Court Opinion

ID: 9943726
Source: CourtListenerOpinion
Date Created: 2024-02-25 15:09:37.272855+00
Date Added: 2024-06-11T13:47:54.645399
License: Public Domain

Supreme Court of Texas
                            ══════════
                             No. 22-0872
                            ══════════

         In re Illinois National Insurance Company, et al.,
                                Relators

  ═══════════════════════════════════════
           On Petition for Writ of Mandamus
  ═══════════════════════════════════════

                      Argued October 24, 2023

      JUSTICE BOYD delivered the opinion of the Court.

       Justice Lehrmann, Justice Huddle, and Justice Young did not
participate in the decision.

      Liability insurance covers “damage the insured does to others.”
Members Mut. Ins. Co. v. Hermann Hosp., 664 S.W.2d 325, 327 (Tex.
1984). When a person who has purchased liability insurance causes
harm to another person, the insurance company must indemnify the
insured person for any liability to the injured person within the
insurance policy’s coverage and limits. See Pharr-San Juan-Alamo
Indep. Sch. Dist. v. Tex. Pol. Subdivisions Prop./Cas. Joint Self Ins.
Fund, 642 S.W.3d 466, 471 (Tex. 2022). This mandamus action raises
three issues regarding liability policies that often arise when the insured
settles with the injured party—the underlying “claimant”—without the
insurer’s participation or consent. First, if the settlement agreement
does not require the insured to pay money and instead limits the
claimant’s recovery to any liability coverage available under the
insurance policy, has the insured suffered a “loss” the policy covers?
Second, can the claimant assert claims directly against the insurance
company to recover the insurance benefits? And third, if the insured has
suffered a loss, is the settlement agreement binding against the insurer
or admissible as evidence to establish coverage or the amount of the loss?
        We have addressed each of these issues previously in several
cases, but this case requires us to provide additional clarification as we
apply our prior holdings to these unique facts. Under these facts, we
conclude (1) the insureds suffered a “loss” under the policies, (2) the
claimants can assert claims directly against the insurers, and (3) the
settlement is not binding or admissible in the coverage litigation.
Because the trial court abused its discretion by holding otherwise on the
third issue, we conditionally grant the requested mandamus relief in
part.
                                 I.
                             Background
        In 2009, Cobalt International Energy partnered with three
Angolan companies to explore and produce oil and gas off the coast of
West Africa. A few years later, the federal Securities and Exchange
Commission (SEC) announced          it was investigating Cobalt        for
facilitating illegal payments to Angolan government officials. Around
the same time, allegations arose         that Cobalt     had materially
misrepresented the oil content of two of its exploratory wells. Publicity
over these developments caused Cobalt’s stock price to plummet, which

                                    2
led Cobalt’s investors to assert federal securities-fraud claims against
Cobalt and its officers and directors. 1 The federal courts consolidated the
claims and appointed GAMCO—a collection of investment funds that
held Cobalt shares2—as lead plaintiff representing a class of 8,800
investors claiming over $1.6 billion in losses.
       Before these events occurred, Cobalt purchased multiple levels or
“towers” of liability insurance from numerous insurance companies. 3
Cobalt gave the Insurers notice of the SEC investigation and the well
allegations before and when the shareholders filed suit, but the Insurers
denied coverage, primarily asserting that Cobalt’s notice was untimely
and that certain policy provisions excluded the claims from coverage.
The policies did not require the Insurers to provide Cobalt a defense
against GAMCO’s claims, but they did require the Insurers to advance
defense costs “for which” the policies “provide coverage.” Because the
Insurers denied that their policies provided coverage, they refused to

       1 We will refer to Cobalt and its officers anddirectors collectively as
“Cobalt” except when necessary to distinguish between them.
       2 We use GAMCO to refer to GAMCO Global Gold, Natural Resources

& Income Trust and GAMCO Natural Resources, Gold & Income Trust.
       3 Among the insurers are the twelve Real Parties in Interest, which we

refer to as the Insurers: Allied World National Assurance Company; Beazley
Insurance Company, Incorporated; Endurance American Insurance Company;
Federal Insurance Company; Freedom Specialty Insurance Company; Hudson
Insurance Company; Illinois National Insurance Company; Pinnacle National
Insurance Company FKA Alterra America Insurance Company; RSUI
Indemnity Company; Starr Indemnity & Liability Company; Swiss Re
Corporate Solutions America Insurance Corporation FKA North American
Specialty Insurance Company; and Westchester Fire Insurance Company.
Some of Cobalt’s insurers settled with Cobalt before this mandamus
proceeding and are not parties in this Court.

                                      3
advance Cobalt’s defense costs. Cobalt self-funded its defense and filed
suit against the Insurers to recover those costs. Cobalt’s officers and
directors later intervened in that suit as plaintiffs, asserting the policies
protected them as “insured persons.”
       In 2017, Cobalt filed for bankruptcy. GAMCO acknowledged that,
as unsecured creditors, the securities class it represented was unlikely
to recover anything from Cobalt’s bankruptcy estate. Meanwhile,
Cobalt’s assets were depleted, its officers and directors were facing
enormous personal liabilities, and the Insurers were refusing to provide
coverage or pay for a defense. Both sides, in short, found reasons to begin
settlement negotiations. The parties initially engaged in a mediation at
which GAMCO demanded $175 million, but Cobalt was unable to accept
without the Insurers’ willingness to provide coverage to fund the
settlement. Negotiations continued, however, and Cobalt updated the
Insurers on the various offers and counters, but the Insurers continued
to decline to participate.
       After four years of extensive litigation for which Cobalt self-
funded $25.5 million in defense costs, Cobalt and GAMCO ultimately
executed a settlement agreement. The agreement recited a “Settlement
Amount” of $220 million, which the parties believed represented the
maximum amount of coverage potentially available under the Insurers’
policies. Cobalt accepted an “obligation to satisfy” the Settlement
Amount, but the parties agreed it would be “payable exclusively” from
any insurance recoveries. The parties agreed that GAMCO would
“pursue and prosecute on [Cobalt’s] behalf” all of Cobalt’s rights,

