Gastar Exploration Ltd. v. U.S. Specialty Ins. Co.

• Citation: 412 S.W.3d 577
• Decision Date: 19 November 2013
• Docket Number: No. 14–12–00118–CV.,14–12–00118–CV.
• Parties: GASTAR EXPLORATION LTD., Appellant v. U.S. SPECIALTY INSURANCE CO. and Axis Insurance Co., Appellees.
• Court: Court of Appeals of Texas

412 S.W.3d 577

GASTAR EXPLORATION LTD., Appellant

v.U.S. SPECIALTY INSURANCE CO. and Axis Insurance Co., Appellees.

No. 14–12–00118–CV.

Court of Appeals of Texas,

Houston (14th Dist.).

July 16, 2013.

Rehearing En Banc Overruled Nov. 19, 2013.

Michael T. Skoglund, Chicago, IL, Nancy Randolph Kornegay, Houston, Reagan W. Simpson, Austin, for Appellant.

John W. Duchelle, Washington, DC, Joseph Love, Howard L. Close, Gene F. Creely, Henry S. Platts Jr., Houston, Ommid Farashahi, Chicago, IL, for Appellees.

Panel consists of Chief Justice HEDGES and Justices BROWN and BUSBY.

OPINION

J. BRETT BUSBY, Justice.

This case involves a dispute over insurance coverage for seven different lawsuits, which the parties label the Seven Gastar Suits. Appellant Gastar Exploration Ltd. was the named insured under two directors' and officers' liability insurance policies, one providing primary coverage and the other providing excess coverage. Appellee U.S. Specialty Insurance Company issued the primary policy, and appellee AXIS Insurance Company issued the excess policy. Appellees (collectively “the insurers”) each denied coverage for the Seven Gastar Suits, contending those suits were related to other litigation that was filed prior to the policy periods. Gastar then filed this suit. The insurers each moved for summary judgment, which the trial court granted. Because there is an ambiguity in the policies that must be resolved in Gastar's favor, we reverse and remand.

Background

A. The insurance policies

U.S. Specialty issued a primary directors' and officers' liability insurance policy to Gastar for a “Policy Period” beginning November 1, 2008 and ending November 1, 2009. AXIS issued an excess directors' and officers' liability insurance policy to Gastar for the same period. The AXIS excess policy follows the form of U.S. Specialty's primary policy and as a result, there are no relevant differences between the two policies.¹

The two policies are claims-made insurance policies. As claims-made policies, the policies only apply to claims first made during the Policy Period: November 1, 2008 to November 1, 2009. The relevant policy provisions include:

INSURING AGREEMENTS

... (B) The Insurer will pay to or on behalf of the Company [Gastar] Loss arising from:

...

(2) Securities Claims first made during the Policy Period ... against the Company for Wrongful Acts.

DEFINITIONS

...

(B) Claim means:

(1) any written demand for monetary or non-monetary relief;

(2) any civil proceeding commenced by service of a complaint or similar pleading,

...

(L) Policy Period means the period [that begins at 12:01 a.m. on November 1, 2008 and ends at 12:01 a.m. on November 1, 2009], subject to prior termination or cancellation ....

...

EXCLUSIONS

Unless otherwise specifically stated or provided for in Condition (D)(2) or elsewhere in this Policy, the Insurer will not be liable to make any payment of Loss in connection with a Claim:

...

(I) [Replaced by Endorsement 10, which states]:

PRIOR & PENDING LITIGATION EXCLUSION

In consideration of the premium charged, it is hereby understood and agreed that EXCLUSIONS (I) is deleted and replaced with the following:

(1) arising out of, based upon or attributable to any pending or prior litigation as of 5/31/2000, or alleging or derived from the same or essentially the same facts or circumstances as alleged in such pending or prior litigation.

All other terms, conditions and limitations of this Policy will remain unchanged, including but not limited to the maximum aggregate Limit of Liability set forth in ITEM 3 of the Declarations.

...

CONDITIONS

...

(C) Interrelationship of Claims

All Claims, alleging, arising out of, based upon or attributable to the same facts, circumstances, situations, transactions or events or to a series of related facts, circumstances, situations, transactions or events will be considered to be a single Claim and will be considered to have been made at the time the earliest such Claim was made.

...

(L) Titles and Headings

The titles and headings to the various paragraphs and sections in this Policy, including endorsements attached, are included solely for ease of reference and do not in any way limit or expand or otherwise affect the provisions of such paragraphs and sections to which they relate.

...

