Prophet Equity LP and Ross Gatlin v. Twin City Fire Insurance Company ( 2019 )

REVERSE and REMAND in part; AFFIRM in part and Opinion Filed August 19, 2019
S In The
Court of Appeals
Fifth District of Texas at Dallas
No. 05-17-00927-CV
PROPHET EQUITY LP AND ROSS GATLIN, Appellants
V.
TWIN CITY FIRE INSURANCE COMPANY, Appellee
On Appeal from the 134th Judicial District Court
Dallas County, Texas
Trial Court Cause No. DC-14-12313
MEMORANDUM OPINION
Before Justices Bridges, Brown, and Whitehill
Opinion by Justice Whitehill
This case concerns insurance coverage for wrongful employment practices in a terminated
employee dispute. Prophet Equity LP and Ross Gatlin, the insureds, sued Twin City Fire Insurance
Company after it denied indemnity coverage. On cross-summary judgment motions, the trial court
granted Twin City’s motion and denied Prophet’s motion. (Prophet includes Prophet, Prophet
Equity, LP, its affected affiliates, and Gatlin unless indicated otherwise.)
Fundamentally, we must interpret and apply this insuring obligation to that dispute:
In three issues with multiple subparts, Prophet argues that the trial court erred by: (i)
rejecting its contract breach claim because it conclusively established coverage for which there
were no applicable exclusions, (ii) rejecting its confidentiality agreement breach, bad faith, and
insurance code claims, and (iii) denying its no-evidence summary judgment motion on Twin City’s
remaining defenses.
We conclude in part that:
 Prophet established Losses arising from a Claim in connection with Wrongful
Employment Practices that exhausted the underlying policies’ limits.
 The Wrongful Employment Practices exception negates the Insured versus Insured
(IvI) exclusion on which Twin City relies.
 Twin City did not show that the dishonesty exclusion applies, because there was no
final adjudication establishing any of the acts to which this exclusion applies.
 Twin City did not show that Prophet failed to allocate Losses between covered and
uncovered Losses, including Defense Costs.1
Thus, the trial court erred in granting Twin City’s summary judgment motion and in denying
Prophet’s summary judgment motion regarding Prophet’s contract breach claims.
The trial court also erred by dismissing Prophet’s extracontractual claims except breach of
the confidentiality agreement. Twin City did not move for summary judgment on Prophet’s bad
faith and insurance code claims. And even if we construe Twin City’s statement that the
extracontractual claims are conditioned on coverage as raising the issue, we have concluded that
Prophet established coverage. So summary judgment on this ground would be error.
But Twin City’s no-evidence motion addressed the confidentiality agreement breach claim,
and Prophet did not respond or raise a fact issue regarding that claim, which the trial court properly
dismissed.
We affirm the trial court’s summary judgment for Twin City on the breach of
confidentiality claim, reverse the trial court’s summary judgment for Twin City and against
1
The Policy’s defined terms appear in bold in the Policy.
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Prophet on all other claims and defenses, render judgment for Prophet for $4,123,382.61, and
remand to the trial court for further proceedings.
I. BACKGROUND
A. The Parties’ Relationships
In 2008, Gatlin and George Stelling partnered to raise a pool of equity capital and form a
small market investment fund (the Prophet entities) to acquire control of underperforming entities.
They formed Prophet Management to manage the fund. Stelling had a 30% interest in Prophet
Management and acted as its Chief Operating Officer. Gatlin had a 70% interest and acted as its
Chief Executive Officer and managing member.
According to Stelling, as Prophet Management’s only members, Stelling and Gatlin were
to receive guaranteed partner draws throughout the year with a substantial portion of their annual
profits distributed at year end. They were also to receive carried interests. When profits were
distributed, the limited partners/investors were to receive a preferential return with 20% of the
remaining distribution going to the general partner. That distribution would then pass from the
general partner to the limited partners as their “carried interests.”
The partnership agreement required the general partner to create a new class of partnership
rights to determine the carried interests once a new portfolio company was acquired. These new
interests were to be reflected on a class designation schedule. Stelling alleges that his class sharing
ratio for each portfolio company was to be a minimum of 22%.2
B. The Policy
In January 2011, Prophet purchased a “Private Equity Professional and Management
Liability Insurance Policy” (the HCC Policy). Prophet is an Insured Organization and Gatlin is
an Insured Person under the HCC Policy. Prophet added employment practices liability coverage
2
We rely on the parties’ allegations for background purposes because the partnership agreement is not part of our record.
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to the HCC Policy. That additional coverage undergirds this dispute. Prophet also purchased a
first excess policy from Great American and a second excess policy from Twin City (the Policy).
All three policies have the same substantive coverage but at different loss levels. The HCC
Policy has a $5,000,000 liability limit.3 Great American covers the next $5,000,000, and Twin
City covers an additional $5,000,000.
C. The Claim and Notice to Carriers
In October 2011, Gatlin removed Stelling as Prophet Management’s COO and as interim
president of a Prophet portfolio company. A few days later Stelling responded with a demand
letter alleging wrongful termination and that Prophet and Gatlin were spreading rumors to harm
his reputation and damage his career. Prophet notified all three carriers of Stelling’s demand.
Prophet, Gatlin, and Stelling attended mediation, during which Stelling alleged breach of
fiduciary duty, negligence, oppression, and wrongful termination and demanded $57,500,000 in
damages. The mediation failed, and an arbitration followed.
D. The Arbitration
During the arbitration, Stelling continued to demand $57,500,000, alleging that Gatlin fired
him to interfere with Stelling’s contract rights and partnership benefits, and that Prophet
misrepresented his responsibilities and the actions he took as COO that led to his termination.
Stelling also asserted derivative claims on behalf of various Prophet entities. His thirty-six page
First Amended Statement of Claim asserted nineteen causes of action against some combination
of Prophet and Gatlin. Each count is rooted in Stelling’s termination or its consequences.
The arbitration panel found partially for Stelling and entered an award that requires: (i)
specific performance of Prophet’s contracts with Stelling; (ii) Profit and Gatlin each to pay Stelling
3
The HCC Policy is the most detailed of the policies and contains the specific provisions that establish the scope of coverage, exclusions,
and exceptions.
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$1,330,167.63 for his attorneys’ fees and related arbitration fees and costs; (iii) Gatlin to pay
Stelling $5,040,000 (without specifying what that amount compensates); and (iv) Gatlin to
reimburse Prophet $4,227,432.74 for attorneys’ fees incurred in the arbitration and up to
$1,193,915.30 for any additional fees and expenses.
The 95th Judicial District Court of Dallas County confirmed the award. That judgment
grants Stelling a total of $7,700,335.36 in monetary relief, consisting of $1,330,167.63 from
Prophet and $6,370,167.63 from Gatlin. Prophet and Gatlin satisfied the judgment.
E. Other Claims Deplete the HCC Coverage
Two other disputes partially depleted the $5,000,000 HCC Policy limits. Specifically,
HCC paid $256,405.88 for the Ludlum claim and $949,216.45 for the Kerr claim. For summary
judgment purposes, these payments and claim amounts were undisputed.
F. Post Judgment Mediations
Following the arbitration award, all three carriers initially denied coverage. But in a
subsequent joint mediation, HCC agreed to pay $2,323,180.16 for the Stelling matter.
During a first joint post-judgment mediation, Prophet submitted $13,052,468.96 in claimed
Losses including $5,352,133.60 in Defense Costs and $7,700,335.36 in judgments. After
subtracting the deductible, defense counsel fee write-offs, Gatlin’s and Prophet’s responsibility
under the HCC settlement agreement, and HCC payments, $8,728,647.29 in claimed
uncompensated Losses remained.
Prophet, Great American, and Twin City mediated again, after which Great American
agreed to pay $3,127,949.07 on the Stelling matter. The settling parties recognized that this
payment, augmented by other credits, exhausted the Great American policy limits.