                                     4
interests, claims, and coverage under the Insurers’ policies, and that
they would “fully cooperate with each other” in that litigation.
      Cobalt had previously received $4.2 million from other liability
insurers, and it agreed to deposit those funds into an escrow account. If
the parties recovered any additional insurance benefits in the suit
against the Insurers, they agreed they would immediately deposit those
recoveries into the escrow account after paying certain amounts to the
bankruptcy plan administrator. When the suit against the Insurers was
finally resolved, Cobalt would receive up to $28.5 million of any
recovered benefits, to reimburse the $25.5 million it spent in defense
costs plus interest, and GAMCO would receive the rest on behalf of the
class of claimants.
      Although Cobalt agreed to allow GAMCO to control the coverage
litigation, it expressly did not assign its insurance policies or coverage
claims to GAMCO. Cobalt expressly disclaimed any representation or
warranty regarding the recovery of any insurance benefits, and GAMCO
expressly acknowledged that the Insurers denied coverage and agreed
on behalf of all the claimants to “proceed with this Settlement at their
own risk.” Nevertheless, GAMCO agreed to release all claims against
Cobalt and its officers and directors once the coverage litigation was
finished, covenanted not to pursue any claims against them, and agreed
to “look solely” to the Insurers and their policies to recover the $220
million Settlement Amount, regardless of whether any insurance
benefits were ever recovered.
      If Cobalt deposited the $4.2 million into the escrow account, fully
cooperated in the coverage litigation, and ensured that any insurance

                                    5
recoveries were paid into the escrow account and then disbursed as
agreed, GAMCO agreed to accept Cobalt’s performance under the
agreement in “full settlement” of its claims. Cobalt and its officers and
directors did not agree to pay any funds to GAMCO in exchange for the
settlement and release, other than funds recovered through the coverage
litigation. Upon final termination of the coverage litigation, GAMCO
agreed to execute a full and final “Settlement Release.” All parties
denied any fault or liability and agreed that the settlement would not
constitute an admission of wrongdoing by any party.
      The parties recognized that the bankruptcy court and the federal
court overseeing the securities class action would have to approve the
settlement, and they agreed to jointly seek that approval. If the courts
rejected the settlement, or if the agreement was otherwise terminated
under its terms, the parties agreed they would “revert to their respective
positions in the Action as of immediately prior to the execution of this
Settlement Agreement.” Both courts approved the settlement, however,
incorporating it into the federal court’s final judgment and into the
bankruptcy court’s reorganization plan. The bankruptcy plan preserved
GAMCO’s claims against Cobalt but expressly limited any recovery to
available insurance benefits.
      Although Cobalt notified the Insurers of the settlement
agreement and the subsequent court proceedings, the Insurers did not
appear, participate in, or lodge any objections to the settlement or to the
resulting federal-court judgment and bankruptcy plan.
      After the courts approved the settlement, GAMCO intervened in
the coverage suit Cobalt had previously filed against the Insurers,

                                    6
requesting a declaratory judgment that the Insurers are obligated to pay
the $220 million Settlement Amount. Cobalt and its officers and
directors likewise amended their pleadings to assert that the Insurers
breached their contractual obligations by refusing to fund the
Settlement Amount.
         The Insurers filed a series of jurisdictional pleas and summary-
judgment motions asserting (1) Cobalt and its officers and directors have
not suffered a covered “loss” under the policies, (2) GAMCO lacks
standing to sue the Insurers, and (3) alternatively, the settlement
agreement is not binding on the Insurers or admissible to establish
coverage or the amount of any covered loss. Cobalt and GAMCO
responded with cross-motions asserting the opposite position on each
point.
         The trial court agreed with Cobalt and GAMCO, denied the
Insurers’ motions, refused to dismiss GAMCO, and held that Cobalt’s
defense costs and the settlement amount constitute a “loss” under the
policies. The court further held that the settlement agreement is
admissible in the coverage litigation, not subject to collateral attack, and
may be relied on by the jury to establish the amount of Cobalt’s loss,
that the Insurers forfeited any defenses by denying coverage and
defense costs, and that the bankruptcy plan and federal-court judgment
approving the settlement were entitled to comity. The Insurers
unsuccessfully sought mandamus relief in the court of appeals, ___
S.W.3d ___, 2022 WL 4553342, at *1 (Tex. App.—Houston [14th Dist.]
2022), and then filed for the same relief in this Court.

