Michael Sean Quinn**

Quinn and Carmona

The court’s unanimous opinion in this case, Richards v. State Farm Lloyds, 19-0802, delivered on March 20, 2020 is brilliant. It also belongs in the law school case-books. Its greatness is not because is revolutionizes anything or transforms the law in any dramatic way. Indeed, literally speaking the opinion identifies itself as a narrow one and affirms already existing law. However, it provides a deep discussion and exposition of how to interpret contracts of insurance in Texas and probably in a number of other “elsewheres.” Indeed, if one understands the undercurrent of this opinion there is a roadmap as to how to think about all standardized contracts and as to how to think about the interaction between contract language and the broader legal realm.  To say that an opinion is brilliant is not to say that it is perfect.

The facts of the case need not be repeated here. It was a coverage issue regarding an insurer’s duty to defend in a death of a child case, where a young boy had been permitted to drive around on an ATV by his grandparents, more but also less on their property, and where there almost certainly was no duty to indemnity. One of the most obvious features of this case is that it affirms the “Eight Corners Rule” (8CR) in bold letters, as it were. Almost jurisprudentially sacrosanct, as one might say. (I use “8CR” throughout. I even use in in quotation from others. Anything to save space.)

In doing this the court recognized the centrality of the duty to defend in both individual-person and business markets of many sorts. The assault on or siege of 8CR–what some have been recently calling “obsolete” is over, among all rational-minded coverage lawyers, underwriters,  senior, adjusters, agents and brokers, as well as risk managers or decision-makers.  See Lydon F. Bittle, “Eight-Corners Rule Under Siege,” EXPERT COMMENTARY, (August 2019).

On a more subtle level, the court has refuted semantic-based poor arguments which would have, if adopted, had a dramatic negative impact on the role of liability insurance in the economics of insurance markets. Since risk-spreading is central to industrial economies, and its citizenry, if the view of the district court in B. Hall Contracting and Richards, were really adopted, there would have been a revolution in the role of liability insurance, or its price at any rate. (These two cases are discussed in Part One of Three in this series of Quinn’s Commentaries on Insurance Law.)

In effect, without saying so, the Supreme Court reaffirmed, and recognized a long and strong  tradition in Texas law, namely, that fundamental economic needs of individual insureds, insofar as interpreting contracts of insurance is concerned, will be embraced in preference to the financial desires of insurers, at least, a lot of the time. This is how deeply the Ambiguity Rule fits it to Texas insurance jurisprudence. (It is also a hint of old-time Texas liberal populism, but don’t tell anybody.)

What it does, on the surface, is to recognize that “even if” clauses in insurance policies do not by themselves change the nature of the contracts. Without saying so, it recognizes that insurers cannot use the word “apply” in a way to defeat an important coverage. (See Part One and below.) Some think that this is an unrecognizable application of the “Ambiguity Rule” to the nature of insurance policies, when it comes to the application of 8CR. That actually is quite dramatic, if one sees what has happened.

By the way, there is also one rather sarcastic remark the court makes that will tell insurance-wonks how firmly the Court stands and how one must think about interpreting standard policies and, really, all standardized contracts in which all sorts of individual persons are parties. The  court’s remark can even be taken to be a statement of public policy when it comes at least to contracts of insurance. See below.

The reader will grasp the drama the depth of what has been done here, presently, if they don’t see it already. First, however, the reasoning of the Court must be laid out.

In the Richards case federal district court distinguished between an insurer’s promise to defend “all actions against its insured” and a promise to defend “all[*] actions against its insured no matter if the allegations of the suit are groundless, false, or fraudulent.” (The clause here, “no matter if” is also worded as “even if” in many policies. That difference is obviously trivial; one phrasing  is the same as the other. The phrase “even if” will be used here.) The district court argued that “even if” clauses create an exception to the insurer promising to defend its insured “against all actions against the insured.”)

[*MSQ Comment. No participant in these legal conversations, debates, arguments, etc., thinks that the “all actions” clause is actually unlimited. If the policy says something like “there is coverage for bodily injury caused by an occurrence, [i.e., accident],” and there is no other coverage, then there is no duty to defend if the plaintiff’s live pleading never, even impliedly, so much as hints, that a bodily injury is being alleged, nor would there be if no unintentional conduct were whispered at the margin of the pleading’s themes. However, the idea of “bodily injury” and the idea of “accident” are built into the whole coverage system in that policy and right at its basis. It is not the case that a minor-looking clause obscurely slipped into a huge statement of obligation is similar to a coverage restriction like “bodily injury” or “accident.” Perhaps it was the district judge’s conception of contract interpretation that mislead him?]

My conjecture is that it is to “even if” and “no matter if” -type clauses that the Fifth Circuit and the Texas Supreme Court refer and identify as a “policy language-exception to the Eight Corner Rule.” If so, then the restricted nature of the clause, as well the physical location of the phrase in the policy are of some relevance to identifying it as a “policy-language restriction.”

In any case, the grandparents’ homeowners policy did not contain an “even if” clause, and Lloyds, after defending for a while, subject to a reservation of rights clause, collected enough external evidence to deny coverage on the grounds that since there was demonstrably no duty to indemnify, there was not duty to defend. The “bet” of many is that it was the lack of such a clause that was the foundation of the district’s court reasoning when it said there was no duty to defend when extrinsic evidence demonstrated that there was no duty to indemnify. (In truth, that argument is invalid.)

In its legal reasoning (or, legal analysis, or discussion-of-law, which ever the reader prefers), the Supreme Court emphasized that it has never endorsed the idea of there being a “policy-language restriction” on the 8CR, even though it has flirted with some cases that do and has never explicitly denied its possibility.