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G. Additional Costs Incurred
Between the first and second post-judgment mediations, Prophet and Gatlin incurred
$473,686.88 in additional attorneys’ fees and related costs. After deducting defense counsel write-
offs and the HCC and Great American payments, $3,804,709.60 in claimed Losses remained.
Additional attorneys’ fees and related costs were subsequently incurred, bringing the total unpaid
alleged Losses to $4,123,382.61.
H. The Lawsuit
When Twin City still wouldn’t pay, Prophet sued, alleging contract breach, insurance code
violations, and bad faith coverage denial. Twin City answered with several affirmative defenses,
including failure to exhaust the underlying policies and that the claims were barred by the Policy’s
terms, exclusions, and conditions. Prophet amended its petition to allege breach of a
confidentiality agreement.
All parties moved for summary judgment.4 Prophet requested a traditional summary
judgment on the coverage issues and a no-evidence summary judgment on Twin City’s affirmative
defenses based on (i) the fraud/unlawful profit or advantage exclusion, (ii) the allocation exclusion,
(iii) the insured versus insured exclusion, and (iv) Twin City’s remaining affirmative defenses.
Twin City’s motion cites both traditional and no-evidence standards, but it devotes only a
footnote to a no-evidence point seeking summary judgment on Prophet’s breach of the
confidentiality agreement claim. The remaining motion seeks traditional summary judgment on
three of Twin City’s affirmative defenses: (i) the allocation exclusion, (ii) the fraud/unlawful profit
or advantage exclusion, and (iii) the insured versus insured exclusion.
4
Prior to its motion, Twin City filed a no-evidence summary judgment on its affirmative defenses, but the court didn’t rule on this motion,
and it is not before us.
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The trial court granted Twin City’s motion, denied Prophet’s motion, and entered a final
judgment from which Prophet appeals.
I. Relevant Policy Terms
The Policy has these terms (bolded words are policy defined terms and appear in bold in
the Policy):
D. EMPLOYMENT PRACTICES LIABILITY INSURANCE
The Insurer shall pay, on behalf of any Insured, Loss arising from Claims for
Wrongful Acts in connection with Wrongful Employment Practices.
It is undisputed that Gatlin and Prophet are both “Insureds” under the Policy.
“Loss” means:
[D]amages, settlements, judgments, and Defense Costs incurred by any Insured,
including pre and post judgment interest, back and front pay, punitive, exemplary
or multiplied damages where insurable under the law of the most favorable venue
to the Insured . . . . Loss shall not include . . . (7) any amount or claim for variable
compensation or pay of any sort including, but not limited to bonuses, stock or other
options, equity, benefits, and interest . . . .
But Losses do not include:
(5) Any amount allocable to uncovered Loss under this Policy;
(6) The return and/or disgorgement of any capital commitments or any money,
assets or personal profit received by an Insured to which such Insured is not
legally entitled as established by a final adjudication . . . .
“Claim” means:
(1) any written demand for monetary or non-monetary damages or injunctive relief
against an Insured alleging a Wrongful Act, deemed to be first made by receipt of
such demand by the Insured;
(2) any civil, judicial, administrative, regulatory or arbitration proceeding,
including but not limited to any investigation . . . .
A “Wrongful Act” in this context includes “Wrongful Employment Practices.”
Wrongful Employment Practices include:
(3) termination, actual or constructive, of an employment relationship in any
manner which is allegedly against the law;
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(4) wrongful demotion, retaliation, misrepresentation, promissory estoppel and
intentional interference with contract which arises from an employment
relationship;
(5) libel, slander, defamation, infliction of emotional distress or mental anguish,
humiliation, false imprisonment, invasion of privacy and other personal injury
allegations that arise from the employment relationship;
(6) breach of an implied employment contract and breach of the covenant of good
faith and fair dealing in the employment contract;
(7) employment terminations, disciplinary actions, demotions or other employment
decisions . . . ;
(10) retaliation against an Insured Person . . . [and]
(11) wrongful deprivation of career opportunity. . . .
Interrelated Wrongful Acts means any “Wrongful Acts which have as a common nexus
any fact, circumstances, situation, event, transaction or series of facts, circumstances, situations,
events or transactions.”
The Policy further provides that “more than one Claim involving the same Wrongful Act
or Interrelated Wrongful Acts constitute a single Claim . . . .”
Defense Costs means “legal fees and expenses (including expert fees) and cost . . . incurred
by the Insured in defense of a Claim . . . .”
The Policy’s Exclusion H excludes “any payment in connection with any Claim . . . by or
on behalf of any Insured in any capacity . . . .”
II. ANALYSIS
A. Standard of Review
We begin with the parties’ traditional summary judgment motions addressing the Policy’s
terms as applied to undisputed facts.5
5
Ordinarily, when a party moves for both traditional and no-evidence summary judgments, we consider the no-evidence motion first and
then review any surviving claims under the traditional standard. See First United Pentecostal Church of Beaumont v. Parker, 514 S.W.3d 214, 219
(Tex. 2017). But Twin City’s motion includes only one no-evidence issue pertaining to the breach of confidentiality agreement claim and many of
Prophet’s no-evidence points depend on the coverage issues raised in the traditional motions. Because we review coverage issues before considering
and exclusions or excerptions, we begin with the traditional motions.
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The party moving for a traditional summary judgment has the burden to show that no
genuine issue of material fact exists and it is entitled to judgment as a matter of law. See TEX. R.
CIV. P. 166a(c). To determine if there is a fact issue, we review the evidence in the light most
favorable to the party against whom the summary judgment was rendered, crediting evidence
favorable to that party if reasonable jurors could do so, and disregarding contrary evidence and
inferences unless reasonable jurors could not. Gonzalez v. Ramirez, 463 S.W.3d 499, 504 (Tex.
2015) (per curiam). More than a scintilla of evidence exists, and the evidence raises a genuine fact
issue, when the evidence rises to a level that would enable reasonable and fair minded jurors to
differ in their conclusions in light of all the summary judgment evidence. Goodyear Tire & Rubber
Co. v. Mayes, 236 S.W.3d 754, 755 (Tex. 2007) (per curiam).
When facing cross-motions for summary judgment, we apply the same standards of de
novo review as when reviewing a trial court’s ruling on a singular motion. See Valence Operating
Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex. 2005). When the trial court grants one motion and
denies the other, we must consider all the grounds presented by both sides, and in the case of an
improper judgment, render the judgment the trial court should have rendered. Id.
B. General Principles
Liability insurance policies typically contain two main duties—a duty to defend and a duty
to indemnify. See D.R. Horton-Texas, Ltd. v. Markel Int’l Ins. Co., 300 S.W.3d 740, 743 (Tex.
2009). But this Policy includes only a duty to indemnify for specific Losses, which in this instance
can include Defense Costs. See id. at 743-44; Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d
819, 821 (Tex. 1997). A duty to indemnify is “triggered by the actual facts establishing liability
in the underlying suit.” Trinity Universal, 945 S.W.2d at 921.
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The “insured bears the initial burden to establish the insurer’s duty to indemnify by
presenting sufficient facts to demonstrate coverage under the policy.” See Mid-Continent Cas. Co.
v. Castagna, 410 S.W.3d 445, 449 (Tex. App.—Dallas 2013, pet. denied).
The burden then shifts to the insurer to prove matters that might limit, avoid, exclude, or
provide an exception to coverage. JAW The Pointe, L.L.C. v. Lexington Ins. Co., 460 S.W.3d 597,
603 (Tex. 2015). Policy exclusions or exceptions to coverage claimed by the insurer are
avoidances or affirmative defenses. TEX. INS. CODE § 554.002.6
If the insurer conclusively establishes an affirmative defense to coverage, the summary
judgment burden shifts back to the policy holder to show an exception to the exclusion. Gilbert
Tex. Constr., L.P. v. Underwriters at Lloyd’s, 327 S.W.3d 118, 124 (Tex. 2010).
