Series-Qualifier Ambiguity & the Insured-Friendly Rule:
Paloma Resources, L.L.C. v. Axis Insurance Co.
(5th Cir. July 7 2025)

1. Introduction

Paloma Resources, L.L.C. (“Paloma”) purchased a Directors & Officers (“D&O”) liability policy from Axis Insurance Company (“Axis”). When Continental Resources, Inc. sued Paloma and its employee Mauricio Toro in Oklahoma state court for misappropriation of confidential information, Paloma incurred substantial defense costs and settled the suit. Axis denied coverage, relying on an Intellectual Property exclusion (“IP Exclusion”) that bars claims “based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any actual or alleged infringement … or the misappropriation of ideas or trade secrets, or the unauthorized disclosure of or access to confidential information.”

The district court granted summary judgment to Axis on two fronts: (1) the IP Exclusion barred both defense and indemnity coverage, and (2) Axis had no obligation to reimburse Paloma for costs it paid on Toro’s behalf. The Fifth Circuit, however, vacated the first ruling, finding the exclusion ambiguous under Texas law, and affirmed the second, concluding Toro never became “legally obligated to pay.”

2. Summary of the Judgment

• IP Exclusion Vacated & Remanded. The panel held that Paloma advanced a reasonable reading of the exclusion—i.e., that the modifier “actual or alleged” applies only to listed “infringement” offenses and not to “the misappropriation of ideas or trade secrets” or “unauthorized disclosure of or access to confidential information.” Under Texas’s long-standing “insured-friendly” rule, any reasonable construction proffered by the insured must control at the summary-judgment stage.
• No Coverage for Toro’s Defense Costs Affirmed. Because the settlement released Toro and imposed no liability on him, he was never “legally obligated to pay.” Therefore, the Insuring Agreement C(2) did not obligate Axis to reimburse Paloma for amounts it spent solely for Toro’s benefit.

3. Analysis

3.1 Precedents Cited

Key authorities that shaped the outcome include:

• United States ex rel. Vaughn v. United Biologics, 907 F.3d 187 (5th Cir. 2018) – explained the “series-qualifier” canon: a trailing modifier generally applies to a series of nouns unless context shows a break, often signaled by an intervening determiner such as “the.”
• Thomas v. Reeves, 961 F.3d 800 (5th Cir. 2020) (en banc) – emphasized that the series-qualifier canon is context-dependent and may be overridden by practical reading of statutory text.
• Canutillo ISD v. National Union Fire, 99 F.3d 695 (5th Cir. 1996) – reiterated Texas principles that insurance contracts are interpreted by ordinary meaning and that ambiguities favor the insured.
• Bitco Gen. Ins. v. Monroe Guar., 31 F.4th 325 (5th Cir. 2022) – restated Texas rule: when an exclusion is susceptible to more than one reasonable construction, courts must adopt the insured’s construction even if the insurer’s appears “more reasonable.”
• In re Farmers (Tex. Sup. Ct. 2021) – clarified that a “legal obligation to pay” can arise from a judgment or from a settlement imposing liability on the insured party.

3.2 Court’s Legal Reasoning

1. Textual Dissection of the IP Exclusion.
   • The court focused on the placement of the determiner “the” before “misappropriation,” concluding that it grammatically severs that clause from the earlier “actual or alleged infringement” phrase.
   • Because applying “actual or alleged” to “the misappropriation” would create the unwieldy phrase “any actual or alleged the misappropriation,” everyday English usage suggests a break.
   • Consequently, only actual misappropriation (not alleged) would trigger the exclusion, making coverage at least plausible during the early, unproven stages of the Continental suit.
2. Texas Ambiguity Doctrine.
   • Texas contract law deems a policy ambiguous when susceptible to more than one reasonable interpretation.
   • When an exclusion is ambiguous, courts construe it strictly against the insurer and liberally in favor of the insured (contra proferentem).
   • The district court erred by weighing Axis’s reading as “more reasonable” rather than asking whether Paloma’s reading was itself objectively reasonable.
3. No “Legal Obligation to Pay” for Toro.
   • Insuring Agreement C(2) indemnifies only when the individual insured “has become legally obligated to pay.”
   • The settlement released Toro entirely; no judgment, settlement payment, or contractual duty ran against him.
   • Paloma’s attempt to characterize Toro’s hypothetical indemnity duty to Paloma foundered because Texas common-law indemnity exists only when the employer’s liability is purely vicarious—here, Continental alleged direct wrongdoing by Paloma.

3.3 Impact of the Decision

• Drafting & Underwriting. Insurers writing D&O or EPL (employment practices liability) coverage must now revisit IP exclusions that combine several offenses under an “actual or alleged” lead-in. Absent careful drafting, insureds will leverage the Fifth Circuit’s reasoning to obtain defense coverage at least until actual misappropriation is adjudicated.
• Litigation Strategy. Policyholders now have a potent blueprint for contesting broad exclusions by invoking grammatical canons (series-qualifier, expressio unius) and Texas’s ambiguity doctrine. Expect more early-stage challenges to insurer denials.
• Choice-of-Law Considerations. Because the Fifth Circuit applied Texas law, forum and choice-of-law battles will intensify in multi-state coverage disputes, especially where Texas’s insured-friendly rules differ from neighboring jurisdictions.
• Separation of Coverage Issues. The case also underscores a clean doctrinal divide between (a) the insurer’s duty to defend/indemnify the corporate insured and (b) claims for reimbursement of costs incurred for individual employees. Corporate insureds must prove that the individual actually became liable.

4. Complex Concepts Simplified

• Intellectual Property (“IP”) Exclusion. A clause in many D&O policies that removes coverage for lawsuits alleging IP violations (copyright, patent, trade secrets, etc.).
• Series-Qualifier Canon. A rule of grammar-based statutory interpretation: a modifier located at the front or end of a list usually carries over to every listed item—unless textual cues (e.g., repeating “the”) indicate a break.
• Expressio Unius est Exclusio Alterius. “The expression of one thing excludes another.” If the policy expressly says “actual or alleged” for infringement but omits that phrase for misappropriation, a court may presume the omission is intentional.
• Duty to Defend vs. Duty to Indemnify. The former obliges the insurer to fund the defense whenever a lawsuit’s allegations potentially fall within coverage. The latter obliges payment of judgments or settlements after liability is established.
• “Legally Obligated to Pay.” Under Texas law, an insured individual must have an actual legal liability—imposed by judgment, settlement, statute, or contract— before an insurer indemnifies him.
• Vicarious Liability & Common-Law Indemnity. An employer may recoup from an employee only when the employer is held liable solely because of the employee’s fault and without its own wrongdoing. Direct allegations against the employer defeat pure vicarious status.

5. Conclusion

Paloma Resources reshapes Fifth Circuit insurance jurisprudence by tying grammatical precision to the powerful Texas rule that ambiguities favor insureds. The decision narrows the reach of broad IP exclusions unless policy language unmistakably extends to alleged misappropriation. It also reaffirms that indemnity for employees turns on an actual legal duty to pay, not merely the employer’s generosity. In future coverage disputes, both insurers and insureds must scrutinize every article, comma, and modifier—syntactical nuance may now spell the difference between a fully funded defense and a costly denial.