Prophet Equity LP v. Twin City Fire Ins. Co.
Dallas Court of Appeals, No. 05-17-00927-CV (August 19, 2019)
Justices Bridges, Brown, and Whitehill (Opinion linked here)
A majority partner wrongfully fired his partner, and paid the judgment entered against him. After the first $10 million of insurance coverage was exhausted, he sued an excess insurer for another $4 million. Reversing the trial court, the Dallas Court of Appeals held the excess insurer must pay the balance of the judgment and additional attorney’s fees, summing up its decision in a nifty flow chart:

Ross Gatlin and George Stelling formed the “Prophet entities” as partners in 2008, with Gatlin holding 70% and Stelling holding 30% interests. In 2011, Gatlin removed Stelling from his management positions. Stelling claimed wrongful termination and defamation, demanding $57.5 million compensation. After a failed mediation, the claims were submitted to arbitration. Stelling repeated his damages demand and added several causes of action against both Gatlin and Prophet, including derivative claims against Gatlin on behalf of the partnership. The arbitrators entered an award in Stelling’s favor, which a district court confirmed. The judgment granted Stelling monetary relief totaling just over $7.7 million. Gatlin and Prophet paid the judgment and sought to recover the loss from Prophet’s insurers.

Prophet had purchased employment-practices liability insurance to cover losses up to $15 million in three policies: an HCC primary policy with a $5 million limit, a Great American excess policy with another $5 million, and a Twin City second-level excess policy for the final $5 million. Gatlin was an individual insured under each of the policies. The policies did not require the insurers to defend the claim, but defense costs were included in covered losses. All three insurers initially denied coverage. In a series of mediations, HCC and Great American settled, leaving Twin City as the last insurer standing. Gatlin and Prophet sued Twin City for breach of contract and bad faith. They sought to recover approximately $4.1 million, calculated by adding their post-judgment attorney’s fees to the judgment and subtracting the amounts paid by HCC and Great American.

On cross-motions for summary judgment, the trial court granted judgment for Twin City. Prophet and Gatlin appealed. In a lengthy opinion, the Dallas Court of Appeals painstakingly reviewed the policy language, the record, and the parties’ arguments (which at one point it characterized as “ships passing in the night”). The relevant policy terms were contained in the HCC primary policy. The rules governing construction of insurance policies played an important role; on more than one issue, the insureds prevailed because they offered “at least one reasonable interpretation” of the relevant terms.

The court’s decision-making process followed the steps in the flow chart copied above.

Step 1: Twin City acknowledged that at least some of the damages were potentially covered losses, but argued recovery was barred by the “Insured v. Insured” (or “IvI”) exclusion because Gatlin and Stelling were both individual insureds under the policy.

Step 2: The court held the IvI exclusion was negated by a “Wrongful Employment Practices” exception that applied to all losses “in connection with” Stelling’s initial wrongful termination claim, including his subsequent derivative claims on the company’s behalf. This conclusion was based in part on the policy’s treatment of a “Claim” and any “Interrelated Wrongful Acts” as a single claim.

Step 3: Twin City argued that if the IvI exclusion did not bar coverage completely, other exclusions applied to portions of the loss and would bring the total recoverable loss below the $10 million threshold required to reach Twin City’s level. The court rejected each argument in turn. The “personal gain” or “dishonesty” exclusion failed for lack of a final adjudication on the alleged dishonest conduct. Attorney’s fees that Gatlin was ordered to repay the partnership were nonetheless recoverable defense costs. And allocation between covered and uncovered losses (including attorney’s fees) was an affirmative defense on which Twin City submitted no summary judgment evidence.

Finally, the court held the trial erred in granting summary judgment for Twin City on the insureds’ extracontractual claims under the Insurance Code and common law, on the grounds those claims were not encompassed by Twin City’s motion. The court therefore rendered a $4.1 million judgment for Prophet and Gatlin on their breach-of-contract claim and remanded for further proceedings on their extracontractual claims.