We follow the general contract construction rules when interpreting policy terms. State
Farm Life Ins. Co. v. Beaston, 907 S.W.2d 430, 433 (Tex. 1995). As with any contract
interpretation, we start with the policy’s language. See Nassar v. Liberty Mut. Fire Ins. Co., 508
S.W.3d 254, 257 (Tex. 2017).
We “give policy language its plain, ordinary meaning unless something else in the policy
shows the parties intended a different, technical meaning.” Tanner v. Nationwide Mut. Fire Ins.
Co., 508 S.W.3d 254, 257 (Tex. 2017). If the contract can be given an exact or certain legal
interpretation, it is not ambiguous, and we must interpret the insurance policy’s meaning and intent
from its four corners. TIG Ins. Co. v. North American Van Lines, Inc., 170 S.W.3d 264, 268 (Tex.
App.—Dallas 2005, no pet.).
But we construe ambiguous or uncertain policy terms, including exclusions and exceptions
to exclusions, in the insured’s favor:
6
“Sec. 554.002. BURDEN OF PROOF AND PLEADING. In a suit to recover under an insurance . . . contract, the insurer . . . has the burden
of proof as to any avoidance or affirmative defense that the Texas Rules of Civil Procedure require to be affirmatively pleaded. Language of
exclusion in the contract or an exception to coverage claimed by the insurer or health maintenance organization constitutes an avoidance or an
affirmative defense.” TEX. INS. CODE § 554.002
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If the written instrument is worded so that it can be given only one reasonable
construction, it will be enforced as written. * * * However, if a contract of insurance
is susceptible of more than one reasonable interpretation, we must resolve the
uncertainty by adopting the construction that most favors the insured. * * * The
court must adopt the construction of an exclusionary clause urged by the insured as
long as that construction is not unreasonable, even if the construction urged by the
insurer appears to be more reasonable or a more accurate reflection of the parties’
intent. * * * In particular, exceptions or limitations on liability are strictly construed
against the insurer and in favor of the insured.
Nat’l Union Fire Ins. Co. of Pittsburg, Pa. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex.
1991) (citations omitted).
C. First and Third Issues: Did the trial court err by denying Prophet and Gatlin
recovery under their breach of contract claims?
Yes. Based on this record, Prophet and Gatlin conclusively established that they suffered
sufficient Losses related to the Stelling Claim to reach Twin City’s layer and Twin City did not
carry its burden to create a fact issue based on its asserted IvI exclusion or other coverage defenses.
1. General Framework
The bulk of the parties’ arguments involve analyzing insurance policy coverage terms and
related policy based defenses. The following diagram illustrates the analytical progression for
sorting through those various relationships:
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The Stelling Dispute
What are Yes Yes No Are there Yes Insureds
Step 1: Is Step 2: Is Step 3: Are
the alleged there an there an there enough win
Losses? exclusion exception exceptions Losses plus
that to the to specific other
Gatlin $ to
Stelling defeats all exclusion? Losses credits to
Losses? Personal gain reach
Gatlin $ to Wrongful
Employment Variable Comp Insurer’s
Prophet “IvI” Practices Allocation layer?
Gatlin $ for
Stelling’s fees
No No Yes No
Prophet $ for Insureds Insureds Insureds Insurer
Stelling’s fees win lose lose for wins
unless ... that
Loss
Claim = At a minimum, the arbitration, but the Claim’s scope affects some recoverable Losses
Alleged Losses = Each $ category at issue (Less: any exceptions‐personal advantage, variable compensation, allocation)
Alleged Exclusion = “IvI” applied to the whole Claim
Alleged Exception to Exclusion = Wrongful Employment Practices
From an overview perspective, the parties agree that (i) Prophet and Gatlin are Insureds
and (ii) the underlying Stelling dispute presents a Policy Claim to some degree. Because the
parties agree that there is a Claim to some degree, it is not necessary at this point to address the
Claim’s exact scope. We do that as it becomes relevant to other questions.
The parties also agree that there are seven categories of possible resulting Losses from the
arbitration award. Because Prophet’s IvI exclusion defense could completely resolve the contract
breach claim, our contract breach analysis begins by discussing the Losses, which we initially
assume are covered Losses, and then analyze in depth Step 1 in the preceding diagram.
2. What are Prophet’s Losses?
The record reflects that Prophet suffered Losses consisting of at least paid damages,
settlements, awards, judgments, and some Defense Costs. Specifically, Prophet’s summary
judgment evidence includes the final judgment confirming the award and proof that Prophet and
Gatlin satisfied the judgment. Prophet also submitted (i) detailed bills reflecting the legal fees and
expenses incurred in the underlying dispute and (ii) evidence of settlements with HCC and Great
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American showing exhaustion of those Policy limits. Gatlin’s detailed affidavit further describes
his asserted Losses.
Collectively, Prophet and Gatlin showed asserted Losses (before subtracting the Great
American and HCC payments) consisting of:
 HCC payment in the Kerr matter . . . . . . . . . . . . . . . . . . . . . . . . . . . $949,216.45
 Great American payment in the Kerr matter . . . . . . . . . . . . . . . . . . . . .$22,050.93
 HCC payment in the Ludlum matter . . . . . . . . . . . . . . . . . . . . . . . . . . . $256,405.88
 Gatlin’s “liability” payment to Stelling . . . . . . . . . . . . . . . . . ..$5,040,000.00
 Gatlin’s reimbursement to Prophet for attorneys’ fees . . . . . . . . . . . . .$5,245,373.99
 Gatlin’s payment to Stelling for arbitration fees/expenses . . . . . . . . $1,330,167.63
 Prophet’s payment to Stelling for arbitration fees/expenses . . . . . . . $1,330,167.63
Total claimed Losses $14,173,382.51
Prophet also established other credits allegedly leaving $4,123,382.51 in Losses remaining
to Twin City. Thus, if these numbers hold, Prophet proved Twin City’s liability on its Policy to
the extent the remaining Losses exceed $10,000,000. Twin City argues that Prophet’s Losses do
not exceed $10,000,000 due to the IvI exclusion, the personal gain exclusion, and other defenses.
We begin with the IvI exclusion.
3. Does the IvI exclusion globally defeat Prophet’s contract breach cause of
action?
No, although an Insured v. Insured relationship exists here, the Wrongful Employment
Practices exception negates the IvI exclusion as a global defense to Prophet’s contract breach
cause of action.
a. Introduction
Twin City’s summary judgment motion argued that Policy’s “unambiguous Insured v.
Insured exclusion operates to sweep the entire underlying arbitration outside of coverage.” To
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that end, Twin City argued that “the underlying arbitration is precisely the sort of action that
triggers the Policy’s exclusion for claims asserted between individuals and entities that qualify as
‘insureds’ under the Policy (the ‘insured’ v. ‘insured’ situation).” Such an exclusion, typically
referred to as an “IvI exclusion,” excludes coverage for any claim made by one insured against
another. See Great Am. Ins. Co. v. Primo, 512 S.W.3d 890, 894–95 (Tex. 2017).
Prophet responded that Twin City’s global IvI defense “is wrong because the exception to
the Insured versus Insured exclusion applies to the entire Claim here, which is the Stelling
Dispute, and therefore the Insured versus Insured exclusion is inapplicable.” Prophet continues
that argument on appeal.
We agree with Prophet because its Policy interpretation is at least one reasonable way to
read that Policy.
b. Policy Text
To start, the IvI exclusion provides that “[t]he Insurer shall not be liable to make any
payment in connection with any Claim” . . . “by or on behalf of any Insured in any capacity . . .
.” The case would be simple if the Policy language stopped there; no Insured would have any
coverage at all for Wrongful Employment Practices. But the text does not stop there. This
exclusion has eleven exceptions, any of which makes the exclusion inapplicable to a Claim in
connection with Stelling’s demands, actions, etc. The question is whether Prophet conclusively
established that one of those exceptions applies here.
