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An appellate court in Texas has issued a decision that suggests that an insured actually can collude with others for the purpose of requiring the insured’s insurance carrier to provide a defense to a lawsuit against the insured.

The Case

Rodolofo Flores allegedly was moving his wife’s car outside of their home when he collided with a vehicle owned by Osbaldo and Antonio Hurtado. Although Mr. Flores’ wife, Karla Flores Guevara, was insured by Loya Insurance Company, the insurance policy contained a named driver exclusion for Mr. Flores.

Ms. Guevara, Mr. Flores, and the Hurtados reported to the police and the insurance company that Ms. Guevara – not Mr. Flores – had been driving Ms. Guevara’s vehicle at the time of the accident.

The Hurtados subsequently sued Ms. Guevara, asserting that she had negligently operated her vehicle and that her negligence had been the proximate cause of the injuries they had suffered. Counsel appointed by Loya to represent Ms. Guevara filed an answer on her behalf.

During the early course of the discovery process, Ms. Guevara identified herself as the driver of the vehicle at the time of the accident. However, according to Loya, it learned that Ms. Guevara actually had not been the driver at the time of the accident but that Mr. Flores had been driving.

Accordingly, Ms. Guevara’s counsel cancelled Ms. Guevara’s deposition and, on that same day, a Loya claim representative sent a letter to the Hurtados denying coverage for their loss pursuant to the driver exclusion provision in Ms. Guevara’s policy. The letter identified Mr. Flores as the driver of the vehicle at the time of the accident.

A month later, Ms. Guevara’s counsel withdrew from representing Ms. Guevara.

A judgment ultimately was rendered against Ms. Guevara for $450,343.34, which constituted damages for the Hurtados’ past medical expenses, “other” damages, prejudgment interest, and costs.

The Hurtados, as assignees of Ms. Guevara, sued Loya, alleging negligence, breach of contract, breach of the duty of good faith and fair dealing, and violations of the Texas Deceptive Trade Practices Act (“DTPA”). According to the Hurtados, Loya had a duty to defend Ms. Guevara in the negligence suit they had filed against her, and Loya had breached its duty when the counsel it appointed to represent Ms. Guevara withdrew.

Loya answered and counterclaimed, asserting claims for breach of contract and fraud. Loya also sought a declaration that it had no duty to defend Ms. Guevara in the negligence suit filed by the Hurtados and that Ms. Guevara was not covered for the car accident involving Mr. Flores and the Hurtados due to the driver exclusion provision.

Loya moved for summary judgment, attaching portions of Ms. Guevara’s deposition testimony – from the Hurtados’ suit against Loya – admitting that Mr. Flores had been driving her car at the time of the accident. She also testified she had not told anyone from Loya that Mr. Flores had been driving the car until “right before [her] deposition was to begin.”

The trial court granted Loya’s motion, and the Hurtados appealed. Among other things, they contended that Loya had a duty to defend its insured, Ms. Guevara, as a matter of law based on the face of the pleadings and the terms of the insurance policy. The Hurtados asserted that, under the “eight-corners rule,” Loya’s duty to defend Ms. Guevara had to be determined by looking only to the allegations contained in the Hurtados’ complaint and the terms of Loya’s policy. According to the Hurtados, because they alleged that Ms. Guevara had been negligently operating her vehicle in the underlying car accident and she was covered by the Loya policy, Loya had a duty to defend her in the negligence suit the Hurtados filed against her.

For its part, Loya argued that it had no duty to defend because Ms. Guevara had breached the insurance policy prior to the filing of the Hurtados’ negligence suit against her by falsely representing to the police and insurance company that she had been driving the car in the accident.

The Appellate Court’s Decision

The appellate court reversed.

In its decision, the appellate court explained that, under the “eight-corners rule,” only two documents – the insurance policy and pleadings – were relevant to the determination of an insurer’s duty to defend. Even if the allegations in the pleadings were “groundless, false, or fraudulent,” an insurer was obligated to defend, the appellate court added. Moreover, it continued, facts outside 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 then pointed out that the Hurtados alleged in their pleadings that on the day of the accident, Ms. Guevara had been operating her vehicle negligently and that, as a result of her negligence, she had proximately caused the Hurtados’ injuries.

The appellate court added that the Hurtados did not allege that Mr. Flores had negligently operated the vehicle involved in the car accident.

It then rejected Loya’s contention that it should consider portions of Ms. Guevara’s deposition in support of its summary judgment motion where she admitted that she had not been driving the vehicle at the time of the accident but, rather, that Mr. Flores had been driving. The appellate court ruled that, under the eight-corners rule, it “may not consider such extrinsic evidence” as it directly contradicted the Hurtados’ allegations that Ms. Guevara had been driving, which was material to the merits of their negligence claim.

The appellate court then held that, “as logically contrary as it may seem,” under the eight-corners rule, Loya had the duty to defend Ms. Guevara against allegations that she had negligently operated the vehicle “even if the allegations were false or fraudulent.”

The appellate court rejected Loya’s contention that Ms. Guevara’s deposition testimony should be considered because it established that Ms. Guevara had materially breached the Loya policy by falsely reporting that she was the driver, and therefore, it had no duty to defend or provide coverage to her. It ruled that if Loya knew the allegations asserted by the Hurtados to be untrue, then it had a duty to establish such facts in defense of Ms. Guevara in the underlying negligence suit filed against her by the Hurtados.

Therefore, the appellate court concluded that, under the eight-corners rule, it could not consider Ms. Guevara’s deposition testimony attached to Loya’s motion for summary judgment and that Loya failed to establish as a matter of law that it had no duty to defend or provide coverage to Ms. Guevara.

The case is Avalos v. Loya Ins. Co., No. 04-17-00070-CV (Tex. Ct.App. July 25, 2018). Attorneys involved include: For APPELLANT: Jorge A. Green, Leticia Garza, The Green Law Firm, P.C., Brownsville, TX. For APPELLEE: Thomas F. Nye, Portia J. Bott, Michelle Hayes, Gault, Nye & Quintana, L.L.P., Corpus Christi, TX; John R. Lyde, Vidaurri, Lyde, Rodriguez & Haynes, LLP, Edinburg, TX.

Steven A. Meyerowitz, Esq., is the Director of FC&S Legal, the Editor-in-Chief of the Insurance Coverage Law Report, and the Founder and President of Meyerowitz Communications Inc. As FC&S Legal Director, Mr. Meyerowitz, a member of the team that conceptualized FC&S Legal, provides daily analysis and commentary on the most significant insurance coverage law decisions from courts across the country and news regarding legislative and regulatory developments. A graduate of Harvard Law School, Mr. Meyerowitz was an attorney at a prominent Wall Street law firm before founding Meyerowitz Communications Inc., a law firm marketing communications consulting company.