The Money Laundering Exclusion in Texas Insurance Coverage Law

United States District Court,

S.D. Texas,

Houston Division.

Laura PENDERGEST-HOLT, et al., Plaintiffs,


CERTAIN UNDERWRITERS AT LLOYD’S OF LONDON and Arch Specialty Insurance Co., De-fendants.

Civil Action No. H-09-3712.



May 10, 2010.




NANCY F. ATLAS, District Judge.


Plaintiffs, each an executive in one or more com-pany founded by R. Allen Stanford, seek in this suit reimbursement of defense costs in criminal and civil litigation under directors’ and officers’ insurance policies (collectively, “D & O Policy”) issued by Defendants (“Underwriters”). On January 26, 2010, the District Court, Judge Hittner presiding, entered a preliminary injunction prohibiting Underwriters from “withholding payment” for costs “already incurred” by Plaintiffs and to be “incurred by them in the future … until a trial on the merits in this case or such other time as this Court orders.” Pendergest-Holt v. Certain Underwriters at Lloyd’s of London, 681 F.Supp.2d 816, 2010 WL 317684, at *14 (S.D.Tex. Jan.26, 2010). Following an expedited appeal by Defendants, the Fifth Circuit modified the injunction, affirmed the District Court’s order as modified, and remanded the case for further proceedings on the coverage question. Pendergest-Holt v. Certain Underwriters at Lloyd’s of London, 600 F.3d 562, 576 (5th Cir. Mar.15, 2010). Specifically, the Fifth Circuit held that “[t]he under-writers are enjoined from refusing to advance defense costs as provided for in the D & O Policy unless and until a court determine[s] that the alleged act or alleged acts [of Money Laundering] did in fact occur.” Id. (internal quotation marks omitted, brackets in the original).


On remand, this Court announced that this “in fact” determination would be made in the context of a preliminary injunction hearing. At a status conference on April 27, 2010, the Court requested briefing on: (1) which elements of the preliminary injunction standard are in issue at this stage of the case; and (2) the ap-plicable burden of proof for the in fact determination of whether Money Laundering occurred.FN1 Both parties have filed the requested briefing. FN2 The Court now turns to these two issues.


FN1. The Court also requested background briefing on an insured’s right to reimburse-ment of defense costs under an insurance policy that does not impose a duty to defend. The Court will take the parties’ submissions on this issue under advisement.


FN2. Plaintiffs filed a Brief in Support of Miscellaneous Relief [Doc. # 81] (“Plaintiffs’ Brief”), and Underwriters filed a “Response to Plaintiffs’ Brief on Elements of the Pre-liminary Injunction at Issue and Burden of Proof (“Response”). Plaintiffs’ also filed a Reply [Doc. # 90].




“A plaintiff seeking a preliminary injunction must establish that [1] he is likely to succeed on the merits, [2] that he is likely to suffer irreparable harm in the absence of preliminary relief, [3] that the balance of equities tips in his favor, and [4] that an injunction is in the public interest.” Id. at 568-69. Both parties agree that the Court’s focus at the preliminary injunction hearing should be on the first prong, i.e., the Plaintiffs’ likelihood of success on the merits.FN3 Considering the Fifth Circuit’s mandate in this case, the Court concurs. See Henderson v. Stalder, 407 F.3d 351, 354 (5th Cir.2005) (“ ‘[T]he mandate rule compels compliance on remand with the dictates of a superior court and forecloses relitigation of issues expressly or impliedly decided by the appellate court.’ ”) (quoting United States v. Lee, 358 F.3d 315, 321 (5th Cir.2004)). The Court’s focus at the preliminary injunction hearing will be on the first prong of the preliminary injunction test. This inquiry will turn on a determination, as to each Plaintiff, of whether money laundering, as defined by the D & O Policy (“Money Laundering”), in fact occurred.


FN3. Plaintiffs’ Brief, at 6-7; Response, at 4-5.




