Because the duty to defend is one of the most important aspects of liability policies such as Commercial General Liability coverage, it is frequently the subject of litigation. One recent case from the Fifth Circuit Court of Appeals — GuideOne Specialty Mutual Insurance Company v. Missionary Church of Disciples of Jesus Christ, No. 11-10894 (5th Cir. July 17, 2012) — addressed a number of issues in the course of adhering to traditional aspects of the duty to defend.
Missionary Church arose out of an underlying automobile accident involving a car owned by one member of the church and driven by another during a break for lunch while they were working on church property.
The driver of the other car sued for personal injuries. The church sought a dismissal of the claims against it, but the trial court denied that motion and held there were several unresolved issues for which a trial was necessary.
GuideOne sued the church, its members and the other driver in federal court asking for a declaration that it had no duty to defend or indemnify the church or its members under the CGL policy it issued to the church.
The district court granted GuideOne’s motion for summary judgment, holding that the duty to defend was co-extensive with the duty to indemnify. In doing so, the district court went beyond the “eight corners” of the insurance policy and the underlying petition. It considered the evidence presented by the parties and even noted that its ruling resolved several issues that the court in the underlying lawsuit left for trial. The district court also issued an order that purported to prohibit the other driver from pursuing her claims in the underlying lawsuit.
The other driver appealed this ruling, leading the Fifth Circuit to consider a number of questions including:
- The scope of GuideOne’s duty to defend;
- The adjudication of GuideOne’s duty to indemnify;
- The disposition of the underlying state law claims; and
- The injunction barring the other driver from pursuing those claims in state court.
On the first issue, the Fifth Circuit first reaffirmed longstanding principles that the “eight corners rule” applies to determine the duty to defend and, in doing so, rejected the district court’s decision to disregard that rule. It explained that the district court’s decision was founded on the conclusion that the removal of the “false, fraudulent or groundless” language historically used in CGL policies was an indication that the parties intended to contract around the “eight corners rule.”
The Fifth Circuit began by noting that this is a “judge-made rule” and that, while parties can contract around it, no Texas case has decided the duty to defend using any other approach. Importantly, the Fifth Circuit also noted that the Texas Supreme Court has not held that the rule applies only to policies containing the “false, fraudulent or groundless” language and, based on the “unwavering commitment” to the “eight corners rule” in Texas, it declined to follow cases from other jurisdictions that have abandoned it
Accordingly, the Fifth Circuit rejected GuideOne’s argument that the absence of the “false, fraudulent or groundless” language required application of a different rule and instead held that the “eight-corners rule” was “ensconced in the policy” even without that language.
The court then compared the allegations in the underlying lawsuit with the church’s policy and concluded that the duty to defend was triggered.
GuideOne next argued that even if the district court’s approach was incorrect, an exception that would allow use of extrinsic evidence was appropriate here. Again, the Fifth Circuit rejected GuideOne’s arguments, holding that the evidence GuideOne sought to use related to the merits of the underlying case. Accordingly, using that evidence would defeat the very purpose of the “eight corners rule.”
Following these rulings, the Fifth Circuit reversed the district court’s ruling that there was no duty to indemnify, leaving that determination to be made once the underlying case was resolved.
Lastly, the Fifth Circuit addressed the district court’s attempt to enjoin the underlying plaintiff from bringing her claims against the church and one of the members, noting that declaratory judgment actions concerning coverage are not meant to resolve underlying tort claims. Consequently, it held that the district court abused its discretion in exercising jurisdiction over those claims and, as a result, vacated the district court’s injunction.
This decision represents a careful study of the duty to defend. The Fifth Circuit’s ruling firmly recognizes that the “eight corners rule” continues to apply to the duty to defend.
The Fifth Circuit also properly rejected the view that a court in a coverage action can decide the merits of an underlying case. Hopefully this ruling will avoid “litigation about litigation” in the future by relying on the time-tested and bright-line simplicity of the historical “eight corners rule” in determining the duty to defend.
Vince Morgan is a partner at Pillsbury Winthrop Shaw Pittman LLP where he focuses on assisting corporate policyholders with insurance and risk management issues.
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