Prophet urges that it conclusively established the Wrongful Employment Practices
exception. See Gilbert Tex. Constr., 327 S.W.3d at 124 (summary judgment burden reverts to an
insured to show an exception to an exclusion). That exception negates the IvI exclusion when a
Claim “is brought by one or more of the Insured Persons for Wrongful Employment Practices.”
That is, an IvI exclusion exception applies if (i) Stelling asserted Wrongful Employment
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Practices by Prophet and (ii) there are Losses arising from Wrongful Acts in connection with
those Wrongful Employment Practices. Stated differently, Prophet contends that the exception’s
reach is conterminous with the Policy’s I(D) payment obligation.
Prophet is at least arguably correct given the way that Policy parts I(D), for insuring
agreements, and IV(H)(6), for exclusions, flow when read together. And this result makes sense
because reading part IV(H) without subsection (6) bringing Wrongful Employment Practices
back into coverage would eliminate Wrongful Employment Practices coverage from the Policy
contrary to the parties’ stated intent to provide coverage for Wrongful Employment Practices.
More specifically, resolving the question requires deciding between the parties’ competing
interpretations of the (i) EMPLOYMENT PRACTICES LIABILITY INSURANCE payment
obligation, (ii) IvI exclusion, and (iii) Wrongful Employment Practices exception. The parties
offer two interpretations to choose from:
One, Twin City’s premise that the exception does not apply because Stelling’s
derivative claim on Prophet’s behalf is the relevant Claim and Prophet the entity
therefore cannot be an Insured Person capable of invoking the exception;
or,
Two, Prophet’s premise that the exception applies because the relevant Claim is
the entire dispute Stelling the individual initiated and carried through to the ultimate
judgment, which means that an Insured Person brought the Claim and can thus
invoke the exception.
These two interpretations are somewhat like ships passing in the night. Prophet’s
interpretation is reasonable to the extent Twin City offers the IvI exclusion as a complete defense
to all alleged Losses, because to conclude otherwise would remove all Wrongful Employment
Practices coverage obligations from coverage as concerns Stelling’s employment termination.
That’s obviously not what the parties intended and the law precludes us from accepting that result.
See Nat’l Union Fire Ins. Co. of Pittsburg, Pa. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex.
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1991). Furthermore, exceptions or limitations on liability, like the IvI exclusion here, “are strictly
construed against the insurer and in favor of the insured.” Id.
Additionally, Wrongful Employment Practices include at least (i) wrongful (contrary to
law) terminations; (ii) intentional interference with a contract that arises from an employment
relationship; (iii) libel, slander, or defamation any of which arise from the employment
relationship; (iv) breach of a covenant of good faith and fair dealing in an employment contract;
(v) employment terminations or other employment decisions; and (vi) wrongful deprivation of
career opportunity. Stelling’s allegations against Prophet included these subjects.
Furthermore, Stelling’s amended arbitration statement of claim shows that all of his
nineteen counts involved Interrelated Wrongful Acts having “as a common nexus any fact,
circumstance, situation, event, or transaction or series of facts, circumstances, situations, events or
transactions [,]” related to Stelling’s employment termination. And the Policy provides that “more
than one Claim involving the same Wrongful Act or Interrelated Wrongful Acts constitute a
single Claim.”
Along those lines, the Policy’s Claim definition includes:
(1) any demand for monetary or non-monetary damages, injunctive or other relief
against an Insured alleging a Wrongful Act, deemed to be first made by receipt of
such demand by the Insured;
(2) any civil, judicial, administrative, regulatory or arbitration proceeding, . . .
initiated against any Insured for a Wrongful Act, any appeal therefrom . . . .
And, per the definition of a Claim, Prophet’s Claim against Prophet began when Stelling
sent his October 25, 2011 demand letter after Gatlin removed him as COO. That letter referred to
Stelling’s wrongful employment termination, the alleged misrepresentations made about his work,
and the ways those actions damaged his reputation and career.
Under these circumstances, one reasonable Policy reading is that it treats the entire
arbitration rooted in Stelling’s termination as a single Claim beginning with Stelling’s initial
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demand letter. Because that reading is reasonable, that is how we construe the Policy on these
facts. See id. Accordingly, we conclude that Prophet as a matter of law established that the
Wrongful Employment Practices exception negates the IvI exclusion as a global defense to
Prophet’s breach of contract claim.7
But Twin City’s argument that the IvI exclusion defeats coverage for specific Losses
attributed to Stelling’s derivatively asserted claims, which would reduce the aggregate Losses to
an amount below Twin City’s layer, requires further analysis. We address those arguments next.
4. Does the IvI exclusion defeat coverage for Gatlin’s Prophet reimbursements?
a. Introduction
The award imposed the following obligation on Gatlin:
Twin City’s summary judgment motion argued that the Policy required Prophet to allocate
the award amounts between covered and uncovered Losses, including reimbursements, and that
doing so drops the required Losses below the amount needed to reach Twin City’s layer.8 To that
7
Because we are construing the contract as a matter of law, the same result pertains regardless of which party had the burden on the issue.
8
Twin City’s “allocation” arguments present a question regarding which side bore the burden on the allocation issue. We will address that
question in more depth later in this opinion.
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end, Twin City argued that (i) the IvI exclusion applies because both Prophet and Gatlin are
Insureds and (ii) the Wrongful Employment Practices exception does not apply because
Prophet, being an Insured Organization, is not an Insured Person as the exception requires.
Twin City further asserted that Prophet, being a company, could not bring a wrongful employment
claim in the first place.
Prophet responded that the exception applies because (i) the relevant Claim is the one
Stelling, as an Insured Person, started and includes the entire process from start to finish; (ii) the
exception is conterminous with the coverage clause so that the exception is met if the Loss would
otherwise be in connection with a covered Claim for Wrongful Employment Practices; (iii) the
obligation is for covered Defense Costs as well as damages; (iv) Prophet’s actually incurred and
paid fees for Gatlin to reimburse were only $1,563,838.85 thereby reducing Prophet’s covered
amount to only $2,559,543.79; and (v) Twin City did not carry its burden to show what portion of
the Gatlin to Prophet reimbursement was not to reimburse Defense Costs incurred and paid in
defending against Stelling’s various assertions in connection with Prophet’s Wrongful
Employment Practices.
We agree with Prophet.
b. Prophet’s Attorneys’ Fees and Arbitration Expenses Evidence
Prophet’s evidence included a signed declaration from Prophet Equity LP’s general
counsel, David Rex. Prophet Equity LP is the payee named in the award’s relevant reimbursement
paragraphs. The Rex Declaration is nine pages long and contains sixty-six discrete paragraphs
that authenticated (or in one instance summarized) Prophet’s attorneys’ fees or related expenses
invoices (or invoice payments).
Sixty-five of those paragraphs referred to an attached invoice and declared that the invoice
“demonstrates that legal fees and/or expenses were incurred in defense of a claim in the amount of
–18–
[$X].” Rex further declared that the “exhibits related to invoices for legal fees and expenses in the
underlying dispute with George Stelling.” The declaration exhibits included hundreds of pages of
invoices from law firms and other vendors in connection with the Stelling dispute. Twin City does
not complain about admissibility of the declaration or its exhibits.
It follows that Prophet prima facially established that these fees and expenses were incurred
Defense Costs of some sort. But Rex did not say whether these Defense Costs were incurred
defending against (i) Stelling’s personal claims, in which case they unquestionably would be
covered Losses, or (ii) claims Stelling asserted derivatively on Prophet’s behalf, which Twin City
argues would render them not-covered Losses because of the IvI exclusion. Conversely, Twin
City did not offer any evidence drawing those distinctions either. On this question, the parties
present two basic questions:
One, as Prophet argues, should the Defense Costs be viewed holistically as all
being incurred in response to Stelling’s allegations that he was wrongfully
terminated and the consequences and damages resulting from Prophet’s related
Wrongful Employment Practices?
