the police's vehicle crash report, which stated the location of the accident. State Farm also argued that the policy's "insured exclusion" applied. The policy excludes coverage for bodily injuries to insureds and defines "insured" to include "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 argued Jayden was an "insured" because the grandparents were his joint managing conservators. As proof, State Farm submitted a court order from a suit affecting the parent-child relationship (SAPCR). In response, the grandparents argued that the eight-corners rule prohibited the district court from considering any evidence, including the crash report and the SAPCR order, when determining State Farm's duty to defend the lawsuit.

The federal district court considered State Farm's proffered evidence, rejecting the defendants’ objections under the eight-corners rule. According to the court, the eight-corners rule did not prohibit consideration of the evidence because the rule applies only to insurance policies that explicitly require the insurer to defend "all actions against its insured no matter if the allegations of the suit are groundless, false or fraudulent."² Richards , 2018 WL 2225084, at *3. The same district court had previously articulated this view in B. Hall Contracting Inc. v. Evanston Ins. Co. , 447 F. Supp. 2d 634, 645 (N.D. Tex. 2006). The grandparents’ policy did not include a groundless-claims clause, so in the district court's view the eight-corners rule did not apply at all. The court granted summary judgment for State Farm. The defendants appealed.³ The Fifth Circuit certified the following question to this 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?

Richards , 784 F. App'x at 253.

The Fifth Circuit panel observed that neither the Fifth Circuit nor any Texas court has previously taken the view of the eight-corners rule articulated by the federal district court. The panel further noted that the Fifth Circuit has consistently applied a different exception to the eight-corners rule, derived from Northfield Ins. Co. v. Loving Home Care, Inc. , 363 F.3d 523, 531 (5th Cir. 2004). That exception allows extrinsic evidence bearing on the duty to defend 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." Richards , 784 F. App'x at 251 (citing Northfield Ins. Co. , 363 F.3d at 531 ). Several Texas courts of appeal have adopted the Fifth Circuit's approach or something similar.⁴ Others have declined to follow the Fifth Circuit's approach.⁵ This Court has never had occasion to address the so-called " Northfield exception," although we have twice acknowledged its widespread use. See Zurich Am. Ins. Co. v. Nokia, Inc. , 268 S.W.3d 487, 497 (Tex. 2008) ; GuideOne , 197 S.W.3d at 308–09.

The Fifth Circuit did not request this Court's opinion on the Northfield exception. Instead, it asked only if the federal district court was correct in B. Hall that the eight-corners rule is inapplicable unless the policy includes a groundless-claims clause. We address only the question certified.⁶

II. Discussion

"Insurance policies are controlled by rules of interpretation and construction which are applicable to contracts generally." Nat'l Union Fire Ins. Co. of Pittsburgh, Pennsylvania v. CBI Industries, Inc. , 907 S.W.2d 517, 520 (Tex. 1995). As with any contract, the parties may displace default rules of construction by agreement. Wenske v. Ealy , 521 S.W.3d 791, 792, 796 (Tex. 2017). "We consider the entire agreement and, to the extent possible, resolve any conflicts by harmonizing the agreement's provisions, rather than by applying arbitrary or mechanical default rules." Piranha Partners v. Joe Neuoff , 596 S.W.3d 740, 744, 2020 WL 868120 (Tex. 2020) (citing Wenske , 521 S.W.3d at 792, 796 ). "Where a valid contract prescribes particular remedies or imposes particular obligations, equity generally must yield unless the contract violates positive law or offends public policy." Fortis Benefits v. Cantu , 234 S.W.3d 642, 648–49 (Tex. 2007). Thus, if an insurance policy contained language inconsistent with the eight-corners rule, the policy language would control. But the question here is not whether parties can contract around the eight-corners rule. They can. The question is whether these parties have contracted around it by declining to expressly agree that State Farm must defend claims "even if groundless, false or fraudulent."

As State Farm sees it, the eight-corners rule arose to enforce...