Date: 09-15-2015

Case Style: Roger D. Burks v. XL Specialty Insurance Company

Case Number: 14-14-00740-CV

Judge: Sharon McCally

Court: Texas Court of Appeals, Fourteenth District on appeal from the 113th District Court of Harris County

Plaintiff's Attorney: Christopher S. Johns for Roger D. Burks

Defendant's Attorney: Frederic Daniel Knight for XL Specialty Insurance Company

Monica W. Latin for USI Insurance Services of Texas

Raymond D. Noah for Federal Insurance Company

Description: Appellant Roger D. Burks was the chief financial officer of Superior
Offshore International, Inc., which had obtained a directors and officers (D&O)
insurance policy from appellee XL Specialty Insurance Company. Superior
Offshore ultimately reorganized through a Chapter 11 bankruptcy, and the plan
agent sought to recover property that the company transferred to Burks and to
avoid future obligations owed to him. After XL denied Burks’s request for defense
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expenses and coverage under the D&O policy, Burks settled the plan agent’s
claim.
In this case, Burks sued XL for breach of the D&O contract, seeking
damages for his defense expenses and the amount of his settlement with the plan
agent. XL moved for summary judgment on these grounds: (1) the plan agent’s
claim was brought outside of the policy period for this claims-made policy, and the
claim was not interrelated with other prior shareholder derivative actions; (2) XL
had no duty to advance defense expenses because there was no possibility of
coverage for the plan agent’s claim, which sought disgorgement and was therefore
not covered by the policy’s definition of “loss”; and (3) XL similarly had no duty
to indemnify Burks because the plan agent sought disgorgement, which was not
covered under the policy’s definition of “loss.” The trial court signed a final
summary judgment in XL’s favor without specifying the grounds, and Burks
appealed.1
First, we review the standards for summary judgment and principles of
insurance contract interpretation. Then, we address each of the grounds XL urged
for summary judgment. Ultimately, we hold that XL has not shown that it is
entitled to summary judgment on Burks’s breach of contract claim.
We affirm the trial court’s judgment in part, reverse the judgment as to
Burks’s breach of contract claim, and remand for proceedings consistent with this
opinion.2
1 Burks alleged claims other than breach of contract, and the summary judgment disposed
of those claims, but on appeal Burks challenges only the disposition of his breach of contract
claim.
2 We note that Burks also appeals the trial court’s denial of his motion for partial
summary judgment on liability, but we do not generally review the trial court’s denial of a
summary judgment motion. See Cont’l Cas. Co. v. Am. Safety Cas. Ins. Co., 365 S.W.3d 165,
172 (Tex. App.—Houston [14th Dist.] 2012, pet. denied). Although there is an exception
3
I.
STANDARDS FOR SUMMARY JUDGMENT
AND
PRINCIPLES FOR INSURANCE CONTRACTS
We review summary judgments de novo, and when, as here, the trial court
grants the judgment without specifying the grounds, we will affirm if any of the
grounds presented are meritorious. FM Props. Operating Co. v. City of Austin, 22
S.W.3d 868, 872 (Tex. 2000). The movant for a traditional summary judgment
must show that there is no genuine issue of material fact and that it is entitled to
judgment as a matter of law. Tex. R. Civ. P. 166a(c); Mann Frankfort Stein &
Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 848 (Tex. 2009). A defendant is
entitled to summary judgment if the defendant negates at least one essential
element of the plaintiff’s cause of action. See Sci. Spectrum, Inc. v. Martinez, 941
S.W.2d 910, 911 (Tex. 1997). Once the defendant establishes its right to summary
judgment as a matter of law, the burden shifts to the plaintiff to present evidence
raising a genuine issue of material fact. Walker v. Harris, 924 S.W.2d 375, 377
(Tex. 1996). We review the summary judgment evidence in the light most
favorable to the nonmovant, crediting evidence favorable to the nonmovant if
reasonable fact finders could, and disregarding contrary evidence unless reasonable
fact finders could not. Mann Frankfort, 289 S.W.3d at 848; see also Joe v. Two
Thirty Nine Joint Venture, 145 S.W.3d 150, 156 (Tex. 2004).
When interpreting an insurance policy, we follow the “general rules of
contract construction to ascertain the parties’ intent.” Gilbert Tex. Constr., L.P. v.