                                     7
      Mandamus relief is an extraordinary remedy available only on a
showing that (1) the trial court clearly abused its discretion and (2) the
party seeking relief lacks an adequate remedy on appeal. See In re
Prudential Ins. Co. of Am., 148 S.W.3d 124, 135–36, 138 (Tex. 2004)
(orig. proceeding). We address both requirements, beginning with
whether the Insurers have established that the trial court clearly
abused its discretion.
                                 II.
                         Abuse of Discretion
      A trial court’s “error of law” or “erroneous application of law to
facts,” we have said, “is always an abuse of discretion.” In re Facebook,
Inc., 625 S.W.3d 80, 86 (Tex. 2021) (orig. proceeding). The Insurers
contend here that the trial court made such errors and thus abused its
discretion as to each of the three they raise. We address the trial court’s
legal conclusions on these issues de novo. See id.
A.    “Legal obligation to pay”
      In their first two issues, the Insurers contend the trial court
clearly abused its discretion by holding that Cobalt suffered a “loss” and
that GAMCO can sue the Insurers directly. Both of these arguments are
ultimately premised on the Insurers’ contention that, as a result of the
settlement agreement, Cobalt has no “legal obligation to pay” anything
to anyone. We agree that the resolution of both issues depends on the
validity of that contention.
      Specifically, on the question of whether Cobalt has suffered a loss,
all of the insurance policies at issue require the Insurers to “pay on
behalf of” Cobalt any “loss” Cobalt sustains during the coverage period
up to the policy limits, and they define “loss” to mean damages,

                                    8
judgments, settlements, defense costs, or other amounts for which
Cobalt is “financially liable” or “legally obligated to pay.” 4 To the extent
Cobalt is seeking to recover from the Insurers any amount for which
Cobalt is not “financially liable” or “legally obligated to pay,” the
Insurers simply have no duty to pay that amount as a matter of law. See
Rocor Int’l, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 77 S.W.3d
253, 261 (Tex. 2002) (explaining that an insurer is not “obligated to
indemnify its insured for a third-party claim on which the insured is not
liable”).
       Similarly, on the question of whether GAMCO can sue the
Insurers, Texas law prohibits an injured party from directly suing the
defendant’s insurer unless and until “it has been established, by
judgment or agreement, that the insured has a legal obligation to pay
damages to the injured party.” State Farm Cnty. Mut. Ins. Co. of Tex. v.
Ollis, 768 S.W.2d 722, 723 (Tex. 1989) (per curiam). 5 Under this “no-

       4 Some policies also provide that “loss” does not include an amount for

which the Insureds “are absolved from payment,” but the Insurers do not
contend that this means anything other than that they are not “financially
liable” or “legally obligated to pay” such amounts.
       5 We   originally announced this “no-direct-action rule” simply as the
application of liability-policy provisions that expressly prohibited a direct
action by a claimant unless the insured’s obligation to pay the claimant or the
amount of the insured’s loss was determined by a final judgment against the
insured or, in some policies, by a written agreement between the insured, the
claimant, and the insurance company. See Kuntz v. Spence, 67 S.W.2d 254, 255
(Tex. Comm’n App. 1934, holdings approved); cf. Great Am. Ins. Co. v. Murray,
437 S.W.2d 264, 265 (Tex. 1969) (orig. proceeding); Bluth v. Neeson, 94 S.W.2d
407, 408 (Tex. 1936); Seaton v. Pickens, 87 S.W.2d 709, 710 (Tex. [Comm’n Op.]
1935); Am. Indem. Co. v. Martin, 84 S.W.2d 697, 698 (Tex. [Comm’n Op.] 1935);
see also Ohio Cas. Ins. Co. v. Time Warner Ent. Co., L.P., 244 S.W.3d 885, 888–
89 (Tex. App.—Dallas 2008, pet. denied) (“The roots of the no-direct-action rule

                                       9
direct-action rule,” which prohibits declaratory-judgment claims as well
as claims for monetary relief, GAMCO’s claims against the Insurers
“must fail unless” the settlement agreement or judgments incorporating
it establish that Cobalt “is in fact liable” to GAMCO. Essex Ins. Co., 450
S.W.3d at 526.

seem to lie in the no-action clause commonly found in liability insurance
policies.”); Turner v. Cincinnati Ins. Co., 9 F.4th 300, 309 (5th Cir. 2021) (“The
no-direct-action rule arises in part from the frequent usage of no-action clauses
in insurance policies and the Texas courts’ willingness to enforce such
provisions.”). In a few early cases, we based the rule on statutory provisions
that imposed similar restrictions on particular types of insurance. See Moxon
v. Ray, 81 S.W.2d 488, 489 (Tex. [Comm’n Op.] 1935); Grasso v. Cannon Ball
Motor Freight Lines, 81 S.W.2d 482, 484–85 (Tex. [Comm’n Op.] 1935).

