Underlying lawsuits involving a "mare leasing" scheme must be defended by two insurance carriers, according a recent opinion from the Texas Court of Appeals.

Gastar Exploration was a defendant in multiple securities investment lawsuits. According to the plaintiffs, they were offered a deal to lease thoroughbred mares and sell the foals as a tax shelter. Gastar and its parent company, GeoStar Corp., promised guaranteed rates of return on the investment and gave investors the right to convert the mare leases into other securities and investments, including Gastar stock.

According to the plaintiff, the scheme was inadequately funded and oversold, and Gastar refused to convert the mare leases upon demand. Approximately 30 lawsuits were filed over the mare leasing, with 10 naming Gastar as a defendant. Seven of those 10 were filed during the 2008-2009 period when the company had purchased primary insurance from U.S. Specialty Insurance Company and excess coverage from Axis Insurance Co.

Both carriers denied coverage for the seven lawsuits, pointing to a Condition C, an "Interrelationship of Claims" provision in the policies that read: "All Claims, alleging, arising out of, based upon or attributable to the same facts, circumstances, situations, transactions or events or to a series of related facts, circumstances, situations, transactions or events will be considered to be a single Claim and will be considered to have been made at the time the earliest such Claim was made."

The carriers then referred to three suits filed prior to the inception of their respective policies as the basis to deny coverage. A trial court agreed, granting summary judgment for the carriers.

The appellate court reversed, finding that Condition C conflicted with another provision, a "Prior & Pending Litigation Exclusion" ("Endorsement 10") that excluded loss in connection with a claim "arising out of, based upon or attributable to any pending or prior litigation as of 5/31/2000, or alleging or derived from the same or essentially the same facts or circumstances as alleged in such pending or prior litigation."

Condition C if applied would render Endorsement 10 meaningless, because the three prior pending claims occurred after May 31, 2000, even though they also occurred before the inception of the two policies:

"The insurers argue the Seven Gastar Suits are related to Claims first made in 2006 and are therefore deemed to be a single Claim made at the time the earliest was made, which was well before the Policy Period," the panel wrote. "Condition C would thus exclude coverage for the Seven Gastar Suits, while Endorsement 10 would place them in the covered window for Claims related to litigation filed about May 31, 2000, but before the effective date of the policy. Under these facts, we conclude Condition C and Endorsement 10 conflict or at best, when read together, create an ambiguity. When provisions in an insurance contract conflict, a court must adopt the interpretation that most favors coverage for the insured . . ."

Applying general principles, the court held that the conflict created an ambiguity that would be interpreted in favor of finding coverage.

To read the decision in Gastar Exploration Ltd. v. U.S. Specialty Insurance Co., click here.

Why it matters: As a general principle, courts examine insurance policies as a whole and seek to harmonize and give effect to all provisions of the policy so that none will be rendered meaningless, useless, or inexplicable. If a court cannot harmonize two conflicting provisions – and discerns more than one reasonable interpretation - then the court will adopt the policyholder's interpretation, demonstrating that general principles remain home base.