The Texas Supreme Court has now issued two major rulings this year regarding the scope of an insurer’s duty to defend: Richards v. State Farm Lloyds and Loya Ins. Co. v. Avalos. Both decisions address the “eight-corners rule” Texas courts use to determine a liability insurer’s duty to defend its insured. The eight-corners rule gets its name from the fact that only two documents are ordinarily relevant to the determination of the duty to defend, each of which has four corners: the pleadings against the insured and the insurance policy.
Generally, facts outside the pleadings, even those easily ascertained, are not material to the determination of an insurer’s duty to defend. Additionally, under Texas law, allegations against the insured are liberally construed in favor of coverage. The Fifth Circuit Court of Appeals, applying Texas law, and various Texas courts of appeal have adopted an exception to the eight-corners rule derived from Northfield Ins. Co. v. Loving Home Care, Inc. The Northfield exception allows consideration of 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. The Texas Supreme Court, however, has not had occasion to address the Northfield exception, although has twice acknowledged its widespread use.