Underwriters at Lloyd’s London, 327 S.W.3d 118, 126 (Tex. 2010). We look to
requiring an appellate court to render the judgment the trial court should have rendered when
both parties move for summary judgment, the exception does not apply unless both parties have
moved for a final summary judgment. See id. Because Burks’s motion was for a partial
summary judgment only, we do not review it. See id.
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the language of the policy because we presume the parties intend what the words
of their contract say. Id. “Terms in insurance policies that are subject to more than
one reasonable construction are interpreted in favor of coverage.” Id. at 133.
II.
INTERRELATED CLAIMS
The parties agree that the D&O policy was a claims-made policy, and the
plan agent’s claim was asserted after the policy period expired. But Burks
contends that the trial court erred by granting a summary judgment to XL on this
ground because the plan agent’s claim was “deemed to have been made during the
policy period” under the “interrelated claims” provision of the policy. XL urged in
its motion for summary judgment that the plan agent’s claim was not interrelated
with prior shareholder derivative actions, so there was no possibility of coverage.
XL also urged that the court could not consider the complaints in the derivative
action under the eight-corners rule.
First, we review the relevant policy terms. Then, we hold that the eightcorners
rule does not prevent consideration of the derivative action complaints to
determine whether the plan agent asserted an interrelated claim. Next, we review
the evidence submitted by the parties: complaints from the derivative actions and
the bankruptcy proceeding. Finally, we hold that Burks raised a genuine issue of
material fact on the interrelatedness of the claims. Thus, XL was not entitled to
summary judgment on this ground.
A. Relevant Policy Terms
A claims-made policy, like the D&O policy here, only covers claims first
asserted against the insured during the policy period. See Prodigy Commc’ns
Corp. v. Agric. Excess & Surplus Ins. Co., 288 S.W.3d 374, 378 (Tex. 2009). The
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parties agree that the plan agent’s claim against Burks in the bankruptcy
proceeding was not, facially, made during the policy period.
The parties dispute, however, whether the plan agent’s claim should be
covered under the interrelated-claims provision, which provides as follows: “All
Claims arising from the same Interrelated Wrongful Acts shall be deemed to
constitute a single Claim and shall be deemed to have been made at the earliest
time at which the earliest such Claim is made or deemed to have been made
pursuant to [the notice conditions].”3
The parties disagree about whether the plan agent’s claim arose from the
same interrelated wrongful acts alleged in shareholder derivative actions against
Burks that were brought during the policy period. The policy defines “interrelated
wrongful acts” as “any Wrongful Act based on, arising out of, directly or
indirectly resulting from, in consequence of, or in any way involving any of the
same or related, or series of related, facts, circumstances, situations, transactions,
or events.”
The parties also disagree about whether the plan agent asserted a “wrongful
act” against Burks, which is defined in relevant part as “any actual or alleged act,
error, or omission, misstatement, misleading statement, neglect, or breach of duty
by any Insured Person while acting in his or her capacity as an . . . Insured
Person of the Company.”
B. Eight-Corners Rule
XL attached evidence to its motion including, among other things, the plan
agent’s complaint and a derivative action complaint. Burks responded to XL’s
3 Bolded terms are defined in the policy.
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motion and submitted an additional derivative action complaint, although the
allegations in each derivative action were substantially the same.
XL contends that the eight-corners rule prevents this court from reviewing
both of the derivative action complaints to determine whether XL had a duty to
advance defense expenses under the policy. The eight-corners rule requires Texas
courts to look only to the pleadings and the insurance policy to determine whether
a duty to defend exists. See Weingarten Realty Mgmt. Co. v. Liberty Mut. Fire Ins.
Co., 343 S.W.3d 859, 862 (Tex. App.—Houston [14th Dist.] 2011, pet. denied).
When determining a duty to defend issue, applying the eight-corners rule means
that the allegations in the third-party pleadings are considered without regard to
their truth or falsity, and the insurer cannot contradict them with extrinsic
evidence. See id. at 864. “The rationale behind the eight-corners rule is to require
insurers to defend the insured against all claims, even those without merit.” Id.