Two, as Twin City urges, are these Defense Costs that Gatlin incurred (and
ultimately paid to Prophet) defending against the Stelling asserted derivative claims
uncovered Losses that Gatlin had to allocate between covered and not-covered
Losses?
Twin City further asserts that sums that the award obligated to reimburse Prophet for
attorneys’ fees and arbitration expenses is a judgment amount that falls squarely within the IvI
exclusion, without an exception, because Prophet is not an Insured Person. Prophet counters that
the IvI exclusion does not apply because (i) this award is merely a reallocation of incurred
Defenses Costs and (ii) Prophet never sought to recover these sums from Gatlin.
For the following reasons, we agree with Prophet that on this record these incurred sums
are covered Losses.
–19–
c. Analysis
To begin, “reimburse” means (i) “to make repayment to or for expense or loss incurred”
and (ii) “to pay back; refund; repay.” Reimburse, http://dictionary.com (last visited August 5,
2019).
Next, because Gatlin reimbursed these sums to Prophet (instead of to Stelling), they do not
compensate Prophet for attorneys’ fees and arbitration expenses Prophet incurred and paid for the
purpose of pursuing the derivative claims. Indeed, there is no evidence that Prophet, which Gatlin
controlled, ever spent any of its own money to pursue those claims. And Rex’s declaration states
that all fees referred to there were in defense of the Stelling’s claims. Twin City adduced no
contrary evidence.
Therefore, all of these outlays were indeed Defense Costs, and not damages, that were
incurred due to allegations and causes of action that Stelling asserted in response to Prophet’s
allegedly Wrongful Employment Practices in connection with its terminating his employment.
Stated differently, Prophet the entity would not have incurred and paid these Defense Costs but
for Stelling’s assertions that Prophet engaged in Interrelated Wrongful Acts in connection with
Wrongful Employment Practices in connection with his employment termination. See part
II(C)(3)(b) above. Accordingly, we conclude that Prophet’s premise that the entire Gatlin to
Prophet reimbursement sum is a covered Loss contemplated by the section I(D) EMPLOYMENT
PRACTICES LIABILITY INSURANCE obligation is at least one reasonable interpretation of
the Policy terms, as applied to this record, and decide this issue in Prophet’s favor. See Nat’l
Union, 811 S.W.2d at 555.
Furthermore, these Defense Costs were first incurred by Prophet and by reimbursement
they were later incurred by Gatlin. Either way, they are Defense Costs in connection with the
–20–
Stelling dispute and Gatlin is an Insured. That is, the award did not change these sums’ nature as
Defense Costs incurred in connection with the Claim as discussed in part II(C)(3)(b) above.
Alternatively, Prophet having shown that the Gatlin to Prophet reimbursement was for
Defense Costs, it was Twin City’s burden to show what portion of those sums are allocable to
uncovered Losses. TEX. INS. CODE § 554.002. But Twin City did not attempt to make that
evidentiary showing, instead relying on its argument that it was Prophet’s burden to do so. Because
we conclude otherwise, we also reject Twin City’s argument that Gatlin reimbursement to Prophet
is not a recoverable Loss for this reason too.
Finally, we address Twin City’s related “allocation” arguments later in this opinion.
d. Disposition
Accordingly, we agree that the entire $5,245,373.99 reimbursement sum is a covered Loss
to be included when calculating Prophet’s total Losses for purposes of determining whether its
Losses reach Twin City’s layer.
5. Twin City’s Remaining Arguments
a. Introduction
Twin City also argues that the Wrongful Employment Practices exception does not apply
because (i) Stelling was not complaining about wrongful termination by the time of the arbitration;
(ii) the $5.04 million award was for lost profits Stelling was entitled to receive but that Gatlin
misappropriated for himself; and (iii) the $5.04 million award is not for tort damages as Prophet
alleges.
Prophet disagrees for various reasons that we discuss below.
b. Nature of the Claim
To start, Twin City urges that the dispute was not an “employment dispute” because
Stelling was not seeking recovery for past or future salary. Instead, it argues that it was a business
dispute between former partners in which Stelling was seeking recovery of (i) distributions he
–21–
claimed Gatlin misappropriated and (ii) either his carried interests or class designation schedules
reflecting his carried interests. To this end, Twin City relies on a one-page summary Stelling
provided in response to the arbitrators’ request. In particular, Twin City relies on Stelling’s
statement that Prophet misappropriated his carried interest and distributions to show that regardless
of what Stelling may have claimed earlier, he was not asserting a Wrongful Employment
Practice Claim by the time of the arbitration.
However, we conclude that Twin City’s argument is based on an overly narrow reading of
the Policy’s language and an isolated reading of Stelling’s arbitration statement. Specifically,
Claims include demands or legal proceedings based on Wrongful Employment Practices.
Furthermore, the Policy and exception are not limited to Claims that are expressly labeled
“wrongful termination.” Rather, it reaches a wide range of Wrongful Acts including (but not
limited to) (i) actual or constructive termination of an employment relationship, (ii) intentional
interference with contract that arises from an employment relationship, (iii) breach of an implied
employment contract and breach of the covenant of good faith and fair dealing; (iv) wrongful
termination of an employment contract, (v) wrongful deprivation of career opportunity, and (vi)
employment related defamation, libel, or slander.
And the Policy further expands the breadth of coverage by covering “Claims for Wrongful
Acts in connection with Wrongful Employment Practices.” In the insurance context, the phrase
“in connection with” is expansive and can be satisfied by any range of causal or logical
relationships. See, e.g., Nationwide Mut. Ins. Co. v. Nunn, 442 S.E.2d 340, 343 (N.C. 1994) (“in
connection with” much broader than the phrase “arising out of.”); see also Artz v. Barnhart, 330
F.3d 170, 174–75 (3d Cir. 2003) (construing the phrase as used in the Social Security Act).
Further, Texas law in other contexts construes the phrase “in connection with” equally
broadly. Indeed, as one of our sister courts observed, “[I]n connection with is a phrase of
–22–
intentional breadth.” Titan Transp. LP v. Combs, 433 S.W.3d 625, 637 (Tex. App.—Austin 2014,
pet. denied) (construing statutory revenue exclusion); see also El Paso Field Serv., L.P. v. Mastec
N. Am., Inc., 389 S.W.3d 802, 808 (Tex. 2012) (construing “all risks in connection with” contract
language to mean all risks); Avocare GP LLC v. Heath, No. 05-16-00409-CV, 2008 WL 56402, at
*4 (Tex. App.—Dallas Jan. 5, 2017, no pet.) (mem. op.) (arbitration clause governing any
dispute…arising out of or in connection with . . . reaches all aspects of the relationship).
Thus, a Claim is not limited to only those acts specifically identified as Wrongful
Employment Practices; it also includes Interrelated Wrongful Acts in connection with such
practices.
When deposed, Stelling testified that Prophet’s actions disrupted his business and
professional relationships and harmed his reputation. He added that, “generally, around town,
folks know that I was sacked.” He also testified that other consultants told him they heard that he
had been fired for fraud. Stelling also said that Prophet’s actions hurt him in the employment
market. According to Stelling, Prophet had a legal obligation to continue to employ him and he
believed that he was “wrongfully terminated.”
Also, Stelling’s arbitration First Amended Statement of Claim shows that all such claims
had their genesis when, “Inexplicably on October 7, 2011, Gatlin removed Stelling as Chief
Operating Officer and Interim President of Altec and from his duties at Prophet Management.”
Likewise, the Policy’s plain text states that the exception arises when a claim is “brought”
for Wrongful Employment Practices; thus, we cannot read the Policy to mean that it arises only
when an award is made or other Loss incurred. See Anadarko Pet. Corp. v. Houston Cas. Co., 573
S.W.3d 187, 192 (Tex. 2019) (undefined words have their plain, ordinary, and accepted meanings
unless the policy itself demonstrates the parties intended a different or more technical meaning).