B. The claims against Gastar

In 2006, Gastar was first named as a defendant in one of the numerous lawsuits arising out of a fraudulent investment scheme that eventually became known as the Mare Lease Program. The plaintiffs in these lawsuits alleged they were defrauded in a scheme involving investment in thoroughbred breeding mare leases. Generally, the plaintiffs alleged the investment scheme: (1) offered tax-advantaged leases of thoroughbred mares; (2) promised attractive, even guaranteed, rates of return; (3) purported to give the investors the right to convert the mare leases into other investments and securities, including Gastar stock; (4) oversold the leases; (5) failed to adequately fund the thoroughbred operation and instead diverted the funds into financing Gastar's operations; and (6) refused to convert the mare leases upon demand as promised. According to the plaintiffs, the investment scheme was marketed and operated by GeoStar Corporation, ClassicStar, L.L.C., and their principals. In addition, the plaintiffs alleged that, at all relevant times, GeoStar was the majority owner of Gastar and that Gastar was controlled by GeoStar's principals.

While approximately thirty Mare Lease Suits were ultimately filed, Gastar was named as a defendant in ten. Three of the ten lawsuits were filed against Gastar prior to the Policy Period, and the first of those was filed in 2006 (“the Pre–Policy Suits”). It is undisputed that the remaining seven, the so-called “Seven Gastar Suits,” were filed during the Policy Period.

C. The coverage litigation below

Once it had been named as a defendant in the Seven Gastar Suits, Gastar submitted claims to the insurers. The insurers denied coverage pursuant to Condition C, the Interrelationship of Claims Provision found in the insurance policies. According to the insurers, the Interrelationship of Claims Provision deems the Seven Gastar Suits to have been filed before the Policy Period because they relate back to the Pre–Policy Suits.

Gastar then sued the insurers, alleging causes of action for breach of contract and violations of the Texas Insurance Code. After limited discovery, the insurers filed traditional motions for final summary judgment. The insurers asserted they were entitled to judgment as a matter of law on Gastar's causes of action because the Seven Gastar Suits were not made within the relevant policy period by virtue of Condition C, the Interrelationship of Claims Provision. The insurers argued Condition C deems all Claims that arise from the same facts, or from a series of related facts, to be a single claim made at the time of the earliest claim. The insurers went on to argue the Seven Gastar Suits arose from the same facts as the Pre–Policy Suits and thus were deemed to be made at that point in time, which is outside the relevant policy period.

In response, Gastar filed a traditional motion for partial summary judgment. In that motion, Gastar asserted two issues: (1) the Seven Gastar Suits state securities claims as defined by the insurance policies; and (2) the claims raised by the plaintiffs in the Seven Gastar Suits were first made during the Policy Period of the policies and Condition C does not preclude coverage.

Following an oral hearing, the trial court granted the insurers' summary judgment motions and denied Gastar's. This appeal followed.

Analysis

I. The parties' arguments on appeal

Gastar's first issue on appeal concerns whether Condition C, the Interrelationship of Claims Provision, applies to deny coverage for the Seven Gastar Suits filed during the Policy Period. More specifically, the question is whether the Seven Gastar Suits are sufficiently related to the Pre–Policy Suits that they are deemed to be a single Claim made prior to the Policy Period. We conclude that we need not resolve this issue because Condition C does not control for the reasons discussed below. Accordingly, we assume without deciding that the Seven Gastar Suits are related to one or more of the Pre–Policy Suits.

Gastar's fourth issue asks whether Endorsement 10 controls over Condition C, and Gastar's third issue concerns whether its interpretation of the policies is reasonable. We address these issues together. In Gastar's view, because the effect of Condition C is to limit or reduce the coverage initially provided by the Insuring Agreement, we must construe it as an exclusion. In addition, Gastar asserts we must narrowly construe any insurance policy provision, regardless of how it is labeled, that excludes or limits coverage. See Gilbert Tex. Constr., L.P. v. Underwriters at Lloyd's London, 327 S.W.3d 118, 124 (Tex.2010). Finally, Gastar contends Condition C is ambiguous or outright conflicts with Endorsement 10. Therefore, it argues, Endorsement 10 controls over the original policy provisions, and we are required to adopt Gastar's reasonable interpretation of the policy in favor of coverage.

In response, the insurers contend Condition C—the Interrelationship of Claims Provision—is a condition, not an exclusion. In support of this contention, the insurers suggest the effect of Condition C is not to limit or exclude coverage, but to “aggregate related claims and place them in the proper policy period.” In other words, Condition C defines which Claims fall within the claims-made policy's affirmative grant of coverage.

II. Standard and scope of review

We address these arguments using the traditional summary judgment standard of review, under which a movant has the burden to show at the trial court level that there are no genuine issues of material fact and it is entitled to judgment as a matter of law. KPMG Peat Marwick v. Harrison Cnty. Hous....