5th Circuit: Carrier Must Defend Against Claim Despite Policy Exclusion

Texas law requires an insurer to defend the grandparents of a 10-year-old boy who was killed while driving their all-terrain vehicle against a negligence lawsuit, even though the carrier says neither the boy nor the crash was covered by its policy, a federal appellate court ruled.

The 5th Circuit Court of Appeals reversed a ruling by U.S. District Judge John McBryde that found State Farm Lloyd’s had no duty defend Janet and Melvin Richards because the policy did not promise a defense against groundless claims.

The appellate panel, in an opinion issued Monday, said under Texas law an insurer’s duty to defend is far broader than its duty to indemnify an insured.

The Texas Supreme Court leaved little room for another outcome when it answered a certified question from the 5th Circuit in March. A maxim in Texas state law known as the “eight corners rule” holds that an insurer has a duty to defend against a claim if allegations made within the four corners of the complaint allege a claim that is covered within the four corners of the policy. No external facts — what lawyers call “extrinsic evidence” — are relevant.

The Supreme Court said the eight corners rule applies even if the policy doesn’t promise coverage for groundless claims. District Judge McBryde had reached the opposite conclusion, finding that because State Farm’s policy did not promise that it would defend against groundless claims, unlike most homeowners’ policies.

The Supreme Court did not say whether there are any exceptions to the eight corners rule, leaving that question for another day. But its decision that the absence of a promise within the policy does not exempt an insurer from the duty to defend settled the question as it pertains to the lawsuit against the Richards.

The dispute stems from the death of Jayden Meals on June 11, 2017. Although only 10, Janet Richards had allowed the boy to drive her 2004 Polaris ATV without a helmet and without any safety instructions. Jayden flipped the vehicle while driving on a paved road near the Richards’ residence. He died shortly after from blunt-force trauma.

The boy’s mother, Amanda Culver Meals, filed suit against the paternal grandparents, whose homeowner’s insurance policy had a $300,000 limit. Janet Richards readily admitted negligence in her answer to the complaint.

State Farm Lloyd’s filed suit seeking a declaration from a federal judge that it has no duty to defend Richards from the suit. First, the insurer said Jayden resided with his grandparents, which would make him an insured person under the homeowner’s policy. The policy exempted the carrier from liability for bodily injury to any of its insureds.

Secondly, the policy exempted any injury caused by a motor vehicle accident that occurred away from the insured premises. State Farm Lloyd’s argued that because Jayden was killed while driving on a road away from the Richards’ property, the crash was not covered.

But the 5th Circuit noted in its opinion that Meals’ lawsuit did not state that her son lived with his grandparents. In fact, the lawsuit alleged the boy lived with his maternal grandmother, Sharen Culver. Also, the lawsuit alleges that the boy was killed because Richards had allowed him to drive the ATV “on her property.” It did not allege he was killed because he was allowed to take the ATV elsewhere.

The court said both policy exclusions depended on “extrinsic evidence” that can be admitted at trial, but don’t exempt the insurer from its duty to defend. In other words, those facts were not contained within both the four corners of the lawsuit and the four corners of the policy.

“Under the very narrow exception we have 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,'” the court said, citing Ooida Risk Retention Grp., Inc. v. Williams.