Fifth Circuit Backs Insured in IP Exclusion Dispute

When a federal appeals court spends serious time on the word “the,” insurance lawyers everywhere should put down their coffee. That is exactly what happened in Paloma Resources, L.L.C. v. Axis Insurance Co., a Fifth Circuit insurance coverage dispute involving a directors and officers liability policy, an intellectual property exclusion, alleged misuse of confidential information, and one tiny determiner with surprisingly large muscles.

The case sounds technical at first glance, but the practical lesson is refreshingly simple: in insurance coverage litigation, every word matters. Not just the flashy words like “misappropriation,” “indemnity,” or “confidential information.” Even the humble “the” can walk into court wearing a cape.

In July 2025, the U.S. Court of Appeals for the Fifth Circuit gave the insured, Paloma Resources, a major win by vacating a district court ruling that had accepted Axis Insurance Company’s broad reading of an intellectual property exclusion. The appellate court held that Paloma’s narrower interpretation of the exclusion was reasonable under Texas insurance law. Because exclusions are construed strictly against insurers when ambiguous, that reasonable reading was enough to send the case back for further proceedings.

What Was the Dispute About?

Paloma Resources and its subsidiary, Paloma Operating Company, were pulled into a lawsuit by competitor Continental Resources. Continental alleged that a Paloma employee, Mauricio Toro, worked with Continental employees to transfer confidential information to Paloma. The allegations involved corporate competition, trade secrets, confidential data, and the sort of business drama that makes legal departments reach for both outside counsel and antacids.

Paloma eventually settled the underlying Oklahoma lawsuit. As part of the settlement, Paloma stipulated that the suit involved unauthorized disclosure of and access to Continental’s confidential information. Continental also agreed to release Paloma’s employees from liability and dismiss its claims against Toro.

After settlement, Paloma looked to its D&O insurer, Axis, for coverage of defense costs and settlement-related expenses. Axis denied coverage, relying on the policy’s intellectual property exclusion. The insurer argued that the underlying lawsuit plainly involved trade secrets and confidential information, which placed the claim outside coverage.

The district court agreed with Axis. It held that the IP exclusion barred both the duty to defend and the duty to indemnify. Paloma appealed, and the Fifth Circuit took a much closer look at the language of the exclusion.

The IP Exclusion at the Center of the Case

The disputed exclusion barred coverage for loss 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.

Axis read the exclusion broadly. In its view, “actual or alleged” applied not only to infringement claims, but also to misappropriation of ideas or trade secrets and unauthorized disclosure or access to confidential information. Under that reading, the exclusion barred coverage because the underlying complaint alleged precisely that kind of misconduct.

Paloma read the sentence differently. It argued that “actual or alleged” modified only the first category: infringement of copyright, patent, trademark, trade name, trade dress, or service mark. Paloma pointed to the word “the” before “misappropriation of ideas or trade secrets.” That word, Paloma argued, created a grammatical break. In other words, the exclusion could reasonably be read as covering three separate categories:

• any actual or alleged infringement of listed intellectual property rights;
• the misappropriation of ideas or trade secrets;
• the unauthorized disclosure of or access to confidential information.

Under Paloma’s interpretation, the exclusion would require actual misappropriation or actual unauthorized disclosure for those latter categories, not merely allegations. Since the underlying lawsuit settled without a final determination that Paloma actually misappropriated trade secrets, Paloma argued that the exclusion did not automatically defeat coverage.

Why the Word “The” Became the Star Witness

The Fifth Circuit agreed that Paloma’s reading was reasonable. The court focused on ordinary grammar and the series-qualifier canon, a rule of interpretation used when a modifier may or may not apply to every item in a list.

Put plainly, when a sentence lists several things after a modifier, courts sometimes ask whether the modifier carries through the whole list. For example, in the phrase “fresh apples, oranges, and bananas,” “fresh” probably modifies all three fruits. But if the sentence says “fresh apples, the oranges, and the bananas,” the repeated determiner may signal a break. Suddenly, grammar has entered the chat.

