APPELLATE COURT FINDS COVERAGE FOR DEFENSE EXPENSES / FACT ISSUES ON INTERRELATED CLAIMS & COVERAGE FOR SETTLEMENT INVOLVING DISGORGEMENT CLAIMS

The Houston Court of Appeals, 14th District, recently addressed an insured's request for defense costs under a directors and officers insurance policy and coverage issues involving interrelated claims and disgorgement claims against the chief financial officer.  The court reversed summary judgment in favor of the insurer finding coverage for the defense costs and facts issues related to the interrelated claims and disgorgement issues precluded summary judgment.  In Burks v. XL Specialty Insurance Company, 2015 WL 6949610 (Tex.App. - Houston [14th Dist.] November 10, 2015), Burks, a chief financial officer, was sued by the plan agent for his bankrupt company seeking in part disgorgement of property received in lieu of future obligations owed to him by the company.  XL denied Burks's request under the directors and officers policy for coverage and defense costs.  Burks settled the claim against him by the bankruptcy plan's agent and then sued XL for breach of contract and other causes of action.  The trial court granted summary judgment in XL's favor and Burks appealed.

The court first addressed XL's argument that the claims against Burks were not "interrelated claims" as defined under the policy and that the "no extrinsic evidence rule" under an eight corners analysis precluded the court from examining the shareholder claims.  The court disagreed   that the rule applied to a case like this where there was no duty to defend, but a duty to advance defense expenses.  After review, the court found a similarity between the shareholder derivative claims and found fact issues made summary judgment on this ground improper.  The court also noted that the intentional act and disgorgement exclusion relied on by XL, specifically excepted "Defense Expenses" as defined, from the exclusion.  Accordingly, they held even if the disgorgement claims are excluded, summary judgment on defense expenses was improper.

Lastly, the court examined Burks's claim for indemnity for the settlement and assertion that fact issues of whether the settlement represented a disgorgement preclude summary judgment on that basis.  The court noted that the settlement agreement was not part of the record, that the plan agent sought more than mere disgorgement(e.g. "money judgment" and "attorney's fees"), and the stipulation of dismissal contained no admission of wrongdoing.  The court observed that the policy defines "Loss" to include settlements and no Texas court has held that disgorgement is uninsurable as a matter of law.  Accordingly, the court held that issues of material fact precluded summary judgment in favor of XL and they reversed the trail court's judgment in XL's favor and remanded the breach of contract claims to the trial court for further proceedings.