By: Diana Faust
A. The Coverage Suit
The background facts of the coverage suit are straightforward. Robert Primo served as a director and treasurer of Briar Green, a non-profit condominium association. Shortly before resigning his positions with the association, Primo wrote himself two checks, totaling just over $100,000, from Briar Green's account. Briar Green maintained Primo misappropriated the funds. But Primo insisted they were payment for management services and that he obtained the association board's approval before writing the checks.
Briar Green made a claim for the alleged loss with its fidelity insurer, Travelers Casualty & Surety Company. Travelers paid the claim in exchange for a written assignment of all of Briar Green's rights and claims against Primo for the loss. Travelers, standing in the shoes of Briar Green, then sued Primo to recover the funds. Primo, in turn, asserted a third-party claim against Briar Green. In addition, as an insured former director under Briar Green's directors and officers (“D&O”) liability policy, Primo then demanded that Great American, which carried the D&O policy, defend him in the Travelers suit. But Travelers non-suited its claims against Primo, making a defense by Great American unnecessary. Primo also non-suited his third-party claims against Briar Green.
Primo then filed a contractual-indemnity action against Briar Green to recover the attorney's fees and expenses he had incurred in the Travelers suit. Great American provided a defense to Briar Green as required by its policy. That suit ended in a judgment for Primo for about $100,000 in damages and fees.
While the indemnity suit proceeded, Primo sued Great American in another action, also seeking reimbursement for the defense costs and attorney's fees he incurred in the Travelers suit. He asserted causes of action for, among others, breach of contract and violations of the Texas Insurance Code.
Great American moved for summary judgment on the basis that it owed no duty to defend Primo in the Travelers suit because that action fell within the D&O policy's insured-v.-insured exclusion. The exclusion proscribes coverage of claims made by an insured against an insured and those made “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].”
B. Interpretation of the Exclusion Requires Consideration of the Kind and Character of the Contract, Its Purpose and Context
The Supreme Court began its analysis with the undisputed facts to frame the issue.
First, as a former director of Briar Green, Primo is an insured under the D&O policy. So the exclusion means that no coverage exists for any claim made against Primo by “any person or entity which succeeds to the interest of” Briar Green.
Next, Briar Green assigned whatever claims it had against Primo to Travelers. In this action, Primo has sued Great American to recover defense costs he incurred when Travelers sued him to prosecute the claims it had obtained from Briar Green.
The question before the court was whether Briar Green's assignment to Travelers of its claims against Primo means that Travelers “succeed[ed] to the interest of” Briar Green, and thus, triggered the exclusion and no coverage under the policy.
The court of appeals interpreted the exclusion by giving a meaning to the term “successor” in a construction contract: “a ‘successor’ is 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.” Under this definition, the court of appeals held, Great American had failed to show that Travelers succeeded to the interest of Briar Green, “because Great American has not shown that Travelers assumed Briar Green's obligations as well as its claims and rights.”
The Supreme Court disagreed, noting that through its interpretation, the court of appeals’ majority rewrote the policy to limit the exclusion to a “successor” in the corporate-transaction sense. Instead, the Supreme Court applied the plain and ordinary meaning of the word “succeeds,” which, it explained, comports with the interpretation commentators and other courts have given insured-v.-insured clauses when an insured assigns its claim against a co-insured to a third party.
In so doing, the court applied the rules of contract interpretation, specifically that it must construe the contract to give effect to the parties’ intent as understood in light of the facts and circumstances surrounding the contract’s execution (subject to the parol evidence rule). This rule of construction does not prohibit consideration of the surrounding circumstances that inform, rather than vary from or contradict, the contract text. The circumstances include the commercial or other setting in which the contract was negotiated and other objectively determinable factors that give a context to the transaction.
In examining the context of the clause, the Supreme Court recognized the purpose of the insured-v.-insured clause found in a D&O insurance policy: to provide that the insurer is not liable for claims made by one insured against another, which includes litigation between directors and officers and the entity which they serve. Thus, insured-v.-insured clauses prevent both collusive suits between business organizations and their officers and directors as well as actions arising out of the bitter disputes that erupt when members of a corporate family have a falling out.
The Supreme Court explained that in erroneously overlooking the context of the clause, the court of appeals’ interpretation makes collusive suits more likely, rather than less: 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’s application.
Because Great American conclusively established that Travelers succeeded to the interest of Briar Green through the assignment to Travelers of Briar Green’s rights against Primo, the exclusion applied. The Supreme Court reversed the court of appeals’ judgment and rendered judgment in favor of Great American based on its insured-v.insured exclusion.
C. Examining Context is Appropriate
The Supreme Court applied the rules of interpretation to appropriately examine the context of the insured-v.-insured clause in Great American’s insurance contract. The court has repeatedly confirmed that one cannot divorce the text from the context. This is true because the goal in contract interpretation is to discern the parties’ intent, which is usually derived from the text. Thus, discerning the meaning of insurance policy language by applying the rule allowing examination of the context and purpose of the contractual provision at issue proves to be a valuable tool in the interpretation algorithm.
 Id., *1.
 Id., *2.
 Id. (citing Primo v. Great Am. Ins. Co., 455 S.W.3d 714, 724 (Tex. App.—Houston [14th Dist.] 2015)).
 Id., *3.
 Id., *4.
 See In re Office of Attorney General of Texas, 456 S.W.3d 153, 155-56 (Tex. 2015); Zanchi v. Lane, 408 S.W.3d 373, 376 (Tex. 2013).
 Primo, 2017 WL 749870, *2.