Texas High Court Finds for Insurer in D&O Coverage Dispute

The Texas Supreme Court recently ruled in favor of an insurer in a case that hinged on the applicability of an insured-v.-insured exclusion in the carrier’s directors and officers (D&O) liability policy.

The Court’s action reversed the ruling in Great American Insurance Company v. Robert Primo by the Court of Appeals for the 14th District of Texas in Harris County (14-13-00492-CV, 455 SW3d 714, 12-18-14).

The case grew out of various actions and counter actions by Robert Primo and Briar Green, a non-profit condominium association.

Primo at one time served as a director and treasurer of Briar Green. Before he resigned from those positions in 2008, Primo wrote himself two checks totaling a little more than $100,000. He said the money was for services rendered to the association and that the Briar Green board had approved the payment. However, the association asserted that the funds were misappropriated and filed a claim with Travelers Casualty & Surety for the loss.

“Travelers paid the claims in exchange for a written assignment of all of Briar Green’s rights and claims against Primo for the loss. Travelers, standing in the shoes of Briar Green, then sued Primo to recover the funds,” the Texas Supreme Court’s written opinion states.

Primo countered with a third-party claim against Briar Green and because he was “an insured former director under Briar Green’s D&O liability policy,” Primo then sought defense from Great American in his suit against Travelers.

“Travelers non-suited its claims against Primo, making a defense by Great American unnecessary,” the Court’s opinion states. Primo also “non-suited” his third-party claim against Briar Green.

Seeking to recover attorneys’ fees and expenses incurred in the Traveler’s suit, Primo filed a contractual-indemnity action against Briar Green and demanded that Great American defend him as required by the D&O policy. Great American provided a defense and Primo ended up recovering around $100,000 in damages and fees.

Simultaneously, in a separate action Primo sued Great American, “also seeking reimbursement for the defense costs and attorney’s fees he incurred in the Travelers suit. He asserted causes of action for breach of contract, breach of the duty of good faith and fair dealing, fraud, negligent misrepresentation, and violations of the Texas Insurance Code and the Prompt Payment of Claims Act,” the Court wrote.

Great American moved for summary judgment, arguing not only had Primo already collected defense costs and attorneys’ fees in his contractual-indemnity action against Briar Green, the insurer “owed no duty to defend Primo in the Travelers suit because that action fell within the D&O policy’s insured-v.-insured exclusion.”

Great American’s Briar Green D&O policy excluded coverage for an insured in actions against another insured “and those made ‘by, or for the benefit of, or at the behest of [Briar Green] or … any person or entity which succeeds to the interest of [Briar Green],” according to the opinion of the Court.

Primo, as a director of Briar Green was an insured under the D&O policy. Because Briar Green had assigned its claims against Primo to Travelers, Great American took the position that Travelers became an insured due to its assignment as a successor to the interest of Briar Green.

The trial court agreed with Great American. However, a divided appeals court relied on its interpretation in an earlier case of the word “successor,” whereby it found that a successor assumes “both rights and obligations” of another. The court of appeals determined that in this case Travelers did not succeed “to the interest of Briar Green, ‘because Great American has not shown that Travelers assumed Briar Green’s obligations as well as its claims and rights.'”

The Texas Supreme Court looked at the issue differently and ultimately agreed with dissenting Appeals Court Justice McCally, who wrote that “the plain meaning of ‘succeed to’ is ‘to fall heir to, inherit, come into possession of.” McCally found that the trial court was correct in granting summary judgment to Great American because Briar Green had assigned to Travelers the association’s “interest in the claim filed against Primo.”