        We later adopted the rule as a common-law “general rule” based on
public-policy concerns, including the conflict of interest that arises when
insurers must defend both themselves and their insureds and the prejudice
that results when juries hear evidence of a defendant’s insurance coverage. See
In re Essex Ins. Co., 450 S.W.3d 524, 526–27 (Tex. 2014) (per curiam) (orig.
proceeding); see also Angus Chem. Co. v. IMC Fertilizer, Inc., 939 S.W.2d 138,
138 (Tex. 1997) (per curiam) (recognizing the “general rule”); Ohio Cas., 244
S.W.3d at 888–89 (explaining “public-policy basis for the rule”); Landmark Am.
Ins. Co. v. Eagle Supply & Mfg. L.P., 530 S.W.3d 761, 767 (Tex. App.—Eastland
2017, no pet.) (describing “public policy reasons” for the “general rule”); Turner,
9 F.4th at 309 (“Even beyond the inclusion of such language in contracts of
insurance, there also is a public-policy reason against allowing a third-party
plaintiff to sue an insured–defendant’s insurer before liability has been
established, as the lawsuit would create a conflict of interest for the insurer.”).
With regard to tort claims against an insured, we adopted formal procedural
rules in the 1940s, expressly prohibiting claimants from joining liability and
indemnity insurers as third parties unless the insurer “is by statute or contract
liable to the person injured or damaged.” TEX. R. CIV. P. 38(c), 51(b); see Aviles
v. Aguirre, 292 S.W.3d 648, 649 (Tex. 2009) (addressing Rules 38(c) and 51(b));
Penny v. Powell, 347 S.W.2d 601, 603 (Tex. 1961) (same); Langdeau v. Pittman,
337 S.W.2d 343, 355 (Tex. Civ. App.—Austin 1960, writ ref’d n.r.e.) (same);
Serv. Mut. Ins. Co. of Tex. v. Erskine, 169 S.W.2d 731, 734 (Tex. Civ. App.—
Waco 1943, no writ) (applying Rule 38(c)).

                                        10
       Thus, to resolve both of the Insureds’ first two issues—whether
Cobalt suffered a “loss” and whether GAMCO can sue the Insurers
directly—we must determine whether, in light of the settlement
agreement and the judgments that incorporate it, Cobalt is “financially
liable” in the sense that it is “legally obligated to pay damages” to
GAMCO.
       The Insurers contend that Cobalt is not “financially liable” or
“legally obligated to pay” GAMCO anything at all. They note that in the
settlement agreement, Cobalt denied any liability or wrongdoing and
GAMCO released Cobalt from any liability and covenanted not to pursue
any payment from Cobalt. GAMCO agreed to look solely to the insurance
for any recovery and absolved and forever discharged Cobalt of any
liability or payment obligation. In fact, instead of imposing a legal
obligation to pay, the agreement gave Cobalt the right to receive any
recovered insurance benefits up to $28.5 million to recover its defense
costs. The federal-court judgment and bankruptcy plan, meanwhile,
merely incorporated those settlement terms. As a result, the Insurers
contend, Cobalt has no financial liability or obligation to pay and thus
has no “loss,” and GAMCO cannot sue the Insurers directly.
       In response, Cobalt and GAMCO contend Cobalt was legally
obligated to pay the $4.2 million in insurance benefits it had previously
received and remains legally obligated to pay any additional benefits it
receives as a result of the coverage litigation against the Insurers. In
addition, Cobalt is legally obligated to fully cooperate in the litigation to

                                     11
recover those benefits, at its own expense, 6 and GAMCO’s claims against
Cobalt are not released until that litigation is terminated.
       Whether an insurer has a duty to indemnify its insured depends
on the “facts actually established in the underlying suit.” Burlington N.
& Santa Fe Ry. Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 334
S.W.3d 217, 219 (Tex. 2011). 7 But as we recently reaffirmed, whether
the insured has a legal obligation to pay an injured party may be
established through a settlement of the underlying suit. See In re
Farmers Tex. Cnty. Mut. Ins. Co., 621 S.W.3d 261, 270–71 (Tex. 2021)
(orig. proceeding) (“Texas courts recognize that an insured can become
legally responsible due to a settlement.”). 8 Whether it is so established,

       6 Cobalt also contends, and the Insurers   appear to agree, that Cobalt
sustained a “loss” by self-funding its defense against GAMCO’s claim. The
Insurers do not concede that the policies cover that loss and observe that this
relatively small $25.5 million claim (compared to the $220 million) exists only
against one of the many Insurers and requires a “much simpler trial” to
resolve. We note that although the defense costs constitute a “loss” for which
Cobalt may pursue a claim, they do not support GAMCO’s right to sue the
Insurers under the no-direct-action rule because Cobalt was not legally
obligated to pay the $25.5 million to GAMCO. See Ollis, 768 S.W.2d at 723. But
because we conclude that Cobalt is legally obligated to pay any and all
insurance recoveries to GAMCO, we need not resolve the case on that ground.
       7 See also D.R. Horton-Tex.,   Ltd. v. Markel Int’l Ins. Co., 300 S.W.3d
740, 744 (Tex. 2009) (“The insurer’s duty to indemnify depends on the facts
proven and whether the damages caused by the actions or omissions proven
are covered by the terms of the policy.”); Zurich Am. Ins. Co. v. Nokia, Inc., 268
S.W.3d 487, 490 (Tex. 2008) (“[T]he facts actually established in the underlying
suit determine whether the insurer must indemnify its insured.”).
       8 See also Comsys Info. Tech. Servs., Inc. v. Twin City Fire Ins. Co., 130

S.W.3d 181, 189 (Tex. App.—Houston [14th Dist.] 2003, pet. denied) (“A legal
obligation can also arise out of a contract, such as a settlement.”); Tex. Prop. &
Cas. Ins. Guar. Ass’n v. Boy Scouts of Am., 947 S.W.2d 682, 691 (Tex. App.—
Austin 1997, no pet.) (“A legal obligation can also arise out of a contract, such

