Insurer Still Has A Duty To Defend, Despite Collusion and Fraud
September 17, 2018
The Court of Appeals of Texas, Fourth District has turned down the decision of the lower court and issued a decision that seems to imply that an insured can collude with others for the purpose of requiring the insured's insurance carrier to provide a defense to a lawsuit against the insured. This decision came based upon an argument that the eight-corners rule governs in situations where the complaint does not match facts that later arise. The case is Avalos v. Loya Ins. Co., No. 04-17-00070-CV, 2018 Tex. App. LEXIS 5629 (App. July 25, 2018).
Rodolfo Flores was moving his wife's car outside of their home when he collided with a vehicle owned by Osbaldo and Antonio Hurtado. Although there was insurance, through Loya Insurance Company, on the car that Flores was driving, it was in his wife's name, Karla Flores Guevara, and Mr. Flores was listed as a named excluded driver under the policy. All parties, Flores, Guevara, and the Hurtado's, reported to the police and insurance company that Guevara had been driving the car at the time of the accident, not Mr. Flores. The Hurtados subsequently sued Guevara alleging that she negligently operated her vehicle and that her negligence had been the proximate cause of their injuries. Loya appointed counsel to represent Guevara and filed an answer on her behalf.
During the course of discovery, Guevara identified herself as the driver of the vehicle at the time of the accident. However, Loya somehow learned that Guevara was not actually the driver of the vehicle when the accident occurred, but that Flores had in fact been driving. Counsel cancelled Guevara's deposition and denied coverage for the loss due to the excluded driver provision in the policy, identifying Flores as the driver of the vehicle when the accident occurred. A month later, Guevara's counsel withdrew from her representation. A judgment was rendered against Guevara for over $450,000, including payment for damages for the Hurtados medical expenses, other damages, prejudgment interest and cost.
The Hurtados sued Loya claiming negligence, breach of contract, breach of the duty of good faith and fair dealing, and violations of the Texas Deceptive Trade Practices Act. The Hurtado's argued that Loya had a duty to defend Guevara in the suit against her and they breached that duty when their counsel withdrew.
Loya answered and counterclaimed alleging breach of contract and fraud, and sought a declaration that it had no duty to defend in the negligence suit, and that Guevara was not covered in the accident due to the named driver exclusion. Loya moved for summary judgment, and attached some of Guevara's deposition testimony where she admitted that she had not been driving when the accident occurred. The trial court granted the motion, and the Hurtados appealed, contending that Loya had a duty to defend its insured Guevara as a matter of law based on the face of the pleadings and the terms of the insurance policy. The Hurtados argued that under the applicable “eight-corners rule,” Loya's duty to defend Guevara had to be determined by only looking to the allegations contained in the complaint and the terms of the policy.
Loya argued that there was no duty to defend because Guevara had breached the policy prior to the Hurtados suit being filed against her, when she falsely represented to the police and insurer that she had been driving the car at the time of the accident.
The appellate court reversed, and explained that under the “eight-corners rule” the only two documents that are relevant to the determination of an insurer's duty to defend are the insurance policy and the pleadings. Even if the allegations in the pleadings were completely false, an insurer is obligated to defend. The court even stated that facts outside of the pleadings were “not material to the determination of the duty to defend, even if those facts directly contradict the allegations in the underlying petition.”
The appellate court noted that although the Hurtados alleged that Guevara had been negligent in operating the motor vehicle, they did not claim that Flores was negligent in his operation of the car. The court rejected Loya's contention that it should consider some of Guevara's deposition, specifically the part where she admitted that she was not the one driving. The court determined that if Loya had evidence that Guevara had not been driving at the time of the accident, then it had a duty to establish those facts in Guevara's defense during the negligence suit.
Editor's Note: The eight-corners rule, sometimes referred to as the four-corners rule, is a principal which is applicable in insurance law, and dictates that a liability insurer's duty to defend its insured is assessed by reviewing the claims asserted within the plaintiff's complaint, without referencing anything outside of the four corners of the complaint and the four corners of the policy. Although it seems counterintuitive, the eight-corners rule governs, and courts generally conclude that they cannot consider any evidence other than the insurance policy and the complaint filed by the plaintiffs. In this case, the court states that it cannot consider the deposition testimony despite the fact that the deposition testimony established that she had materially breached her policy by falsely reporting that she had been driving at the time of the accident.
The Texas Supreme Court has declined to adopt an exception to the eight-corners rule, but has indicated that an exception may be appropriate in cases where collusion or fraud comes into play. In this case, Guevara, Flores, and the Hurtados agreed to, and did, lie to the investigating police officer and to the insurer, Loya in an attempt to deceive Loya. These facts indicate fraud and collusion. Texas case law suggests the adoption of a true-facts exception to the eight-corners rule to prevent the rule's recurring use as a tool for the commission of fraud. (That referenced case is GuideOne Elite Insurance Co. v. Fielder Road Baptist Church, 197 S.W. 3d 305 (Tex. 2006))