A Texas Court of Appeals in a split decision reversed summary judgment for an insurer regarding the defense of a director accused of misappropriation of funds and remanded the case for further proceedings. Primo v. Great American Insurance Company, No. 14-13-00492-CV, 2014 WL 7237330, (Tex.App.—Hous. [14th Dist.] Dec. 18, 2014).

A former treasurer of a condominium association wrote checks to himself on the association’s account. The association had an E&O policy and a surety bond. The surety indemnified the missing money and took an assignment, and then sued the officer for fraud, breach of fiduciary duty and other claims. The officer tendered the suit to the E & O insurer contending that he was covered under the policy as a former director and officer, but coverage was denied. The officer sued the insurer directly for breach of contract and extra-contractual claims. The policy expressly excluded “any Claim made against any Insured … by, or for the benefit of, or at the behest of the Organization or a Subsidiary … or any person or entity which succeeds to the interest of the Organization or Subsidiary,” commonly referred to as the “Insured vs. Insured” exclusion. The insurer moved for summary judgment on several grounds, including the “Insured vs. Insured” exclusion, which the trial court granted.

The appellate court found that the allegation that the surety had an “assignment” and “stepped into the shoes of [the association]” was insufficient to show that it was a “successor-in-interest” of the insured for the exclusion to apply. It concluded that a “successor” has all of the rights and obligations of its predecessor but here, the assignment appeared to be of only a right and no obligation. The court added that the insurer could have used more “typical” exclusionary language which simply states that the insurer is not liable for claims made against an officer, director, or other insured by or on behalf of another insured or the company. A dissent concluded that the first part of the exclusion should apply even if the “successor-in-interest” part did not, but the majority would not consider this, citing that the insurer did not raise this at the trial court level and thus waived it on appeal