XL cites no authority to suggest that the rule applies to a duty to advance
defense expenses. See Pendergest-Holt v. Certain Underwriters at Lloyd’s of
London, 600 F.3d 562, 574 (5th Cir. 2010) (“[N]o Texas state court has applied the
rule to a case, like the present one, involving a duty to advance defense costs.”).
Regardless, the rationale for the rule does not apply when an insured seeks to
establish coverage under an interrelated-claims provision. See Weingarten, 343
S.W.3d at 865 (recognizing a limited exception to the eight-corners rule for a “pure
coverage” question where the insurer is not questioning the merits of the
underlying third-party claim, and the extrinsic evidence goes “strictly to an issue of
coverage without contradicting any allegation in the third-party claimant’s
pleadings material to the merits of that underlying claim”).
Burks is not trying to contradict any allegations in the plan agent’s
complaint. Thus, the eight-corners rule does not bar him from proving coverage
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under the interrelated-claims provision by referring to complaints from prior
claims. See ACE American Ins. Co. v. Ascend One Corp., 570 F. Supp. 2d 789,
795 (D. Md. 2008) (under Maryland law, the exclusive-pleadings or eight-corners
rule did not bar the insured from using extrinsic evidence to prove the potentiality
of coverage under an interrelated-claims provision); see also American Gen. Life
Ins. Co. v. Ace Ins. Co., 131 Fed. App’x 217, 221 (11th Cir. 2005) (under Texas
law, the eight-corners rule did not bar insurer from introducing extrinsic evidence
to show relatedness of claims under an exclusion that barred coverage for claims
related to pending litigation).
C. The Evidence
1. Derivative Actions
During the policy period, Burks and eight other officers and directors of
Superior Offshore were sued in two derivative actions. The plaintiffs in both
actions alleged claims for breach of fiduciary duties, insider selling of stock,
misappropriation of information, abuse of control, gross mismanagement, waste of
corporate assets, and unjust enrichment. The plaintiffs sought money damages,
equitable or injunctive relief, attorney’s fees and costs, accountant’s fees, expert’s
fees, expenses, and restitution, including disgorgement of “all profits, benefits and
other compensation obtained by [Burks].”
The derivative actions alleged that the directors and officers made
misrepresentations about the financial health of the company while the defendants
“profited handsomely” by selling stock based on insider information, and the
defendants artificially inflated the price of the stock “so they could protect and
enhance their executive and directorial positions and the substantial compensation
and prestige they obtained as a result thereof.” Regarding the unjust enrichment
claim, the plaintiffs sought “restitution from these Individual Defendants [and] an
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order of this Court disgorging all profits, benefits, and other compensation
obtained by these Defendants, and each of them, from their wrongful conduct and
fiduciary breaches.” Regarding the waste-of-corporate-assets claim, the plaintiffs
alleged that the defendants “caused Superior Offshore to waste valuable corporate
assets by paying incentive based bonuses to certain of its executive officers.”
2. Plan Agent’s Complaint and Objection to Claims
The plan agent’s complaint and objection to Burks’s claims in the
bankruptcy proceeding sought to recover transfers of money and stock made to
Burks (the “2007/2008 Transfers”), and to avoid obligations under an agreement
for compensation to Burks (the “Separation Agreement”). The legal bases for the
plan agent’s complaint and objections were that Superior Offshore did not receive
reasonably equivalent value under the Bankruptcy Code and the Texas Uniform
Fraudulent Transfers Act (TUFTA). See 11 U.S.C. § 548(a)(1)(B); Tex. Bus. &
Com. Code Ann. §§ 24.005(a)(2), 24.006(a). The plan agent also sought to avoid
Superior Offshore’s obligations under the Separation Agreement as a preferential
transfer under the Bankruptcy Code. See 11 U.S.C. § 547(b). The plan agent
alleged that Burks was an insider of the company and that the transfers under the
Separation Agreement were made while the company was insolvent.
The plan agent identified the “2007/2008 Transfers” that the plan agent
sought to avoid:
(i) non-base salary compensation paid to Burks during 2007 and 2008
in the amount of approximately $243,000; (ii) the additional base
salary paid to Burks after the September/October, 2007 raise
described herein; (iii) the perquisites identified above and paid during
2007 and 2008 [such as an automobile allowance, tax and estate
planning services, and life insurance premiums]; (iv) the transfer(s) to
Burks of no less than 256,667 shares of the Debtor’s common stock;
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(v) the 2007 employment agreement and all related agreements; and
(vi) the General Release . . . .