And, as we concluded in part II(C)(3)(b), all Claims involving the same Wrongful or Interrelated
–23–
Wrongful Acts are a single Claim that began with Stelling’s demand letter and included all
assertions in connection with his termination.
Moreover, Twin City’s suggestion that the dispute’s nature changed from what was initially
employment-related to a partnership dispute outside the scope of coverage ignores the Policy
language that, “More than one Claim involving the same Wrongful Act or Interrelated
Wrongful Acts shall be deemed to constitute a single claim. ” It also ignores the broad scope that
Policy section II(B)(1), (2)’s text gives to the term Claim (see part II(C)(3) above).
Here, the record shows that the Stelling Claim arose out of Prophet’s termination of
Stelling’s employment. That the Claim was initially labeled “wrongful termination” and was then
subsequently expanded or refined is of no consequence because the substance of all of Stelling’s
assertions was interrelated and made in connection with his Wrongful Employment Practices
assertions. See part II(C)(3)(b) above.
Stelling’s arbitration summary also asserts that Prophet breached fiduciary duties and an
implied covenant of good faith and fair dealing—all arising out of the employment relationship
with Prophet. Thus, the summary judgment evidence establishes that the Stelling Claim was for
Wrongful Acts, including Interrelated Wrongful Acts, in connection with Prophet’s Wrongful
Employment Practices.
Because the summary judgment evidence establishes as a matter of law that all requisites
for the Policy’s Wrongful Employment Practices exception were met, Prophet satisfied its
burden to prove that this exception negates the IvI exclusion.
c. The $ 5.04 Million Award’s Basis
The arbitrators awarded the $5.04 million without findings, reference to a particular cause
of action, or any explanation regarding what that award compensates. Instead, it simply orders:
–24–
Cash payment. It is further Awarded that Ross Gatlin, individually, pay to George
H. Stelling, Jr. a cash payment of Five Million Forty Thousand Dollars
($5,040,000.00).
Both parties speculate about this specific award’s basis.9 But the Policy does not require Prophet
to explain the arbitrators’ rationale behind the $5.04 million award or otherwise link that award to
a specific Wrongful Employment Practice. Rather Twin City’s payment obligation applies to
Losses “arising from Claims for Wrongful Acts in connection with Wrongful Employment
Practices.”
The bottom line here is that the $5.04 million award represents damages Prophet suffered
due to the Stelling Claim, which we have already decided includes the entire dispute from
Stelling’s demand letter through the arbitration award. See part II(C)(3)(b) above. Damages are
within the Policy definition of a Loss. And the exception applies when there is a Loss arising from
a Claim brought in connection with a Wrongful Employment Practice. Thus, this sum facially
is a covered Loss as a matter of law unless Twin City presented evidence of a defense that would
make this Loss an uncovered Loss. See TEX. INS. CODE § 554.002. It didn’t.
d. Variable Compensation
Twin City similarly argues that Prophet failed to establish coverage because Gatlin’s $5.04
million payment to Stelling for distributions is variable compensation that is expressly excluded
under the Policy’s definition of Loss. Prophet responds that this is a limitation on coverage that
Twin City was required to prove. See id.
Specifically, Twin City insists that the phrase “Loss shall not include . . . variable
compensation” is not an exclusion; rather, it is merely part of the “loss” definition and thereby a
9
Prophet argues that the $5.04 million must be a tort award for Stelling’s lost salary and unreimbursed expenses. Twin City argues that the
$5.04 million corresponds to a calculation of lost profits Stelling was deprived of and that Gatlin misappropriated for himself.
–25–
precondition to coverage.10 But the insurance code does not require that language of exception or
exclusion fall only within a policy’s designated exclusions section. In fact, the statute is clear that
whenever an insurer seeks to rely on such language, regardless of where it appears in the policy,
the insurer has the burden of proof. See id.
Here, even if the language at issue is not technically an exclusion, it is nonetheless limiting
language that excepts certain enumerated items from coverage. Thus, Twin City had the burden
to establish its application. See id.
Twin City does not identify any summary judgment evidence establishing that the $5.04
million payment was for variable compensation, nor have we found any such evidence in the
record. We therefore conclude that Twin City failed to raise a fact issue, let alone establish as a
matter of law, that the payment is not included in the Loss calculation.
e. Malooly
Twin City also argues that the summary judgment must be affirmed because Prophet did
not contest one of the grounds on which it could be affirmed—that the $5.04 million was not a
covered Loss. See Malooly Bros., Inc. v. Napier, 461 S.W.2d 199, 121 (Tex. 1970). We disagree.
Twin City’s summary judgment motion argued that $10 million in covered Loss did not
fall within the Wrongful Employment Practices exception to the IvI exclusion for two reasons,
(i) that Gatlin’s $5.04 million payment to Stelling was not for future salary and (ii) the $5.04
million component of the arbitration award is not an award to an insured person and instead is an
award to Prophet, an insured organization There was no separate ground arguing that the $5.04
million was not a covered Loss.
10
Tellingly, Twin City’s summary judgment response referred to this clause as the “variable compensation exception” and it makes this
argument here, as it did in the court below, not only as an argument concerning why Prophet failed to meet its initial burden to prove coverage but
also when asserting that Prophet failed to properly allocate between covered and non-covered losses. Twin City does not dispute, however, that
allocation is one of the Policy’s exclusions. In fact, allocation is one of the affirmative defenses Twin City pled and relied on in its summary
judgment motion.
–26–
Prophet’s appellate issues argue, among other things, that (i) Prophet established a Loss
(which includes the $5.04 million payment) relating to coverage under the Policy’s employment
practices liability terms sufficient to reach Twin City’s layer; (ii) Twin City failed to establish that
the IvI exclusion because the Wrongful Employment Practices exception negates the exclusion;
and (iii) Prophet conclusively negated one or more essential elements of Twin City’s affirmative
defenses. Thus, Prophet addressed not only Twin City’s grounds for summary judgment, but it
also the arguments offered to support those grounds. So, Malooly doesn’t apply here.11
f. The Dishonesty Exception
Twin City also relied on the dishonesty exclusion to deny coverage. Thus, it had the burden
to establish its applicability. See JAW The Pointe, 460 S.W.3d at 603. Prophet argues that Twin
City did not carry its burden regarding this defense. We agree.
The dishonesty exclusion applies to “any deliberately dishonest, fraudulent, or criminal act
or omission committed with the willful intent to deceive, or any personal profit or advantage gained
by any Insured to which they were not legally entitled.” (emphasis original). This exclusion
requires that the deliberately dishonest, fraudulent or criminal act or personal profit or advantage
be “established by final adjudication . . . adverse to the Insured in the underlying action.”
Twin City focuses on the phrase “personal profit or advantage gained by any insured to
which they were not legally entitled” to argue that the exclusion does not require that the profit or
advantage result from fraud or other illegal conduct. See Nat’l Union Fire Ins. Co. v. U.S. Bank,
N.A., No. 4:07-CV-1958, 2008 WL 2405974, at *5 (S.D. Tex. June 11, 2008), aff’d, 597 F.3d 298
(5th Cir. 2010) (profit or advantage need not result from fraud or illegal conduct but rather the
focus is whether the actor was “not legally entitled” to such profits or advantage). According to
11
Moreover, because Twin City did not include its argument that the $5.04 million payment was not a covered loss as a separate ground for
summary judgment, the rules did not require Prophet to raise an exception to Twin City’s motion. See McConnell v. Southside Indep. Sch. Dist.,
858 S.W.2d 337, 342 (Tex. 1993).
–27–
Twin City, Gatlin “arrogated the $5.04 million to himself when that money belonged to Stelling,”
and thus gained a personal profit or advantage to which he was not entitled.