Said the Court, often quoting from earlier opinions, “Insurance policies are controlled by rules of interpretation and construction which are applicable to contracts generally. As with any contract, the parties may displace default rules of construction by agreement. We consider the entire agreement and, to the extent possible, resolve any conflicts by harmonizing the agreement’s provision, rather than by applying arbitrary or mechanical rules. Where a valid contract prescribes particular obligations equity generally must yield unless the contract violates positive law or offends public policy. Thus, if an insurance policy contained language inconsistent with the 8CR the policy language would control. But the question here is not whether the parties can contract around the eight-corners rule 8CR. They can. The question [here] 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.’”

The Court continue on a number of fronts.

“Because the circumstances giving rise to the rise to the 8CR (the language commonly used in insurance policies) have changed, [it is not the case that that] the 8CR itself must change, no matter how deeply embedded in law it has become.”

(MSQ Comment: The phrase “eight-corners” rule does not often occur in common liability insurance polies, except perhaps rarely. I cannot recall ever seeing it. The point makes no difference because its presence is implied, at least because for the regulatory status of such policies and to some extent similar surplus lines policies.)

“Because the presence or absence of a groundless-claim clause has rarely, if ever, been important to Texas courts’ analysis of the contractual duty to defend and because Texas courts routinely apply the 8CR without looking for a groundless-claims clause, the idea that there is a “policy-language exception” is erroneous. An insurer does not contract away the  8CR altogether merely by omitting from its policy an express agreement to defend claims that are ‘groundless, false or fraudulent. [W]e have never held or suggested that the eight-corners rule is contingent on a groundless-claim clause.] Consistent with [Supreme Court] decisions, Texas courts of appeal have routinely applied the 8CR for many decades without regard to whether the policy contained a groundless-claims clause.” Remember, the “8CR” abbreviation is mine.

(MSQ Comment: At this point, Footnote 8 is to be found; it is a concatenation of Texas cases supporting the Court’s statement.)

The Court goes on to formulate and independent argument. “The eight-corners rule does not arise merely from the courts’ say-so, however. The duty to defend is a creature of contract, “a valuable benefit granted to the insureds by the policy. The goal in interpreting the contractual duty to defend when interpreting any contact language–is to ascertain the true intentions of the parties as expressed in the writing itself. The 8CR is not a judicial amendment to parties’  agreements. Instead, its purpose is to effectuate those agreements, to enforce them consistently and predictably so that parties may write their agreements knowing how courts will interpret them.”

Some readers may be getting nervous at this point and for two reasons:

First, almost no contracts of liability insurance are drafted jointly by the parties. Most of them are standardized and many are subject to regulation by TDI. The closest most insureds get to joint drafting is picking out some endorsements recommend by brokers or others. 

Second, the Court is talking about what is expressed in the written words of the contract. But wasn’t that what the district judge tried to do? Fortunately, the Court cites as authority a law review article which argues that rules of construction reflect “the commonsense expectation within the relevant community of discourse” and mitigate “interpretive mistakes.”  Randy Barnet, The Sound of Silence: Default Rules and Contractual Consent,” 78 Va. L. Rev. 821, 881-82 (1992). Iron-clad, closed-minded, phony academic rigor, whilst concentrating on a few words, as against the whole of the contractual document, is not really in the spirit of the law.

(MSQ Comment: What the Texas Supreme Court  has done is to combine Professor Barnet’s insight, within its own history, the recent history of Texas insurance jurisprudence and suggest that, in the absence of crystal clear changes in terms, what is embedded in the relevant and precedent or near-precedent should be understood as part of the parties’ intentions.

Near the end of the Opinion, the court continued.  If the claim is “for damages because of  bodily injury … to which the coverage applies, the duty to defend is implicated.” The 8CR merely acknowledges that, under many common duty-to-defend clauses, only the petition and the policy are relevant to the inquiry into whether the petition’s claim fits within the policy’s coverage. If any party is familiar with the overwhelming precedent to the effect, it is a large insurance company. State Farm  ‘… is well aware of the courts’ longstanding interpretive approach to contractual duties to defend, and it knows how to contract around that approach. It did not do so merely by omitting the words “groundless, false, or fraudulent,” or similar words from this policy.

(MSQ Comments: (1) One may not be sure how an insurer can draft around anything in a prescribed, TDI regulated policy. That is not at all easy, even if it is possible. (2) One might also be inclined to think that “did not” in the quoted sentence should read “cannot”).

(Another MSQ Comment: Notice the underlined word, “applies” in the last paragraph. The underlined is not that of the court; it’s mine. I put it here in order to call the reader’s attention to the fact that the Supreme Court recognizes that an insurance policy can apply to a risk or injury even it is not covered. Once this is recognized, there is another reason why the decisions of the district court are invalid from the point of view of elementary logic.)

This is a brilliant opinion. It a paradigm of a lovely piece. Lots of clarity. Many supportive citations. An excellent feel for the broader law. Both vision and historical insight. Oh yes. And strands  of important subtility, here and there.

**No person other than the author is responsible for any argument or conclusion in this essay. Quinn’s Resumes–both the “Long” one and the “Short” one can be easily found on the Internet.  Education, experience, writing, and lecturing are all noted there. Various blog postings are not.

Michael Sean Quinn, PhD, JD, CPCU, Etc

Michael Sean Quinn, PhD, JD, CPCU, Etc. (530)

One of Texas's leading insurance scholars, Michael Sean Quinn is a past chair of the Insurance Section of the State Bar of Texas and has a broad legal practice.

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