The plan agent also detailed the terms of the Separation Agreement, which
included an obligation to pay Burks about $675,000 in severance payments, nine
months of medical and dental benefits, payment of some legal fees, and a
company-supplied cell phone.
D. Analysis
XL makes two arguments for why the broad policy definitions do not
encompass the plan agent’s complaint. First, XL contends that the plan agent did
not allege a “wrongful act” by Burks. Second, XL contends that the plan agent did
not allege “interrelated wrongful acts.” We address each argument in turn.
1. Wrongful Acts
XL contends that the plan agent did not allege that Burks “acted
wrongfully,” and “the intent of [Burks] is not at issue” in the bankruptcy
proceeding because the plan agent sought recovery only under the constructive
fraud theories of the Bankruptcy Code and TUFTA. However, the plain language
of the policy does not require scienter to establish a wrongful act. The term is
defined broadly as “any . . . alleged act, error, or omission . . . by any Insured
Person while acting in his or her capacity as an . . . Insured Person of the
Company.” Here, the plan agent alleged acts and omissions—the receipt of
money, stock, and other benefits, and the failure to give Superior Offshore
something of reasonably equivalent value—while Burks was acting as a corporate
officer. Viewing the evidence in the light most favorable to Burks, he raised a fact
issue as to whether the plan agent alleged a wrongful act.
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2. Interrelated Wrongful Acts
Next, XL contends that the plan agent’s allegations are not related to the
derivative actions. Initially, we note that an interrelated-claims provision is a
double-edged sword. Most often, insurers use it to exclude coverage for claims
made during the policy period when those claims relate to claims made before the
policy period began. See, e.g., Reeves Cnty. v. Houston Cas. Co., 356 S.W.3d 664,
675 (Tex. App.—El Paso 2011, no pet.). But such a provision can also be used, as
Burks seeks here, to have a claim that is made after the policy period deemed one
made during the policy period, thus including coverage for a subsequent claim.
See, e.g., Blackburn v. Fid. & Deposit Co. of Md., 667 So. 2d 661, 670 (Ala.
1995).4
As quoted above, the definition of “interrelated wrongful acts” is incredibly
broad as it includes any wrongful act that “in any way involv[es] any of the same
or related . . . facts, circumstances, situations, transactions, or events.” See XL
Specialty Ins. Co. v. Perry, No. CV 11-02078-RGK, 2012 WL 3095331, at *6
(C.D. Cal. June 27, 2012) (excluding claims under this “broad” definition, which
describes “a wide range of causal connections . . . that will suffice to make claims
fall within the scope of ‘interrelated wrongful acts’”).
In Reeves County, the El Paso Court of Appeals held that claims were
interrelated when both suits involved the same parties, alleged similar facts, and
involved similar alleged wrongful actions taken by the defendant. See 356 S.W.3d
4 See generally John E. Zulkey, Related and Interrelated Acts Provisions, 50 Tort Trial &
Ins. Prac. L.J. 83, 92–93 (2014) (collecting cases) (“Most commonly, insurers rely on such
provisions to argue that claims that are made during the policy period should be deemed to have
been made prior to the inception of the coverage period—and thus are not covered by that
policy—because they are related to claims that were first-made before the inception date. . . .
Policyholders have relied on such provisions to argue in favor of coverage for claims made after
the end of the coverage period on the basis that they were related to claims that were made
within the coverage period.”).
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at 674–75. Several cases discussed in Reeves County are also illustrative. In
ruling that claims were not related, the United States District Court for the District
of Maryland focused on the temporal differences and the nature of the claims—the
first claim was a private action by individuals and the second was a governmental
investigation dealing with transactions and events from a completely different time
period. See ACE American Ins. Co., 570 F. Supp. 2d at 801. Similarly, the United
Stated District Court for the Northern District of Oklahoma ruled on summary
judgment that two claims were not related because the plaintiffs in the first action
sought recovery based on the failure of the company’s officers to release the
plaintiffs from a loan guarantee, and the second action was brought by a
bankruptcy trustee and focused on the poor management of the company without
any reference to the loan agreement. See Axis Surplus Ins. Co. v. Johnson, No. 06-
CV-500-GKF-PJC, 2008 WL 4525409, at *8–9 (N.D. Okla. Oct. 3, 2008).
