Construing a D&O policy’s insured-versus-insured exclusion which included in its scope “any person or entity which succeeds to the interest of” the insured, the Texas Supreme Court held that this exclusion applies to a subrogated insurer of an insured. Great American Insurance Company v. Primo, Case No. 15-0317 (Tex. Feb. 24, 2016).

The director of a non-profit condominium association allegedly misappropriated funds. The association made a claim for the loss with its fidelity insurer, which paid the claim in exchange for a written assignment of the association’s rights and claim against the director. It then sued him to recover the funds, and the director tendered the defense of the suit to the association’s D&O policy, which insured the director as a former director. The case was non-suited, but the director pursued the insurer for defense costs he had incurred before the non-suit.

The insurer refused to cover the defense costs, citing the policy’s insured-versus-insured exclusion, which excluded coverage for claims brought against one insured by another insured, or any entity which “succeeds to the interest of” that insured, which the insurer contended includes insurers of the insured. The Court of Appeals disagreed, narrowly construing the phrase “succeeds to the interest” to mean only “successor-in-interest,” a term borrowed from corporate law and which commonly refers to one company that assumes control of another. On appeal, the Texas Supreme Court reversed, holding that the exclusion applies, and that this result comports with the general intent of the exclusion to prevent collusive suits between businesses and their directors. To hold otherwise, the Court noted, would mean that an insured could avoid the exclusion simply by “assign[ing] its rights in any claim against another insured to a third party.”