The Texas Supreme Court has granted in part a petition for writ of mandamus in a massive securities fraud case involving an energy company accused of paying bribes to the Angolan government in exchange for offshore drilling concessions, an international investment brokerage house that backed the company, and the company’s dozen or so insurance carriers. As we reported, SCOTX previously issued an emergency stay of trial in the case last March.

In re Illinois National Insurance Company (No. 22-0872) originated in a securities fraud class action brought by GAMCO as class representative against Cobalt International Energy Inc. and its directors and officers. The class action plaintiffs alleged that Cobalt had made substantial payments to the Angolan government through a partnership with three Angolan oil companies. In return, the Angolan government gave Cobalt rights to conduct offshore exploration and production. GAMCO offered to settle the litigation for $175 million, which Cobalt refused. Cobalt subsequently declared bankruptcy, leading to a nonrecourse settlement agreement with GAMCO relieving Cobalt and its directors and officers of all obligations in the securities fraud litigation. Instead, GAMCO agreed to seek recovery solely from the proceeds of Cobalt’s insurance policies. The settlement amount went up to $220 million, which was fine with Cobalt since the agreement didn’t obligate it pay anything. In fact, the agreement gave Cobalt a partial interest in any recovery from the insurers in an amount of more than $28 million. The bankruptcy court approved, but neither it nor the federal district court expressly validated GAMCO’s plan to sue the insurers or any opinion on the coverage issues.

GAMCO sued the insurers in a declaratory judgment action in a Harris County district court. In a series of head-scratching rulings, the trial court denied the insurers’ motion for summary judgment on the basis that GAMCO lacked standing to bring a direct action the insurers. It likewise denied the insurers’ summary judgment motion arguing that Cobalt suffered no loss because the settlement agreement not only let them off the hook but promised them a share of the proceeds should GAMCO succeed. To cap off this flurry of rulings, the trial court approved GAMCO’s motion allowing the settlement agreement into evidence and barring the insurers’ from attacking the agreement at trial, apparently ignoring a contrary SCOTX ruling in Great Am. Ins. Co. v. Hamel, 525 S.W.3d 655 (Tex. 2017). The insurers unsuccessfully sought mandamus from the Houston [14th] Court of Appeals. The insurers sought mandamus relief from SCOTX.

In an opinion by Justice Boyd, SCOTX granted mandamus relief in part. This case raised multiple issues, to wit: (1) does GAMCO have standing to pursue an action against the insurers despite Texas law’s “no direct action” rule; (2) do Cobalt’s directors and officers (or GAMCO under the nonrecourse settlement agreement) have standing to assert an indemnity claim against the insurers when they have not and will not ever suffer a “loss” as defined by the policy; and (3) is the settlement agreement, which was concluded without a fully adversarial proceeding, binding on the insurers and admissible as evidence of Cobalt’s liability or damages in the underlying securities litigation? The upshot is that, unless mandamus is granted, the insurers face being dragged through a trial in a nine-figure case when the key issues have already been decided against them despite what appears to be well-settled law in their favor.

The Court addressed the first two issues, the “no direct action” rule and the question of “loss,” as part of the same inquiry: “whether, in light of the settlement agreement and judgments that incorporate it, Cobalt is ‘financially liable’ in the sense that it is ‘legally obligated to pay damages’ to GAMCO.” As noted above, the insurers argue that Colbalt is not liable for anything because in the settlement agreement Cobalt denied liability and is not obligated to pay. The Court rejected this argument. First, just because Cobalt denied liability in the settlement agreement does not mean that it is not legally obligated to pay (citing In re Farmers Tex. Cnty. Mut. Ins. Co., 621 S.W.3d 261 (Tex. 2021)). Second, just because the settlement agreement does not obligate Cobalt to pay “out of its own pocket” does not “relieve[] Cobalt of any ‘legal obligation to pay’ under the settlement agreement. The policies at issue are assets of Cobalt” (citing Great Am. Ins. Co. v. Hamel, 525 S.W.3d 665, 667 (Tex. 2017)). They are also liability policies, not indemnity policies, so they cover (up to policy limits) the insured’s legal obligations (rather than reimbursing the insured for what it has already paid). Furthermore, GAMCO’s covenant not to collect the judgment from Cobalt but only from the insurers “does not relieve the insurer of liability for paying that judgment within policy limits.” The Court thus concluded that Cobalt was legally obligated to pay GAMCO “both the previously recovered insurance benefits and any benefits it recovers from the Insurers through the coverage litigation.” Consequently, the Court held, Cobalt “suffered a ‘loss’ under the policies and the no-direct-action rule does not prevent GAMCO from suing the Insurers directly” (citations omitted).

The Court, however, held for the insurers on the third issue: whether the settlement agreement was binding against them and “admissible in the coverage litigation to establish coverage and the amount of Cobalt’s loss.” The problem here, the Court explained, was that the settlement between Cobalt and GAMCO “did not result from a ‘fully adversarial trial.’” Citing Hamel for the proposition that the insured must have a “meaningful incentive to ensure that the judgment or settlement accurately reflects the plaintiff’s damages and thus the defendant-insured’s covered liability loss,” the Court concluded that Cobalt had no such incentive because the settlement agreement took Cobalt (and its non-insurance assets) off the hook from enforcement of a judgment. In fact, as the Court pointed out, “[t]he setltement amount of $220 million was directly and explicitly tied to the value of the insurance policies, not to any loss GAMCO may have suffered.” The trial court thus clearly abused its discretion when it “rejected the Insurer’s defense that the settlement agreement is not binding or admissible to establish coverage or the amount of Cobalt’s loss.” Finding that the insurers had no adequate remedy by appeal (because a trial based on the trial court’s ruling would be a “complete waste” of time), the Court conditionally granted mandamus.

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