Here, although the plaintiffs in the derivative actions and bankruptcy
proceeding are not identical, Burks’s evidence shows that they served a similar
purpose and alleged similar facts and wrongful acts arising out of the same time
period. The plan agent carried out the Chapter 11 plan, which provided that the
agent had authority to pursue claims and avoidance actions for the benefit of the
estate of Superior Offshore. Similarly, the plaintiffs in the derivative actions sued
Burks on behalf of Superior Offshore. See, e.g., Richardson v. Newman, 439
S.W.3d 538, 542 (Tex. App.—Houston [1st Dist.] 2014, no pet.) (shareholder in
derivative action asserts the corporation’s claims against the directors). Both
actions alleged that Superior Offshore gave compensation, bonuses, and benefits to
Burks while the company was in financial straits. Both actions sought
disgorgement of his compensation, bonuses, and benefits from the same time
period. Viewing this evidence in the light most favorable to Burks, he raised a fact
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issue as to whether the plan agent’s complaint alleged wrongful acts that “in any
way involv[ed] any of the same or related . . . facts, circumstances, situations,
transactions, or events” alleged in the derivative actions.
Summary judgment on this ground was not proper.
III.
DEFENSE EXPENSES
XL argued in its summary judgment motion that it owed no duty under the
policy to advance defense expenses because there was no possibility of coverage
for the plan agent’s claims, which sought disgorgement of ill-gotten gains that are
not insurable under Texas law and therefore fall outside of the definition of “loss”
contained in the policy. Under a plain reading of the policy, we hold that XL had a
duty to advance defense expenses even if the plan agent’s desired remedy of
disgorgement was not insurable.5
The D&O policy provides that XL will pay Burks “Loss resulting from a
Claim.” The policy defined “loss” as “damages, judgments, settlements or other
amounts . . . and Defense Expenses that the Insured Persons are obligated to
pay,” but “Loss will not include: . . . matters which are uninsurable under the law
pursuant to which this Policy is construed.”6
5 Although neither party has cited any Texas authority holding that insurance for
disgorgement is against public policy, Burks conceded before the trial court and this court that
disgorgement for ill-gotten gains generally is “uninsurable under the law” of Texas. Given the
strong policy in Texas favoring the right of parties to contract and the lack of any Texas
authority holding that insuring against disgorgement is against public policy, we render no
opinion on the matter. We assume without deciding that disgorgement is “uninsurable” in Texas.
6 The parties do not dispute that the plan agent’s complaint fit the definition of “claim,”
which is broadly defined as “(1) a written demand for monetary or non-monetary relief; (2) any
civil or criminal judicial proceeding in a court of law or equity, or arbitration; or (3) a formal
civil, criminal, administrative, or regulatory proceeding or formal investigation against an
Insured Person.” The policy defined “defense expenses” as “reasonable legal fees and expenses
incurred in the defense of any Claim.”
13
On appeal and in its summary judgment motion, XL cites to Texas cases that
reiterate a familiar principle for insurance contracts that create a duty to defend:
“An insurer has no duty to defend if a petition against an insured alleges facts
excluded by the policy.” E.g., Chapman v. Nat’l Union Fire Ins. Co. of Pittsburgh,
171 S.W.3d 222, 228 (Tex. App.—Houston [1st Dist.] 2005, no pet.). XL argues
that it had no duty to pay Burks defense expenses because the plan agent’s claim is
excluded by the policy.
However, the D&O policy does not create a duty to defend. The policy
expressly denies it: “It shall be the duty of the Insured Persons and not the duty of
the Insurer to defend Claims.” Rather, the D&O policy creates a duty to advance
defense expenses: “Upon written request, the Insurer will pay on a current basis
any Defense Expenses before the disposition of the Claim for which this Policy
provides coverage.” The policy allows XL to obtain Burks’s guarantee to repay
these defense expenses “if it is finally determined that the Loss incurred is not
covered under this Policy.” The policy further clarifies that defense expenses will
be paid before the claim is adjudicated: “Except for such Defense Expenses, the
Insurer shall pay Loss only upon the final disposition of any Claim.” The policy
similarly does not exclude defense expenses from other types of excluded loss that
arguably applied to Burks’s actions (an “ill-gotten gains” exclusion):
Except for Defense Expenses, the Insurer shall not pay Loss in
connection with any Claim:
. . . .