                                       12
however, depends on the settlement terms. Id. The Insurers contend the
settlement agreement here did not impose a legal obligation to pay
because Cobalt expressly denied any liability, the agreement did not
obligate Cobalt to pay any of its own funds to GAMCO, GAMCO
covenanted not to enforce any obligation to pay under the settlement or
judgment, and GAMCO agreed to release Cobalt from all liability. We
are unconvinced.
       First, we do not agree that Cobalt’s denial of liability or
wrongdoing in the settlement agreement relieves it of any legal
obligation to pay. A settling insured need not admit to wrongdoing or
concede legal liability to accept a legal obligation to pay under a
settlement agreement. See Farmers Tex. Cnty. Mut., 621 S.W.3d at 271
n.6 (rejecting contention that a settlement creates a legal obligation
“only if the insured admits to facts that would establish fault in the
settlement agreement”). The “legal obligation to pay” on the claims
asserted in the underlying litigation is created by the insured’s
contractual agreement to pay those claims, regardless of whether the
insured admits to wrongdoing or liability. Tex. Prop. & Cas. Ins., 947
S.W.2d at 691 (holding insured’s statement in settlement agreement

as a settlement.”); HM Int’l, L.L.C. v. Twin City Fire Ins. Co., 13 F.4th 356, 360
(5th Cir. 2021) (“[U]nder Texas law, ‘legally liable to pay’ can mean a
contractual obligation to pay.”). As we explained in Farmers Texas County
Mutual, other policy provisions may, of course, “require the insurer’s consent
to the settlement for coverage to apply,” Farmers Tex. Cnty. Mut., 621 S.W.3d
at 271 n.4, and the policy may present “other legal grounds that may prevent
an insurer from being obligated to pay a settlement,” id. at 272. The Insurers
have not raised any such grounds in this case, however, so we address only the
question they have presented, whether Cobalt is legally obligated to pay as a
result of the settlement agreement and judgments incorporating it.

                                       13
“that it was not legally obligated to pay the . . . claim does not establish
that the . . . settlement was not a covered claim under the [insurance]
policy”).
       Nor do we agree that the lack of any obligation that Cobalt
actually pay funds from its own pockets relieves Cobalt of any “legal
obligation to pay” under the settlement agreement. The policies at issue
are assets that belong to Cobalt. See Great Am. Ins. Co. v. Hamel, 525
S.W.3d 655, 667 (Tex. 2017) (referring to liability policy as insured’s
“asset”); Hernandez v. Gulf Grp. Lloyds, 875 S.W.2d 691, 692 (Tex. 1994)
(same). And the policies are “pay on behalf of”—or “liability” policies—
as opposed to true “indemnity” policies. In an indemnity policy, the
insurer agrees only to reimburse the insured for amounts within the
policy limits that the insured has actually paid to fulfill a legal
obligation. Young Men’s Christian Ass’n of Metro. Fort Worth v. Com.
Standard Ins. Co., 552 S.W.2d 497, 504 (Tex. App.—Fort Worth 1977,
writ ref’d n.r.e.). 9 By contrast, in a liability policy the insurer agrees to
pay “on behalf of” the insured amounts within policy limits that the
insured is legally obligated to pay. Id. Under a liability or pay-on-behalf-
of policy, the insurer’s obligation to pay benefits arises when the insured
becomes legally obligated to pay the injured party, regardless of whether

       9 See also Yorkshire Ins. Co. v. Seger, 279 S.W.3d 755, 770–71, 770 n.22

(Tex. App.—Amarillo 2007, pet. denied) (“[A]n indemnity policy provides that
the insurer’s liability does not attach unless the judgment against the insured
has actually been paid.”); Conoco, Inc. v. Republic Ins. Co., 819 F.2d 120, 122
(5th Cir. 1987) (“In an indemnity contract, . . . the insurer agrees to reimburse
expenses to the insured that the insured is liable to pay and has paid.” (quoting
Cont’l Oil Co. v. Bonanza Corp., 677 F.2d 455, 459 (5th Cir. 1982))).

                                       14
the insured has actually paid. Id.10 The policies at issue here are liability
policies, requiring the Insurers to “pay on behalf of” Cobalt amounts
within the policy limits that Cobalt becomes legally obligated to pay,
regardless of whether Cobalt ever actually pays out of its own coffers
first.
         For the same reason, we reject the Insurers’ contention that
GAMCO’s covenant not to execute on the judgment or attempt to collect
any additional funds from Cobalt prevents Cobalt from having a legal
obligation to pay under the settlement agreement. Because the insured
under a liability policy is not required to pay the obligation before the
insurer is obligated to pay, a covenant not to execute on a judgment does
not relieve the insurer of liability for paying that judgment within the
policy limits. See Young Men’s Christian Ass’n, 552 S.W.2d at 505 (“A
covenant not to execute is certainly not a satisfaction, nor is it the same
as a release. Its legal effect is similar to a covenant not to sue, in that it
does not extinguish the plaintiff’s cause of action and does not operate

         10 Seealso Yorkshire, 279 S.W.3d at 771 n.22 (“[T]he insured is not
required to pay the obligation before the insurer is required to pay. If a
judgment is rendered against the insured, the insurer’s liability to pay attaches
at that time.”); Home Owners Mgmt. Enters., Inc. v. Mid-Continent Cas. Co.,
294 F. App’x 814, 817 (5th Cir. 2008) (“[U]nlike under an indemnity policy, [the
insured] did not have to pay the judgment in order to trigger [the insurer’s]
duty to indemnify.”); First Nat’l Bank of Louisville v. Lustig, 975 F.2d 1165,
1166–67 (5th Cir. 1992) (“[U]nder a liability policy a cause of action accrues
when liability attaches, whereas under an indemnification policy there is no
cause of action until the liability has been discharged, as by payment of the
judgment by the insured.” (quoting Quinlan v. Liberty Bank & Tr. Co., 575 So.
2d 336, 355 (La. 1990))); Conoco, 819 F.2d at 122 (“In a liability contract, the
insurer agrees to cover liability for damages. If the insured is liable, the
insurance company must pay the damages.” (quoting Cont’l Oil, 677 F.2d at
459)).