In Paloma’s policy, the word “the” appeared before “misappropriation of ideas or trade secrets.” The Fifth Circuit reasoned that this placement could indicate that “actual or alleged” did not carry over to the misappropriation clause. The court also noted that Axis’s reading would produce awkward English: “any actual or alleged … the misappropriation of trade secrets.” That is not exactly the kind of sentence one wants framed above the underwriting desk.

The key point was not that Paloma’s interpretation was unquestionably the best reading. Under Texas insurance law, Paloma did not need to prove that. It only needed to show that its reading of the exclusion was reasonable. Once the court found the policy language reasonably susceptible to Paloma’s interpretation, the exclusion had to be construed in favor of the insured.

Texas Insurance Law: Why Ambiguity Matters

Insurance policies are contracts, but they are not interpreted like casual text messages between friends. Courts apply rules designed to give effect to the policy as a whole, read words in their ordinary sense, and avoid rewriting the contract for either side.

But when an insurer relies on an exclusion, the burden becomes especially important. Exclusions remove coverage that might otherwise exist. For that reason, Texas law construes unclear exclusionary language strictly against the insurer and liberally in favor of the insured.

This doctrine is sometimes called contra proferentem, a Latin phrase that means, roughly, “you drafted it, so do not be shocked when ambiguity bites you.” Insurers write the policy language. If they want to remove coverage, they must do so clearly. A court will not stretch an exclusion beyond its reasonable wording just because the insurer later says, “That is what we meant.”

The Fifth Circuit’s decision reinforced that principle. It said courts do not need to decide whether the insured’s reading is more natural, more elegant, or more commercially expected. If the insured’s construction of an exclusion is reasonable, that reading controls.

The Court Did Not Give Paloma Everything

Although Paloma won on the IP exclusion issue, the Fifth Circuit did not hand it a total victory. The court affirmed summary judgment for Axis on a separate issue involving expenses Paloma incurred on behalf of Mauricio Toro.

The relevant policy language required that the insured individual be “legally obligated to pay.” The settlement released Toro from liability and dismissed claims against him. Because Toro did not become legally obligated to pay any amount as a result of the settlement, Axis was not required to reimburse Paloma for expenses incurred solely on Toro’s behalf.

This part of the decision is just as practical as the IP exclusion ruling. Coverage is not triggered by good intentions, business convenience, or the fact that a company spent money that helped an employee. If the policy requires a legal obligation to pay, courts will look for an actual obligation, not a theoretical one hiding behind the furniture.

Why This Decision Matters for Policyholders

The Fifth Circuit’s ruling matters because intellectual property exclusions are common in D&O, errors and omissions, media liability, and commercial liability policies. These exclusions can be broad, dense, and intimidating. They often sweep together infringement, trade secrets, confidential information, advertising injury, unfair competition, and related business torts.

For policyholders, the Paloma decision offers a powerful reminder: do not assume an insurer’s denial letter is the final word. Denial letters often quote exclusionary language confidently. Sometimes that confidence is justified. Sometimes it is just legal jazz hands.

A careful review may reveal that the exclusion does not apply as broadly as the insurer says. The structure of the sentence, punctuation, modifiers, defined terms, exceptions, and placement of small words can change the result.

Policyholders Should Read Exclusions Like a Judge

When a claim is denied, policyholders should not stop at the headline label of the exclusion. An “IP exclusion” does not automatically bar every dispute involving information, competition, software, customer data, trademarks, trade secrets, or business ideas.

Instead, policyholders should ask:

• What exact category of claim does the exclusion address?
• Does the exclusion apply to allegations only, or only to actual findings?
• Are there exceptions that restore coverage?
• Does the underlying complaint allege covered and excluded facts?
• Does state law require ambiguous exclusions to be read in favor of coverage?