(2) brought about or contributed to in fact by any:
(i) intentionally dishonest, fraudulent, or criminal act or
omission or any willful violation of any statute, rule, or
law; or
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(ii) profit or remuneration gained by any Insured Person
to which such Insured Person is not legally entitled;
as determined by a final determination in the underlying action.
(emphasis added). Thus, defense expenses are specifically excluded from
the exclusion.
Under the unambiguous terms of the policy, XL agreed to advance defense
expenses until it is “finally determined” the loss is not covered. The Fifth Circuit
has interpreted similar language in a D&O policy to require the advancement of
defense expenses until “it is determined” that that the insured engaged in money
laundering. See Pendergest-Holt, 600 F.3d at 570, 574, 576 (noting that the
insureds correctly argued that “mere allegations [of money laundering] are
insufficient to bar coverage under the D&O Policy” for defense expenses, and
noting that the policy contained a similar provision requiring repayment if it is
determined the insured committed money laundering). To the extent there is any
ambiguity, we must adopt Burks’s interpretation. See Gilbert Tex. Constr., 327
S.W.3d at 133.
XL cites no Texas case holding that an insurer has no duty to advance
defense expenses when loss for the alleged wrongful act would not be covered
itself.7 There is authority to the contrary. See Pendergest-Holt, 600 F.3d at 570,
7 XL cites two New York cases holding that defense expenses were not recoverable when
the insureds settled with third-parties that had sought disgorgement. See Vigilant Ins. Co. v.
Credit Suisse First Boston Corp., 10 A.D.3d 528 (N.Y. App. Div. 2004); Millennium Partners,
L.P. v. Select Ins. Co., 24 Misc. 3d 212 (N.Y. Sup. Ct. 2009). But in both of those cases, and
unlike the situation here as discussed more fully below, the terms of the settlements were clear
that the settlements were for ill-gotten gains. See Vigilant Ins. Co., 10 A.D.3d at 529;
Millennium Partners, 24 Misc. 3d at 217–18. Further, the Vigilant Insurance court
acknowledged that an insurer may be required to advance defense costs, subject to repayment,
which is exactly how we interpret the policy here: “While, under certain circumstances, the
insurers must advance defense costs incurred by the insured in connection with a claim, the
insured is obligated to repay such advance payments upon a finding that it is not entitled to
payment of such Loss.” Vigilant Ins. Co., 10 A.D.3d at 529 (quotation omitted).
15
574; see also Level 3 Commc’ns, Inc. v. Fed. Ins. Co., 272 F.3d 908, 911 (7th Cir.
2001) (noting that even if “loss” did not include disgorgement or restitution, an
insured may suffer loss from incurring legal expenses to defend against a suit
seeking restitution or disgorgement; “Those expenses would be a loss to the
company not offset by any benefit to it, unlike the ‘expense’ that consists simply of
the value of the stolen property, a wash.”); Starkville Mun. Separate Sch. Dist. v.
Cont’l Cas. Co., 772 F.2d 168, 170 (5th Cir. 1985) (for a policy that defined “loss”
to not include “matters which shall be deemed uninsurable under the law,” costs
and attorney’s fees to defend against a plea for punitive damages were covered
even though under Mississippi law punitive damages were uninsurable for reasons
of public policy; reasoning that if the insurer “intended to exclude these other costs
from the policy’s coverage, it needed to do so more explicitly”).
Accordingly, we hold that even if disgorgement is “uninsurable under the
law” of Texas, this D&O policy does not exclude the advancement of expenses
incurred for defending against such claims based solely on the definition of “loss.”
In his live petition, Burks sought to recover his defense expenses from XL. The
trial court granted XL summary judgment on those defense expenses. Summary
judgment on this ground was improper.
IV.
INDEMNIFICATION
Finally, XL contends that it had no duty to indemnify Burks for the
settlement because it represents uninsurable disgorgement or restitution.8 Burks
8 As a threshold to making this argument, and in response to Burks’s contrary position,
XL contends it is not precluded from denying indemnity even if it breached the duty to advance
defense expenses. We agree with XL; even Burks’s authority supports XL’s position. See Tex.