                                       15
to release other joint tortfeasors.” (quoting Rager v. Superior Coach
Sales & Serv. of Ariz., 516 P.2d 324, 327 (Ariz. 1973))). 11
       The fact that GAMCO agreed to release Cobalt from any liability,
however, requires a slightly more complicated analysis. In Ollis, an
older per curiam opinion, we held that a settlement agreement in which
the insured paid money to “buy peace” and obtain a release from the
injured party without agreeing to “pay damages” or admit liability did
not establish that the insured was “obligated to pay damages” or entitled
“to payment under the insurance policy.” 768 S.W.2d at 723. And in
Angus Chemical, another older per curiam decision, we stated that “a
release of the [insured] that precludes a final determination of liability
by agreement or judgment . . . precludes the [injured] party from suing
the    tortfeasor’s     insurer”     because     “the     release     precludes
the prerequisite determination of [the insured’s] liability.” 939 S.W.2d
at 138–39. Yet we also said in Angus Chemical that, even after the
injured party releases the insured, the insurer may still be obligated
under the policy. See id. (holding that a release against the insured does

       11 See also Horton v. State Dep’t of Ins. Receiver J. Robert Hunter, 905

S.W.2d 59, 63 (Tex. App.—Austin 1995, no writ) (“[T]he fact that [the insured]
will not have to pay any damages does not eradicate the insurer’s . . . duty to
pay.”); Ard v. Gemini Expl. Co., 894 S.W.2d 11, 15 (Tex. App.—Houston [14th
Dist.] 1994, pet. denied) (same); Brodhead v. Dodgin, 824 S.W.2d 616, 621 (Tex.
App.—Austin 1991, writ denied) (same); Whatley v. City of Dallas, 758 S.W.2d
301, 309 (Tex. App.—Dallas 1988, writ denied) (“As a rule, a claimant who
covenants not to enforce any judgment he might obtain against an insured
individually does not release the insurer who has wrongfully refused to defend
its insured from liability within policy limits.”); Yorkshire, 279 S.W.3d at 770–
71 (holding corporate insured’s dissolution and inability “to pay the damages
awarded in the underlying judgment does not affect [its] liability under the
judgment”).

                                       16
not preclude suit in jurisdictions that allow for direct actions against
insurers without a prior determination of the insured’s liability).
      We have further expounded on these issues, however, since our
opinions in Ollis and Angus Chemical. In D.R. Horton-Texas, for
example, we explained that when the injured party’s claims against the
insured are “resolved before a trial on the merits” pursuant to an
agreement that prevents an “opportunity to develop the evidence”
needed to “establish or refute an insurer’s duty to indemnify,” that issue
may be resolved in a subsequent coverage action against the insurer.
300 S.W.3d at 744. Despite the pretrial resolution of the underlying
liability action, the “insurer and the putative insured may introduce
evidence in coverage litigation to establish or refute the insurer’s duty
to indemnify.” Id. at 745.
      Most recently, we held in Farmers Texas County Mutual that
a settlement agreement in which the insured agreed to pay money to
“buy peace” while expressly denying any “liability” in exchange for the
injured party’s “release” of all claims “establishes that [the insured] was
‘legally responsible’ for damages.” 621 S.W.3d at 271. We thus agreed
that the insured could pursue her coverage claim against the insurer to
recover “amounts she was legally responsible to pay under the
settlement.” Id. at 264. While acknowledging that “other legal
grounds”—an unsatisfied requirement that the insurer consent to the
settlement, other “coverage” issues, or the “reasonableness of the
settlement amount”—might “prevent an insurer from being obligated to
pay a settlement,” id. at 264, 271 n.4, 272, the settlement agreement—
even with a complete release and no admission of fault or liability—

                                    17
established that the insured was “legally responsible” to pay, id. at 271.
The settlement may have prevented the establishment of facts
necessary to prove coverage, we explained, but “those facts are not
required to be proven in an underlying trial against the insured and are
often proven in coverage litigation.” Id. at 276. Although the settlement
may not have established all those necessary facts, it did “legally
obligate” the insured “to pay damages.” Id.
       Applying these principles here, we conclude the settlement made
Cobalt “legally obligated to pay” GAMCO. The settlement legally
obligates Cobalt to pay to GAMCO, through the escrow account, both the
previously recovered insurance benefits and any benefits it recovers
from the Insurers through the coverage litigation. As the insured under
these pay-on-behalf-of policies, Cobalt holds these benefits as its own
assets and need not pay first from its own funds to receive them. And if
Cobalt fails to fulfill its obligations to pursue and deliver any recoverable
benefits, GAMCO’s release will not become effective. The federal court’s
judgment incorporating the settlement agreement requires the same:
that Cobalt pay to GAMCO any recovery in the coverage litigation and,
until then, the claim releases are not effective.
       Because the settlement agreement establishes that Cobalt is
legally obligated to pay and is “in fact liable” to GAMCO for any
recoverable insurance benefits, Cobalt has suffered a “loss” under the
policies and the no-direct-action rule does not prevent GAMCO from
suing the Insurers directly. See Essex Ins. Co., 450 S.W.3d at 526; Great
Am. Ins. Co., 437 S.W.2d at 265. The trial court therefore did not clearly
abuse its discretion by denying the Insurers’ summary-judgment