Underwriters will bear the burden of proving that Money Laundering in fact occurred. Plaintiffs argue that the Money Laundering policy provision on which Underwriters rely in denying reimbursement costs is an exclusion, and that Underwriters therefore bear the burden of proving its applicability. FN4 Underwriters agree.FN5 The Court holds that Underwriters have the burden of proving the applicability of the Money Laundering exclusion in the D & O Policy. See Gore Design Completions, Ltd. v. Hartford Fire Ins. Co., 538 F.3d 365, 370 (5th Cir.2008) (“Texas law places the burden of proving that an exclusion applies on the insurance company .”) (citing TEX. INS.CODE § 554.002); Texas Farmers Ins. Co. v. Murphy, 996 S.W.2d 873, 879 ( Tex.1999) ( “If there are any con-tractual provisions that could limit or bar recovery, it is incumbent on the insurer to plead and prove them.”).


FN4. Plaintiffs’ Brief, at 14-15.


FN5. Response, at 3.


The Fifth Circuit expressly reserved the question of whether a decision on the Money Laundering exclu-sion should be made by a preponderance standard or only by clear and convincing evidence. See Penderg-est-Holt, 600 F.3d at 575. Based on the Court’s current research, the Court will apply a preponderance of the evidence standard. Although there appears to be li-mited Texas authority on this point,FN6 the cases cited by Underwriters, and those located through the Court’s own research, indicate that an insurer must prove the applicability of a policy exclusion by a preponderance of the evidence. See Routis v. Clarendon Am. Ins. Co., 2007 WL 1412566, at *8 (Tex.App.-Houston [1st Dist.] 2007, no pet.) (stating that to establish arson by an insured, the insurer bears the burden of proving that the insured set the fire, “[h]owever, the insured’s burden of proof is not to show by an absolute cer-tainty, but rather, by a preponderance of the evidence that the insured set the fire”) (citing Murphy v. Texas Farmers Ins. Co., 982 S.W.2d 79, 84 (Tex.App.-Houston [1st Dist.] 1998) (“To establish arson as a defense to a civil suit for insurance proceeds, the insurance company must show by a preponderance of the evidence that the insured set the fire or caused the fire to be set.”), aff’d on other grounds, 996 S.W.2d 873 ( Tex.1999)); Nobles v. Employees Retirement Sys. of Texas, 53 S.W.3d 483, 486 (Tex.App.-Austin 2001, no pet.) (an insurer has the burden to plead, and prove, by a preponderance of the evidence, a policy exclusion and present some evidence of its applicability).


FN6. TEX. INS.CODE § 554.002 provides that the insurer has the burden of proof on an exclusion but does not specify the applicable standard.


Plaintiffs do not expressly argue that another standard should apply.FN7 Plaintiffs’ cite the following passage from Couch on Insurance: “While the degree of proof required for both coverage and exclusions is generally described as being a preponderance of the evidence, there may be a slightly heavier weight required for proof of exclusions.” FN8 However, Plaintiffs admit that they have not located a single Texas case apply-ing a clear and convincing standard in this context.FN9 In the absence of any applicable Texas case or statute, Plaintiffs’ citations to Couch on Insurance are insufficient to trigger the use of a standard of proof other than preponderance of the evidence.


FN7. See generally Reply. Plaintiffs state that they did not brief the issue in Plaintiffs’ Brief because they believed that the issue to be addressed was who had the burden of proof rather than the appropriate standard. Id. at 2 n. 3.




FN9. Reply, at 2.




For the foregoing reasons, it is


ORDERED that the Court’s focus at the preliminary injunction hearing will be the first element of the preliminary injunction standard, i.e., the Plaintiffs’ likelihood of success on the merits. It is further


ORDERED that Underwriters will have the burden of proving that Money Laundering in fact occurred.


Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Texas civil litigation attorneys based in Fort Worth who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s new office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

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