A United States Court of Appeals ruled that an insured's interpretation of a contract exclusion was reasonable, based on the inclusion of the word "the". The case is Paloma Res., L.L.C. v. Axis Ins. Co., 2025 U.S. App. LEXIS 16588 (5th Cir. 2025).
Background
Continental Resources, an oil and gas company, alleged that two employees of Continental and an employee of Paloma Resources, a competitor to Continental, colluded to steal confidential information from Continental and transfer it to Paloma's network.
Paloma and Continental began settlement discussions in May 2017, and Axis Insurance Company, Paloma's insurance carrier, was notified of Paloma's claim in July 2017.
Continental and Paloma settled in an Oklahoma court, with Paloma stipulating that unauthorized disclosure of confidential data had occurred. Continental agreed to release Paloma's employee from liability and dismissed its claims against the employee.
Paloma filed a claim with Axis to recover its defense costs and the settlement funds. Axis denied the claim, pointing to the Intellectual Property (IP) Exclusion in the policy. In response, Paloma sued Axis and Continental in a Texas state court.
Legal History
Paloma sought a declaration that Axis wrongfully denied coverage. Continental removed the case to a federal District Court, and Axis moved for summary judgment. Axis argued that the policy's Intellectual Property Exclusion barred coverage for Paloma's claim and that Axis owed neither the duty to defend nor indemnify Paloma.
The District Court agreed with Axis and granted their motion for summary judgment. Paloma appealed the ruling to a United States Court of Appeals.
Court of Appeals
Axis argued that the policy's IP Exclusion strictly barred coverage for Paloma's claim. The policy states the insurer is not liable for loss for any claim:
"based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any actual or alleged infringement of copyright, patent, trademark, trade name, trade dress, or service mark or the misappropriation of ideas or trade secrets, or the unauthorized disclosure of or access to confidential information…"
Paloma argued that the way the exclusion was worded, the phrase "actual or alleged" only modified the first list of items, but ended with "or the misappropriation of ideas." Because the series was broken, only the actual misappropriation of ideas would be excluded, not just alleged misappropriation.
The District Court did not agree with that interpretation and ruled that the exclusion unambiguously barred coverage. Paloma stated the exclusion is better visualized as follows:
Intellectual Property: based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving
- any actual or alleged infringement of copyright, parent, trademark, trade name, trade dress, or service mark or
- the misappropriation of ideas or trade secrets, or
- the unauthorized disclosure of or access to confidential information
The Court of Appeals found Paloma's interpretation reasonable. In the case of United States ex rel. Vaughn v. United Biologics, L.L.C., the Court of Appeals had to analyze a statutory provision asking the Attorney General to "give written consent to the dismissal [of FCA actions] and their reasons for consenting."
The court found that "'written' applied only to 'consent' and not to 'reasons' because the possessive determiner 'their' was attached to 'reasons' under the series-qualifier canon."
In this case, the court found that "the inclusion of the determiner 'the' before 'misappropriation' represents a purposeful break in the series." Further, under Texas law, if an insurance policy is susceptible to more than one reasonable interpretation, it must be construed against the insurer and liberally in the insured's favor.
Since Paloma's interpretation of the exclusion was deemed reasonable, the Court of Appeals vacated the District Court's grant of summary judgment.
Editor's Note
This case highlights the importance of precise contract language. In this case, even a seemingly innocuous word such as "the" made all the difference. The court found Paloma's reading of the contract reasonable, but even if the court found the insurer's interpretation more reasonable, the possibility of multiple interpretations means the judgment will be construed against the insurer.
(Photo credit: Aerial Mike/Adobe Stock)
This article originally appeared on FC&S Expert Coverage Interpretation and may not be reprinted.
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