“Succeeds to the Interests of” Does Not Require Assumption of Obligations: D&O Policy’s Insured v. Insured Exclusion Applies to Claim Assigned to Fidelity Insurer; No Bad Faith

On February 24, 2017, the Texas Supreme Court reinstated a state trial court ruling that an “insured-versus insured” exclusion barred coverage under a D&O policy for the costs of defending a lawsuit. Because the D&O insurer demonstrated, as a matter of law, that the exclusion applied and no coverage existed, the high court also held the extra-contractual claims were properly disposed. See Great Am. Ins. Co. v. Primo, 2017 WL 749870, at *4 (Tex. Feb. 24, 2017).

The individual insured, Robert Primo, previously served as a director and treasurer of Briar Green Condominium Association in Houston, Texas. In 2008 and, shortly before resigning, Primo wrote himself two checks from Briar Green’s account totaling roughly $100,000. Briar Green asserted the funds were misappropriated. Primo, however, contended the funds were payment for management services approved by Briar Green’s board. Briar Green sought coverage from its fidelity insurer, Travelers Casualty & Surety Company, who paid the claim. As consideration for payment of the claim, Briar Green assigned its rights and claims against Primo to Travelers.

Thereafter, Travelers, standing in Briar Green’s shoes, filed suit against Primo to recover the funds. As a previous director under Briar Green’s directors and officers liability policy issued by Great American Insurance Company, Primo demanded that GAIC defend Primo. GAIC refused, citing the policy’s insured-versus-insured exclusion, which barred coverage for claims “made against any Insured 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].”

Aggrieved, Primo filed suit against GAIC alleging breach of contract, breach of the duty of good faith and fair dealing, fraud, negligent misrepresentation, and violations of the Texas Insurance Code. GAIC moved for summary judgment and the trial court granted the motion. A divided Fourteenth District Court of Appeal in Houston reversed, holding the trial court’s interpretation of the exclusion was too broad as Travelers was not Briar Green’s “successor” under the exclusion.

On review to the Texas Supreme Court, the Court began with long-standing contract interpretation principles, including its refusal to “insert language or provisions the parties did not use or to otherwise rewrite private agreements.” Primo, 2017 WL 749870, at *2. The policy’s “plain language controls, not what one side or the other alleges they intended to say but did not.” Id. (internal citations omitted). The Court further explained that ambiguity does not arise simply because one party suggests an alternative conflicting interpretation, but only where the policy is actually “susceptible to two or more reasonable interpretations.” Id. (internal citations omitted).

According to the Court, the exclusion meant no coverage existed for any claim made against Primo by “any person or entity which succeeds to the interest of” Briar Green. No party disputed Primo’s insured status, or that Briar Green assigned all of its claims against Primo to Travelers. Thus, the high court was tasked with determining whether Travelers “succeed[ed] to the interest of” Briar Green—if it did, the exclusion barred coverage.

Turning to the appellate court’s decision, the Court explained the lower court relied on a prior interpretation of the term “successor” as “one who not only takes another’s place, but also maintains the character of the place taken. It contemplates an assumption of both rights and obligations or ‘stepping into the shoes’ of another.” Augusta Court Co-Owners’ Ass’n v. Levin, Roth & Kasner, P.C., 971 S.W.2d 119, 126 (Tex. App.—Houston [14th Dist.] 1998, pet. denied). Applying this definition, the lower court held GAIC failed to show Travelers succeeded to Briar Green’s interests, because GAIC had not shown Travelers assumed Briar Green’s obligations, in addition to its claims and rights.

The Court disagreed with the lower court’s analysis, citing the Augusta court’s express recognition that “[t]he exact meaning of the word ‘successor,’ when used in a contract[,] depends largely on the kind and character of the contract, its purposes and circumstance, and context.” Augusta, 971 S.W.2d at 125. Unlike the contract at issue in Augusta, the Court here was faced with a D&O policy’s insured-versus-insured exclusion, which “typically provide that the insurer is not liable for claims made by one insured against another, . . . includ[ing] litigation between directors and officers and the entity which they serve.” Primo, 2017 WL 749870, at *3. The purpose of these exclusions is to prevent both collusive suits between business entities and their officers or directors, along with actions arising out of the “bitter disputes that erupt when members of a corporate . . . family have a falling out.” Id. (internal quotations omitted).

Guided by the exclusion’s context, the Court explained that under the lower court’s interpretation, an insured under a D&O policy need only assign its rights in any claim against another insured to a third party to avoid the exclusion. The Court found the meaning it gave to the term “succeeds” comported with interpretations of commentators and other courts analyzing the exclusion in the context of insureds assigning claims against co-insureds to third parties.

In closing, the Court held that the exclusion applied as a matter of law, and no coverage existed under the GAIC policy for the Travelers/Briar Green suit against Primo. Because there was no coverage, the trial court also properly disposed Primo’s extra-contractual claims. Primo, 2017 WL 749870, at *4 (citing State Farm Lloyds v. Page, 315 S.W.3d 525, 532 (Tex. 2010) (“When the issue of coverage is resolved in the insurer’s favor, extra-contractual claims do not survive.”).

In the absence of policy provisions to the contrary, it is widely accepted that nothing prohibits insurance coverage for claims brought by one insured against another insured. See, e.g., Higby Crane Service, LLC v. National Helium, LLC, 751 F.3d 1157, 1163-64 (10th Cir. 2014). As such, and for the insurance industry to properly function, it is crucial that courts honor insured-versus-insured exclusions expressly included in the parties’ contract. As explained in Primo, overly narrow interpretations threaten and erode the key motives for including these exclusions. The Texas Supreme Court effectively refused to allow an interpretation that would render the exclusion meaningless, instead viewing the exclusion in the context of the policy, and D&O insurance as a whole. Further, the Court favorably cited the trial court’s holding that, absent coverage and, because the extra-contractual claims were based on improper denial of coverage, Primo’s extra-contractual claims failed as a matter of law.

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