Hunton Insurance Recovery Blog

On August 19, 2019, a Texas appellate court reversed a trial court’s summary judgment in favor of an excess carrier, and ruled as a matter of law that an arbitration award in favor of a former officer was covered under the EPL component of a management liability policy.  In doing so, the court rejected the carrier’s reliance on an Insured v. Insured exclusion.  The court also looked to the policy’s definition of “Interrelated Wrongful Acts,” a concept typically relied on by carriers to deny or limit coverage, to sweep a variety of allegations within the scope of the policy’s EPL insuring agreement and an exception to the Insured v. Insured exclusion.

Prophet Equity LP v. Twin City Fire Insurance Co., from the court of appeals in Dallas, arose out of a dispute between two founders—Gatlin, the CEO, and Stelling, the COO—of a private equity fund and management company.  After Gatling removed Steeling as COO, Stelling made a demand on Gatlin and Prophet, and then instituted an arbitration asserting various causes of action, including derivative claims on behalf of Prophet, all “rooted in Stelling’s termination or its consequences.”  The arbitration panel ordered Gatlin and Prophet to pay $1.3 million for attorneys’ fees and costs; Gatlin to pay Stelling $5 million for unspecified reasons; and Gatlin to reimburse Prophet over $5 million for attorneys’ fees and other fees and expenses.

After the primary and first excess insurers paid amounts under their policies, Twin Cities, as the second excess insurer, denied coverage, and Gatlin and Prophet sued.  Following the trial court’s summary judgment for Twin Cities, the appellate court wrestled with a multitude of issues in reversing the trial court and ruling for Gatlin and Prophet as a matter of law.  The court rejected Twin City’s arguments that coverage for the entire award was excluded by the Insured v. Insured exclusion, holding instead that the policyholders had satisfied their burden of conclusively establishing that an exception for a claim for “wrongful employment practices” applied.  The court also rejected Twin City’s effort to avoid responsibility for some portion of the loss on the grounds that some of the claims in the arbitration arose out of a partnership or contractual relationship, rather than the employment relationship, or were asserted derivatively on behalf of Prophet.  In doing so, the court relied on the policy definition under which claims arising out of “interrelated wrongful acts” are deemed a single claim, and reasoned that all of Stelling’s claims, and the proceedings from beginning to end, arose out of a common set of facts.

Twin City’s defense based on a dishonesty/personal profit exclusion met a similar fate.  The exclusion required a final adjudication establishing deliberate dishonesty or personal profit.  While the arbitration was a final adjudication, the panel made no findings as to the reasons for the $5 million award against Gatlin, so the exclusion was not triggered.  And finally, the court rejected Twin City’s argument that policy’s allocation requirement had not been satisfied, ruling that Twin City failed to show that the claimed losses were excluded from coverage.

The Prophet Equity opinion provides helpful guidance for policyholders seeking coverage under D&O, EPL or management liability policies for claims asserting numerous theories, some of which might otherwise not be covered, but all of which arise out of a common nucleus of facts.