A Texas intermediate appellate court has ruled that an insured v. insured exclusion in an E&O policy did not bar coverage for a claim made by an insured condominium association’s assignee against its former treasurer.  Primo v. Great Am. Ins. Co., 2014 WL 7237330 (Tex. Ct. App. Dec. 18, 2014).

A dispute arose between a condominium association and an individual who was serving as a director and treasurer regarding checks the individual had written to himself and his family members.  The association’s board of directors filed a claim on a fidelity bond, which the bonding company paid in exchange for an assignment of all rights the association had against the individual.  The bonding company subsequently sued the individual, who sought coverage under the association’s E&O policy.  After a number of different claims were made, a dispute arose between the E&O insurer and the individual as to whether there was coverage for the bonding company’s claims against him.  In relevant part, the E&O policy contained an insured v. insured exclusion, which barred coverage for a claim made “by, or for the benefit of, or at the behest of [the association] … or any person or entity which succeeds to the interest of [the association].”

The court held that the exclusion did not apply.  In doing so, the court first distinguished between assignees and successors, and it noted that the bonding company in this case was not a successor because it had not assumed the association’s obligations (despite assuming its claims and rights).  In addition, the court noted that while many authorities supported the notion that claims by assignees were encompassed by a typical insured v. insured exclusion for claims made against one insured by or on behalf of another insured, the language in the exclusion at issue included a second prong barring coverage for a claim made by “any person or entity which succeeds to the interest” of the insured, which the court found would have been unnecessary if the first prong of the exclusion was construed broadly.  As a result, the court held that the first prong of the exclusion did not include claims by assignees.  Finally, the court noted that many of the arguments advanced by the insurer—including that the bonding company pled standing through subrogation and that the bonding company’s claims were the “equivalent” of claims excluded by the insured v. insured exclusion—were not raised in the insurer’s summary judgment motion and thus were not properly before the court on appeal.