No Coverage for Wrongful Acts Alleged in Lawsuit Received Prior to Policy Period

Applying Texas law, the United States District Court for the Western District of Texas has held that a claims-made policy did not provide coverage for an underlying suit where the allegations in that lawsuit were based on the same wrongful acts as a lawsuit received by the insured prior to the policy period.  Turner v. Cincinnati Ins. Co., 2021 WL 3578620 (W.D. Tex. Aug. 13, 2021). The court also held that the third-party plaintiffs that obtained a default judgment against the insured had standing to sue the insurer where the policy’s no-action clause did not require an adversarial judgment.

The insured operated several trade schools in Texas.  Before the policy period, former students of the insured’s Dallas campus filed suit, alleging that the insured misrepresented the quality of its programs, used misleading sales techniques, and lacked adequate facilities and qualified instructors.  During the policy period, former students of the insured’s Waco campus sued the insured, alleging essentially the same conduct as the prior suit.  The insurer denied coverage for the action brought by the former Waco campus students on the grounds that it was related to the Dallas campus students’ lawsuit, which was first made prior to the inception of the policy.  After the trade school operator filed for bankruptcy, the Waco plaintiffs obtained a default judgment against the bankruptcy estate and sued the insurer to recover policy proceeds based on the default judgment.

In the subsequent coverage action, the plaintiffs argued that the lawsuits were not related because they involved different plaintiffs, cities, and schools.  The court disagreed, finding the allegations “virtually identical” and holding that the lawsuits were “based on at least one common ‘wrongful act’ or ‘interrelated wrongful acts,’” such that they constituted a single claim under the policy.  Because the two lawsuits were related, the court concluded that the Waco plaintiffs’ lawsuit was not a claim first made during the policy period and not covered under the policy. 

Before reaching its coverage determination, the court first considered whether the plaintiffs had standing to sue the insurer in the absence of an adversarial judgment against the insured.  The court held that the state’s “no direct action rule” generally barred third-party plaintiffs from suing the defendant’s insurer when the underlying plaintiffs did not have a judgment or agreement establishing liability; however, if the third-party plaintiff obtained a judgment, as the plaintiffs did here, the policy’s no-action clause addressed the type of judgement that affords a third-party plaintiff standing.  The policy did not require a judgment resulting from an actual trial, but rather provided that the plaintiff must have obtained “an adjudication against” the insured before it could bring a direct action against the insurer.  Accordingly, the court held that the default judgment afforded the plaintiffs standing to sue the insurer.  Nonetheless, as indicated above, the court determined the claim was not covered because it was not first made during the policy period.

Wiley Executive Summary

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