Once again, we are asked to speculate about the nature of the award. The parties offer
competing theories as to what this award compensates. But the fact remains—there are no arbitral
findings or explanations for the $5.04 million award. Contrary to Twin City’s suggestion, the
award does not say that (i) Gatlin is to “return” anything to Stelling, (ii) Stelling was entitled to
something that Gatlin misappropriated, or (iii) Gatlin received anything of value. It simply orders
Stelling to pay Gatlin $5.04 million.
More importantly, regardless of whether the conduct is labeled fraud or dishonesty or a
personal profit or advantage, the exclusion requires that a final adjudication establish one of these
enumerated types of conduct. This term requires a specific judgment or similarly express
adjudication that the excluded conduct was the actual cause of damages. See Pendergest-Holt v.
Certain Underwriters at Lloyds of London, 600 F.3d 562, 573 (5th Cir. 2010). There is no such
adjudication here. Consequently, Twin City did not meet its burden to establish that the dishonesty
exclusion removed this Loss from coverage.12
g. The $5.245 million and $1.33 million attorneys’ fees payments
Twin City asserts that the IvI and dishonesty exclusions apply to the $5.245 million Gatlin
was ordered to reimburse Prophet for attorneys’ fees and the $1.33 million the arbitrators ordered
Gatlin to pay for Stelling’s attorneys’ fees and expenses.13 Specifically, it contends that the IvI
exclusion applies because the $5.245 million was a judgment amount that one insured had to pay
12
Likewise, for the same reasons, neither exclusion N (3) (Loss does not include matters deemed uninsurable by an adjudicative body) nor
exclusion N (6) (Loss does not include disgorgement of personal property an insured is not entitled to receive as established by final adjudication)
remove this Loss from coverage.
13
Regarding the $5.245 million, the arbitration award required Gatlin to reimburse Prophet $4,272,432.74 for attorneys’ fees and expenses
incurred in the arbitration and up to $1,193,915.30 for any additional attorneys’ fees and expenses. The final amount of such fees and expenses
was $5,245,373.99, of which Gatlin paid Prophet $1,563,838.85 and HCC paid Prophet $3,681,535.14.
–28–
to another and the dishonesty exclusion applies because the amount was a personal advantage
Gatlin gained at Prophet’s expense.14
But Twin City ignores the Policy text stating that Loss includes Defense Costs. And
Defense Costs include “legal fees and expenses . . . incurred by the Insured” and the Policy
requires payment of Loss “on behalf of any Insured.” Thus, the Policy required indemnity for
not only Gatlin’s and Prophet’s liability to Stelling, but also for their legal fees and expenses
incurred in defending against that liability. See Anadarko, 573 S.W.3d at 193-96.
That one insured, Prophet, initially paid the fees and expenses and due to an arbitration
tribunal’s award was reimbursed by another, Gatlin, does not equate to a claim made by one
insured against another. Prophet did not sue Gatlin to recover its attorneys’ fees. Rather, to the
extent that these sums represent sums paid to outside counsel or vendors in connection with
defending against the Stelling dispute, they are Defenses Costs, and the IvI exclusion does not
apply. See part II(C)(4) above.
And we have already held that none of the specified conduct in the dishonesty exclusion
was established by final adjudication.
Therefore, Twin City did not meet its burden to show that the dishonesty or IvI exclusions
remove the attorneys’ fees and expenses from coverage.
h. Allocation
i. Introduction
According to Twin City, allocation between covered and non-covered Losses is required
at each policy layer to determine whether that policy’s layer has been exhausted. Twin City further
14
Twin City also argues that the wrongful employment practices exception does not bring the $5.245 million back into coverage because
Prophet cannot bring a claim for or be harmed by a wrongful employment practice because such a claim can only be brought by an insured person
and Prophet is an insured organization. Twin City’s argument is premised on the fact that Stelling asserted claims derivatively on behalf of Prophet.
The record reflects, however, that although Stelling asserted claims individually and derivatively, he did not seek any damages or attorneys’ fees
on Prophet’s behalf. Likewise, Stelling’s arbitration summary seeks only damages for himself.
–29–
argues that Prophet failed to prove Loss exceeding $10 million because (i) the IvI exclusion applies
to the entire Stelling dispute; (ii) there was no recovery for Wrongful Employment Practices;
(iii) the HCC and Great American settlements were not payments for covered Losses; and (iv)
Prophet failed to segregate Defense Costs.
Prophet responds that allocation is required only under the Twin City policy, and it proved
$14,173,382.51 in covered Losses, which exceeds the $10 million threshold triggering Twin City’s
duty to indemnify.
We covered points (i) and (ii) in parts II(C)(3) and II(C)(5), respectively and need not
address them again.
ii. Analysis
The Policy’s Loss definition underlies this dispute. After defining what a Loss includes,
the Policy lists several items that are not a Loss, including a catch-all phrase that “Loss shall not
include any amount allocable to uncovered Loss under this Policy.”
A Policy endorsement more specifically addresses allocation, not by defining it, but by
addressing what the insurer and Insured should do if there are both covered and uncovered Losses.
If an Insured incurs both Loss covered under the Policy and Loss that is not covered by the Policy,
the Insured and the insurer “shall use all reasonable efforts to agree upon a fair and proper
allocation of such amount between covered Loss and uncovered loss.” If there is an agreement on
Defense Costs, the Insurer is to advance such costs allocated to covered loss on a quarterly basis.
The Policy further provides:
If there can be no agreement on an allocation of Loss:
A. No presumption as to allocation shall exist in any arbitration, mediation,
suit, or other proceeding;
B. The Insurer shall advance Defense Costs which the Insurer believes to be
covered under the Policy until a different allocation is negotiated, arbitrated,
mediated, or judicially determined; and
–30–
C. The Insurer, if requested by an Insured Person or the Insured organization,
shall submit such dispute to binding arbitration or mediation . . . .
Although the parties frame the argument in terms of who has the burden to “allocate”
between covered and uncovered Loss,15 stripped to its essence, the issue is a matter of coverage
and exclusions, both of which pertain to all layers of coverage. That is, Prophet had to prove any
coverage exclusion. Mid-Continent, 410 S.W.3d at 449. Then, the burden shifted to Twin City to
establish any coverage exclusion. JAW The Pointe, 460 S.W.3d at 603.
Other than distinguishing between covered and uncovered Losses, the Policy does not
specify how “allocation” is to be made. Prophet’s summary judgment evidence established that
Prophet sought reimbursement for covered Losses and specifically excluded those items that it did
not believe were covered. Those items included costs associated with satisfying the contractual
performance aspect of the arbitration award and $899,119.50 in written off Defense Costs.16 Thus,
Prophet met its obligation to distinguish between covered and uncovered Loss. The burden then
shifted to Twin City to demonstrate that some or all of the remaining asserted Losses were
excluded from coverage. TEX. INS. CODE § 542.002. Twin City argued only that a different
allocation was required but failed to raise a fact issue or establish such an allocation as a matter of
law as to what those other allocations were.
Next, we consider whether Prophet demonstrated that the underlying coverage layers were
exhausted so as to trigger Twin City’s duty to indemnify. Exhaustion of the underlying layers is
a condition precedent to an excess carrier’s duty to indemnify. St. Paul Mercury Ins. Co. v.
15
Ordinarily, when policy language is ambiguous, we construe it against the insurer and in favor of the insured, particularly when there are
exceptions or liability limitations. See Nat’l Union Fire Ins. Co. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex. 1991). We also strive to give
effect to all of the words and provisions in a policy so that none is rendered meaningless. RSUI Indem. Co. v. The Lynd Co., 466 S.W.3d 113, 118
(Tex. 2015). But the language here does not rise to the level of ambiguity.
16
Twin City also argues that Exclusion G (barring coverage for an Insured Organization’s liability under an express contract) makes
Prophet’s payment of $1,330,167.63 for Stelling’s attorneys’ fees and arbitration expenses an uncovered Loss because Stelling requested such fees
and expenses pursuant to the LP Agreement. Prophet responds that damages or costs requiring performance of contractual duties were allocated to
uncovered Loss, and it adduced summary judgment evidence to establish this assertion. As discussed above, Twin City did not prove that a different
allocation was required. Consequently, Twin City’s reliance on Exclusion G is misplaced.