                                     18
motions on these issues, and we decline to grant mandamus relief on
this ground.
B.     The settlement’s effect on the coverage litigation
       We now turn to the third issue: whether the settlement
agreement is binding against the Insurers and admissible in the
coverage litigation to establish coverage and the amount of Cobalt’s
loss.12 Because the settlement did not result from a “fully adversarial
trial,” we conclude it is not.
       As we observed long ago, “one who agrees to indemnify against
loss should not be required to pay more than what is actually lost.”
Hernandez v. Great Am. Ins. Co. of N.Y., 464 S.W.2d 91, 93–94 (Tex.
1971). Based on this principle, we have held that a settlement between
an insured and an injured party is not binding on the liability insurer if
it was “rendered without a fully adversarial trial.” State Farm Fire &

       12 Relying on Texas Rule of Appellate Procedure 55.2(f), Cobalt argues

that the Insurers did not preserve this argument because they did not raise it
in their mandamus petition in the court of appeals. Rule 55.2(f) prohibits a
“petitioner” from raising in its “brief on the merits” any “additional issues or
points or chang[ing] the substance of the issues or points presented in the
petition.” TEX. R. APP. P. 55.2(f). This rule governs briefs on the merits in
appeals, and its reference to the “petition” refers to a petition for review, not a
petition for writ of mandamus. See TEX. R. APP. P. 55.2(f). The comparable rule
for mandamus petitions does not contain the same language, because
mandamus proceedings are original proceedings and are not subject to the
same preservation and presentation requirements as appeals. See TEX. R. APP.
P. 52.3(f); In re AIU Ins. Co., 148 S.W.3d 109, 121 (Tex. 2004) (orig. proceeding)
(“While it is certainly the better practice to present all arguments to a court of
appeals before seeking mandamus in this Court, the failure to do so is not a
failure to preserve error as it ordinarily would be in an appeal.”). We will thus
consider the Insurers’ arguments on this issue.

                                        19
Cas. Co. v. Gandy, 925 S.W.2d 696, 714 (Tex. 1996). In determining
whether a settlement resulted from a “fully adversarial trial,”
      the controlling factor is whether, at the time of the
      underlying trial or settlement, the insured bore an actual
      risk of liability for the damages awarded or agreed upon,
      or had some other meaningful incentive to ensure that the
      judgment or settlement accurately reflects the plaintiff’s
      damages and thus the defendant–insured’s covered
      liability loss.

Hamel, 525 S.W.3d at 666. Without such a “meaningful incentive,” the
resolution of the underlying suit becomes “a mere formality—a pass-
through trial aimed not at obtaining a judgment reflective of the [injured
party’s] loss, but instead at obtaining a potentially inflated judgment to
enforce against [the insurer].” Id. at 667.
      We agree with the Insureds that Cobalt lacked the necessary
“meaningful incentive” in connection with this settlement agreement.
We do not doubt that Cobalt vigorously litigated against GAMCO’s
claims and entered into the settlement agreement in good faith and
without engaging in improper collusion with GAMCO. But the terms of
the settlement agreement protected Cobalt against any “actual risk of
liability” beyond its obligation to pay insurance benefits it may or may
not receive.
      As in Hamel, the settlement agreement here “eliminated any
meaningful incentive” because GAMCO “agreed not to enforce any
resulting judgment” and “not to pursue” Cobalt’s non-insurance assets,
leaving only the insurance policies “as a potential source to satisfy any
judgment obtained.” Id. at 666–67. Although, as we have held, the
settlement legally obligated Cobalt to pursue the policy benefits and pay

                                    20
any received to GAMCO, Cobalt would have “no stake in the outcome”
of the coverage litigation “and thus no meaningful incentive to defend
itself” as to liability to GAMCO or to minimize the amount of GAMCO’s
damages. Id. at 667. In fact, the settlement agreement did not fix
GAMCO’s damages to any amount, but merely set the amount to the
maximum amount of insurance proceeds that could possibly be obtained.
The settlement amount of $220 million was directly and explicitly tied
to the value of the insurance policies, not to any loss GAMCO may have
suffered. 13
       Cobalt has pointed to no facts or terms to establish that it
retained a meaningful incentive and thus overcome the “strong
presumption that” the settlement “did not result from an adversarial
proceeding.” Id. at 668. In its cross-motion for summary judgment on
this issue, it argued (and the trial court agreed) that the Insurers
“abandoned” their right to challenge the settlement because they
refused to advance defense costs, participate in the settlement
negotiations, or respond to GAMCO’s settlement demands. But the
requirement that a settlement or judgment result from a “fully
adversarial” proceeding applies even when the insurer “neither accepted

       13 We are aware, of course, that GAMCO represented a class of plaintiffs

that collectively alleged damages exceeding $1.6 billion, several times greater
than the $220 million potentially available under the insurance policies. Cobalt
certainly may have considered that the amount of damages was not worth
fighting over because it would at least exceed the available insurance benefits.
But Cobalt could not deprive the Insurers of the opportunity to disagree by
simply caving on the issue. Whether the Insurers can in fact prevent or limit
any recovery to something less than the total policy limits will be determined
in the coverage litigation.