United Ins. Co. v. Burt Ford Enters., Inc., 703 S.W.2d 828, 833 (Tex. App.—Tyler 1986, no
writ) (noting that the supreme court has held that “where an insurer refuses to tender a defense to
its insured and denies coverage on a claim made against its insured, and the insured thereafter
16
contends that there is doubt (i.e., at least a fact issue) about whether the settlement
represented disgorgement, and summary judgment is not appropriate.
A judgment ordering the repayment of a fraudulent transfer under the
Bankruptcy Code may indicate that an insured has paid restitution or
disgorgement. See In re TransTexas Gas Corp., 597 F.3d 298, 310 (5th Cir. 2010).
But Burks correctly notes that the mere fact of settlement does not indicate
admission of the allegations in a complaint. Cf., e.g., City of Houston v. Sam P.
Wallace & Co., 585 S.W.2d 669, 673 (Tex. 1979) (settlement agreements generally
are not admissible because the jury may improperly view the settlement as an
admission of liability). “[S]ettlement represents the parties’ willingness to resolve
the claims after weighing the negotiated settlement amount against the potential
judgment amount and accounting for the costs and benefits of continued
litigation.” U.S. Bank Nat’l Ass’n v. Indian Harbor Ins. Co., 68 F. Supp. 3d 1044,
1050 (D. Minn. 2014). “[T]he essential purpose of a settlement is to avoid
adjudication of the lawfulness or propriety of conduct which is the subject of
allegations of the complaint.” Alliance to End Repression v. City of Chicago, 561
F. Supp. 537, 554 (N.D. Ill. 1982). “If a settlement resolves claims alleging
unlawful activity but excludes an admission of liability for the activity, it does not
establish that the underlying allegations are true or false.” U.S. Nat’l Ass’n, 68 F.
Supp. 3d at 1050. Accordingly, we “will not automatically presume . . . that the
settlement constitutes restitution because it resolved claims alleging ill-gotten gains
and seeking disgorgement of those gains.” Id. (granting summary judgment to the
insured after the insured settled allegations of disgorgement when the policy
included a definition of loss and an ill-gotten-gains exclusion similar to the policy
involved here).
negotiates a settlement of the claim, the insurer is entitled to raise a policy defense of exclusion
of coverage set forth in the policy”).
17
The actual settlement agreement is not in the record; merely a stipulation of
dismissal of the plan agent’s complaint, which contains no admission of
wrongdoing. And the plan agent sought more than merely disgorgement or
restitution; the plan agent sough a “money judgment” and “attorney’s fees” under
TUFTA. Given that Burks settled these claims, there is necessarily a fact issue
about whether the entire settlement amount represented disgorgement of ill-gotten
gains. And we note that Burks testified by affidavit, attached in response to XL’s
motion for summary judgment, that Burks had “always maintained that [he] was
legally entitled to the compensation owed [him] under [his] Employment
Agreement and Separation Agreement with Superior.” Viewing the evidence in
the light most favorable to Burks, we cannot assume from this record that the
settlement was for disgorgement and therefore uninsurable under the law of Texas.
As its only Texas authority on point, XL relies on the Dallas Court of
Appeals’ decision in Nortex Oil & Gas Corp. v. Harbor Insurance Co., 456
S.W.2d 489 (Tex. Civ. App.—Dallas 1970, no pet.). The policy and facts of
Nortex are vastly different and not persuasive when interpreting the policy here.
Some plaintiffs sued Nortex for conversion after Nortex allegedly slantdrilled
and removed oil belonging to the plaintiffs. Id. at 490. Nortex settled and
demanded indemnification from its insurer under a policy that covered “damages,
direct or consequential, and expenses, all as more fully defined by the term
‘ultimate net loss’, on account of personal injuries . . . and property damage.” Id.
at 491 & n.1. The term “ultimate net loss” was defined in relevant part as “the
total sum which the Assured . . . becomes obligated to pay by reason of a Personal
Injury or Property Damage Claims, either through adjudication or compromise.”
Id. at 491 n.1. The term “property damage” included “damage to or destruction or
loss of property.” Id.
