The Texas Supreme Court Finds a Settlement Agreement Between an Insured and Its Claimants Not Admissible or Binding in Coverage Litigation Against the Insurers

By Ramy P. Elmasri and Erin K. Rutherford

In In re Ill. Nat’l Ins. Co., the Supreme Court of Texas issued a writ of mandamus ordering the trial court to vacate its orders because the Court found that a settlement agreement between Cobalt and GAMCO was not admissible and binding to establish coverage under the policies and the amount of any covered loss. Federal courts appointed GAMCO as lead plaintiff against Cobalt International Energy for claims of over $1.6 billion in losses. Cobalt’s insurers denied coverage and defense costs of those claims. Cobalt self-funded $25.5 million over four years of litigation before the parties ultimately executed a settlement agreement without the insurers’ consent, even though the agreement necessitated payment from Cobalt’s insurers for a “settlement amount” of $220 million. Both the federal court overseeing the claims against Cobalt and the bankruptcy court handling Cobalt’s filing for bankruptcy approved the settlement agreement. Cobalt and GAMCO then filed suit against Cobalt’s insurers for coverage under the policies.

The Court applied the no-direct-action rule to determine that GAMCO had standing to sue the insurers directly for coverage under the agreement. The Court agreed with the trial court that Cobalt suffered a “loss” under the policies because the settlement agreement establishes that Cobalt has a legal obligation to pay and is “in fact liable” to GAMCO for any recoverable insurance benefits. However, the Court disagreed with the trial court’s holding that the settlement agreement is admissible in the suit and binding against the insurers because the agreement did not result from a “fully adversarial trial.” The Court reasoned that because the settlement agreement required that Cobalt pay only the insurance benefits it may or may not receive in the litigation against the insurers and GAMCO would then release all claims against Cobalt, Cobalt lacked a meaningful incentive to defend itself in the litigation against the insured. Accordingly, the Court concluded that the trial against the insurers as ordered by the trial court’s holdings would be a waste of judicial resources and thus granted the insurers mandamus relief.

The case is In re Ill. Nat’l Ins. Co., No. 22-0872, 2024 Tex. LEXIS 158, (Tex. February 23, 2024).