                                      21
coverage nor made a good-faith effort to adjudicate coverage.” Hamel,
525 S.W.3d at 664.
      Cobalt   relies   on   Evanston   Insurance    Co.   v.   ATOFINA
Petrochemicals, Inc., in which we held that an insurer who wrongly
denied coverage was barred from collaterally attacking the settlement
amount. 256 S.W.3d 660, 674 (Tex. 2008). But we specifically noted in
ATOFINA that the settlement there did not raise the same concerns as
those raised in Gandy because “ATOFINA settled without knowing
whether or not it would be covered by the policy, leaving in place its
motive to minimize the settlement amount in case it became solely
responsible for payment.” Id. As we noted in Hamel, our holding in that
case was not inconsistent with ATOFINA because the insured party in
ATOFINA “retained the risk that he would be liable for the damages,”
and that “incentive to contest the plaintiffs’ alleged damages was
sufficient to ensure that the settlements accurately reflected the
insured’s covered loss.” 525 S.W.3d at 666; see also HM Int’l, 13 F.4th at
361 (“The possibility of being liable for damages or the settlement if the
insurer does not ultimately cover it is an adequate incentive to make
such a settlement adversarial.”). That incentive is missing here.
      Cobalt also argues (and the trial court also agreed) that principles
of comity mandate that the trial court give full faith and credit to the
federal court and the bankruptcy court’s findings that the settlement
agreement was fair, reasonable, and made at arm’s-length. “[I]t is
appropriate for courts to apply the comity doctrine where another court
has exercised jurisdiction over the matter and where the states agree
about the public policy at issue.” Bryant v. United Shortline Inc.

                                   22
Assurance Servs., N.A., 972 S.W.2d 26, 30 (Tex. 1998). But the federal
court and the bankruptcy court did not find that the settlement
agreement resulted from a fully adversarial proceeding or that the
Settlement Amount represented a fair appraisal of GAMCO’s damages.
Holding that the settlement agreement may not bind the insurers to the
Settlement Amount does not violate comity principles.
      In granting Cobalt’s cross-motion for partial summary judgment
and denying the Insurers’ motion, the trial court rejected the Insurers’
defense that the settlement agreement is not binding or admissible to
establish coverage or the amount of Cobalt’s loss. Because these facts
conclusively establish that the settlement agreement did not result from
a fully adversarial proceeding, this was a clear abuse of discretion.
                                III.
                          Adequate Remedy
      Having determined that the trial court abused its discretion on
the third issue, we must now determine whether the Insurers have
demonstrated they have no adequate remedy by appeal. See Walker v.
Packer, 827 S.W.2d 833, 842 (Tex. 1992) (orig. proceeding). Generally,
mandamus relief is “unavailable when a trial court denies summary
judgment, no matter how meritorious the motion.” In re McAllen Med.
Ctr., Inc., 275 S.W.3d 458, 465 (Tex. 2008) (orig. proceeding).
      But some extraordinary circumstances will warrant mandamus
relief. See In re Acad., Ltd., 625 S.W.3d 19, 32 (Tex. 2021) (orig.
proceeding); In re United Servs. Auto. Ass’n, 307 S.W.3d 299, 314 (Tex.
2010) (orig. proceeding). When “the very act of proceeding to trial—
regardless of the outcome—would defeat the substantive right involved”
or would cause a knowing waste of resources, mandamus relief may be

                                   23
necessary. See McAllen Med. Ctr., 275 S.W.3d at 465–66 (“Sitting on our
hands while unnecessary costs mount up contributes to public
complaints that the civil justice system is expensive and outmoded.”);
Prudential, 148 S.W.3d at 137 (stating that in some circumstances “the
irreversible waste of judicial and public resources that would be
required” absent mandamus relief justifies granting such relief (quoting
In re Masonite Corp., 997 S.W.2d 194, 198 (Tex. 1999) (orig. proceeding)).
And the same is true when the order being challenged “severely
compromised” and “effectively foreclose[d]” the defendant’s ability to
present a defense. In re Chefs’ Produce of Hous., Inc., 667 S.W.3d 297,
303 (Tex. 2023) (orig. proceeding).
      We     conclude    this    case      presents   such   extraordinary
circumstances. Under the trial court’s rulings, Cobalt and GAMCO may
pursue their coverage claims against the Insurers and the Insurers will
not be permitted to challenge their liability for the full Settlement
Amount set forth in the settlement agreement. But as a matter of law,
the settlement agreement is not binding on the Insurers or admissible
to establish coverage or the amount of Cobalt’s loss, so the trial as
currently ordered would be a complete waste of the courts’ and parties’
resources. We thus conclude that the Insurers are entitled to mandamus
relief regarding the effect of the settlement agreement.
                                   IV.
                                Conclusion
      We conditionally grant the Insurers’ petition for writ of
mandamus in part and order the trial court to vacate its January 19,
2023 orders to the extent they rely on the holding that the settlement
agreement is admissible and binding to establish coverage under the

                                      24
policies and the amount of any covered loss. Our writ will issue only if
the trial court fails to comply.

                                        Jeffrey S. Boyd
                                        Justice

OPINION DELIVERED: February 23, 2024

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