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The Nortex court did not hold that settlements for disgorgement, generally,
are against public policy or “uninsurable” under Texas law. Instead, the court held
that the plaintiffs’ claims were “not claims for property damage within the
meaning of the policy.” Id. at 493. The Nortex policy, as quoted above, required
that the total sum Nortex was obligated to pay through settlement was “by reason
of a . . . Property Damage Claim[].” Id. at 491 n.1. Thus, the Nortex court was
required to look at the claim alleged and determine whether it was for property
damage, and therefore, whether the settlement was a covered loss. Id. at 494.
Here, the definition of “loss” in the D&O policy is not so limiting: “‘Loss’
means damages, judgments, settlements or other amounts (including punitive or
exemplary damages, where insurable by law) and Defense Expenses that the
Insured Persons are obligated to pay. Loss will not include: . . . matters which are
uninsurable under the law pursuant to which this Policy is construed.” Unlike in
Nortex, “settlements” is not modified by a particular type of claim, such as
“property damage,” which can be ascertained by reference to the claims asserted in
a plaintiff’s petition or complaint. The settlement in Nortex was excluded because
“loss” was defined by reference to the type of claim asserted—loss included
“property damage” claims, not conversion claims.
Further, no Texas court has held that insuring a settlement of a claim seeking
restitution or disgorgement is against public policy or otherwise generally
“uninsurable under the law” of Texas; nor has the Legislature enacted any
legislation on point. Under these circumstances, we cannot hold as a matter of law
that the parties intended for a settlement such as this one to be excluded from
coverage. See U.S. Bank Nat’l Ass’n v. Indian Harbor Ins. Co., No. 12-cv-3175,
2014 WL 3012969, at *3 (D. Minn. July 3, 2014) (settlement for restitution was
not “uninsurable” under Delaware law because no Delaware statute or case law
19
expressly precluded insurance coverage for settlements of restitution). To the
extent the Fifth Circuit in In re TransTexas understood Nortex as establishing a
public policy in Texas against insuring settlements made in satisfaction of claims
alleging ill-gotten gains, we disagree with that reading.9
Finally, XL suggests that it “can’t be right” that a judgment for
disgorgement is uninsurable while a settlement is not, quoting the Seventh Circuit.
See Level 3 Commc’ns, Inc. v. Fed. Ins. Co., 272 F.3d 908, 911 (7th Cir. 2001).
Notwithstanding that the sweeping Level 3 decision has never been cited as
authority by a Texas court, even the Seventh Circuit acknowledged that not all
settlements in satisfaction of claims alleging ill-gotten gains necessarily would be
excluded from coverage. See id. at 912. It refused to decide and could find “no
guidance” on whether an insured might argue that such a settlement could be
covered with a showing that the third-party’s allegations were groundless. Id.
Here, unlike in Level 3, Burks has raised a fact issue on the nature of the
settlement, and he testified that he was legally entitled to the compensation that the
plan agent sought.10
We discern a genuine issue of material fact on whether Burks’s settlement
was for disgorgement and therefore “uninsurable under the law” of Texas, and we
9 The Fifth Circuit, relying on Nortex as its only Texas authority, held that a judgment
“restitutionary in nature” is “uninsurable under Texas law.” In re TransTexas Gas Corp., 597
F.3d 298, 309–11 (5th Cir. 2010).
10 The Seventh Circuit’s apparent concern for adopting a different standard for judgments
and settlements is also alleviated by the terms of XL’s policy, which required Burks to not admit
liability or make any settlement “without the Insurer’s consent, such consent not to be
unreasonably withheld.” At least one court has suggested a similar clause obviates the concern
over treating settlements differently because the insurer could “condition[] consent on an
admission of liability for wrongdoing or a stipulation that the payment was restitution.” U.S.
Bank Nat’l Ass’n, 68 F. Supp. 3d at 1053. We do not now address whether Burks failed to
comply with this condition, or whether Burks was relieved from doing so by XL’s failure to
advance defense expenses.
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find no Texas authority precluding coverage for such a settlement as a matter of
law. Therefore, we hold that the trial court erred by granting summary judgment to
XL on this ground.

Outcome:
None of the grounds XL alleged in its motion for summary judgment on
Burks’s breach of contract claim is meritorious. Thus, we affirm the trial court’s
judgment on the non-contract claims, reverse the judgment as to the contract claim,
and remand the case to the trial court for proceedings consistent with this opinion.

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