–31–
Lexington Ins. Co., 78 F.3d 202, 209 (5th Cir. 1996) (“Texas law dictates that primary policies’
limits must be exhausted before excess insurers become liable.”). The Twin City policy comports
with this rule:
It is expressly agreed that liability for any Loss shall attach to the Underwriters
only after either: (i) the insurer(s) of the Primary Policy and Underlying Excess
Policy(ies) shall have paid the full amount of their respective liability for such Loss;
or (ii) the lnsured(s) shall have paid, in the applicable legal currency, any portion
of such Loss that, together with any payments by such insurer(s) above, equals the
limits of liability of the Underlying Insurance. The Underwriters shall then be
liable to pay additional amounts of Loss up to the Limit of Liability.
Twin City maintains that the HCC and Great American settlement payments do not exhaust
their layers because those payments were not for covered Losses, and in fact, HCC and Great
American steadfastly denied coverage (until they didn’t). Therefore, according to Twin City,
Prophet’s reliance on the paragraph in these settlement agreements stating that the HCC and Great
American policies “will be deemed to be exhausted” is misplaced. Prophet, however, responds
that it does not rely on those settlements to conclusively establish exhaustion, but that it is “some
evidence of exhaustion that precludes summary judgment for Twin City.”
Setting aside the gratuitous language in the HCC and Great American settlements (deeming
coverage exhausted), the summary judgment evidence shows a $14,173,382.51 covered Loss,
payment by HCC and the insureds under the HCC policy of $5,050,000., and payments by Great
American and the insureds under the Great American policy of $5,000,000. Thus, the evidence
shows that the $10 million underlying coverage threshold was met by payments for a Loss as
defined in the Policy. The exhaustion of these underlying coverage limits triggered Twin City’s
duty to indemnify for covered Losses.
Finally, we consider Twin City’s premise that Prophet failed to segregate between covered
and uncovered claims in connection with the $5.245 million attorneys’ fees payment and also
failed to distinguish which fees were incurred to pursue their affirmative claims against Stelling.
–32–
Failure to properly allocate was an affirmative defense on which Twin City had the burden
of proof.17 See TEX. INS. CODE § 554.002. But there is no summary judgment evidence showing
which, if any, of the Defense Costs were improper.18 Therefore, the trial court’s summary
judgment was in error to the extent it was based on this defense.
C. Second Issue: Did the trial court err by granting summary judgment against
Prophet’s non-coverage claims?
Did the trial court err by granting summary judgment on Prophet’s breach of confidentiality
agreement, bad faith, and insurance code violation claims? Yes, the trial court erred by granting
summary judgment on Prophet’s bad faith and insurance code claims because Twin City did not
expressly move for summary judgment regarding these claims. But, the trial court did not err by
granting summary judgment on Prophet’s confidentiality agreement claim, because Prophet
submitted no response to Twin City’s no evidence summary judgment motion attacking the
damages element of that claim.
Twin City’s motion cited Progressive County. Mutual Insurance. Co. v. Boyd, 177 S.W.3d
919 (Tex. 2005) for the premise that extracontractual recovery is conditioned on establishing
coverage and states:
Twin City, therefore, respectfully requests that the court enter judgment in Twin
City’s favor on Plaintiffs’ claims for breach of contract and their claims for
extracontractual relief.
Although Twin City included the foregoing request for judgment, it did not move for
traditional or no-evidence summary judgment on the extracontractual issues.19 Rule 166a(i)
“unconditionally requires a movant to specify the elements as to which there is no evidence.” Jose
17
Twin City pled allocation as an affirmative defense.
18
Prophet requested a continuance to allow additional, discovery, argument, and briefing in this issue, but the trial court denied the request.
19
In fact, Twin City’s response to Prophet’s summary judgment motion argues that a bad faith ruling would be premature.
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Fuentes Co. v. Alfaro, 418 S.W.3d 280, 286 (Tex. App.—Dallas 2013, pet. denied) (en banc).
Passing references will not suffice to raise no-evidence summary judgment grounds. Id.
Likewise, a traditional motion must clearly state the alleged grounds for judgment on a
specific cause of action. Id. Twin City’s motion did not meet either requirement. Therefore, the
trial court erred by granting summary judgment on Prophet’s bad faith and insurance code
violation claims.20
The breach of confidentiality agreement claim, however, is different. A footnote in Twin
City’s motion says:
Twin City is also due summary judgment on Plaintiffs’ claim for breach of
confidentiality agreement. Damages are an essential element of a claim for breach
of contract . . . Plaintiffs however, have no damages resulting from this alleged
breach.
Prophet argues that Twin City’s motion addresses only compensatory damages and does
not include nominal damages or equitable relief such a specific performance. A plaintiff may be
entitled to nominal damages for a contract breach, see Fisher v. Westinghouse Credit Corp., 760
S.W.2d 802, 808 (Tex. App.—Dallas 1988, no writ), or in certain circumstances, to specific
performance, see Stafford v. S. Vanity Magazine, Inc., 231 S.W.3d 530, 535–36 (Tex. App.—
Dallas 2007, pet. denied). But Prophet did not respond to this aspect of Twin City’s motion—
either by raising these points or by alleging the existence of a fact issue. Absent a timely response,
a trial court must grant a no-evidence summary judgment motion that meets the requirements of
rule 166a(i). Bouie v. Kirkland’s Stores, Inc., No. 05-12-00453-CV, 2013 WL 4033645, at *2
(Tex. App.—Dallas Aug. 8, 2013, no pet.) (mem. op.). Because there was no response to the
summary judgment motion concerning breach of the confidentiality agreement, the trial court did
not err by granting summary judgment on this ground.
20
In addition, to the extent the trial court’s judgment was based on the premise that the coverage issues determined Twin City’s liability
under the insurance code, it was erroneous. Contractual liability is not always a prerequisite for insurance code liability. USAA Tex. Lloyds Co. v.
Menchaca, 545 S.W.3d 479, 499–501 (Tex. 2018) (op. on reh’g).
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III. DISPOSITION
We affirm the trial court’s summary judgment in favor of Twin City on the breach of
confidentiality claim, reverse the trial court’s summary judgment in favor of Twin City and against
Prophet on all other claims and defenses, render judgment for Prophet for $4,123,382.51, and
remand to the trial court for further proceedings consistent with this opinion.
/Bill Whitehill/
BILL WHITEHILL
JUSTICE
170927F.P05
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S
Court of Appeals
Fifth District of Texas at Dallas
JUDGMENT
PROPHET EQUITY LP AND ROSS On Appeal from the 134th Judicial District
GATLIN, Appellants Court, Dallas County, Texas
Trial Court Cause No. DC-14-12313.
No. 05-17-00927-CV V. Opinion delivered by Justice Whitehill.
Justices Bridges and Brown participating.
TWIN CITY FIRE INSURANCE
COMPANY, Appellee
In accordance with this Court’s opinion of this date, the judgment of the trial court is
AFFIRMED in part and REVERSED in part. We AFFIRM that portion of the trial court's
summary judgment in favor of TWIN CITY FIRE INSURANCE COMPANY on the breach of
confidentiality claim. We REVERSE the trial court’s summary judgment in favor of TWIN
CITY FIRE INSURANCE COMPANY and against PROPHET EQUITY LP AND ROSS
GATLIN on all other claims and defenses, RENDER judgment for Prophet for $4,123,382.51,
and REMAND this cause to the trial court for further proceedings consistent with this opinion.
It is ORDERED that appellants PROPHET EQUITY LP AND ROSS GATLIN recover
their costs of this appeal from appellee TWIN CITY FIRE INSURANCE COMPANY.
Judgment entered August 19, 2019.
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