These questions can turn a denied claim into a disputed claim, and a disputed claim into a coverage recovery.

Why Insurers Should Care Too

The Paloma case is also a drafting lesson for insurers. If an insurer intends “actual or alleged” to apply to every item in a long exclusion, the policy should say so clearly. Better yet, insurers can use bullet points, repeated modifiers, or separate clauses to avoid syntactic confusion.

For example, if Axis wanted the exclusion to apply to actual or alleged infringement, actual or alleged misappropriation, and actual or alleged unauthorized disclosure, the exclusion could have repeated those words before each category. That may be less elegant, but in insurance drafting, clarity beats elegance the way a fire extinguisher beats a scented candle during an emergency.

Long, jam-packed exclusions are risky because they invite interpretive fights. A dense clause may look efficient on paper, but if a court finds ambiguity, the insurer may lose the benefit of the exclusion. The Paloma ruling shows that saving a few words in drafting can cost a lot of money in litigation.

Specific Example: How a Small Drafting Change Could Change the Result

Consider two versions of an IP exclusion:

Version A: Ambiguity Risk

any actual or alleged infringement of copyright, trademark, or patent or the misappropriation of trade secrets.

This version creates the same type of issue seen in Paloma. Does “actual or alleged” apply only to infringement? Or does it also apply to misappropriation? The word “the” may signal a break.

Version B: Clearer Insurer-Friendly Drafting

any actual or alleged infringement of copyright, trademark, or patent, any actual or alleged misappropriation of trade secrets, or any actual or alleged unauthorized disclosure of confidential information.

This version is wordier, but it is clearer. It repeats the modifier and reduces the chance that a court will find ambiguity. No one has to summon a grammar professor with a magnifying glass.

Practical Takeaways for Businesses

Businesses that buy D&O, E&O, cyber, media, technology, or commercial general liability insurance should treat the Paloma decision as a checklist moment.

First, review intellectual property exclusions before a claim happens. Do not wait until litigation arrives with a suitcase and a bad attitude. Companies in energy, software, consulting, manufacturing, media, healthcare, and technology often handle confidential information. Their policies should be reviewed with that risk in mind.

Second, compare exclusions across policies. A cyber policy may respond differently than a D&O policy. An E&O policy may contain narrower or broader language. A crime policy may address employee theft differently. Coverage often depends on the full insurance tower, not one policy read in isolation.

Third, notify insurers early. In Paloma, the timing of notice was part of the background dispute. Late notice can complicate coverage even when the policyholder has strong arguments on the exclusion. Early notice preserves options.

Fourth, be careful with settlement language. Stipulations in settlement agreements can affect later coverage disputes. When settling an underlying case, policyholders should consider how admissions, releases, and factual recitals might be used by insurers.

Fifth, get coverage counsel involved before accepting a denial. The difference between “not covered” and “maybe covered” may be one word, one comma, or one exception. That is not a joke; that is modern insurance litigation in a very expensive hat.

Experience-Based Insights: What Paloma Teaches in the Real World

From a practical coverage-review perspective, the Paloma decision feels familiar because many insurance disputes begin with a denial letter that sounds more certain than the policy actually is. The insurer quotes a broad exclusion, connects it to the allegations, and concludes that coverage is barred. For busy executives, that can feel final. But experienced risk managers know the first denial letter is often the opening chapter, not the ending.

One common experience in IP exclusion disputes is that the underlying lawsuit rarely fits neatly into a single box. A complaint may allege trade secret misappropriation, but it may also allege unfair competition, breach of fiduciary duty, conspiracy, negligence, breach of contract, or wrongful acts by directors and officers. Coverage may depend on whether those theories are independent, whether the exclusion has broad “arising out of” language, and whether the policy contains carve-backs for securities claims, derivative demands, or other covered matters.

Another practical lesson is that settlement language matters enormously. Companies often settle business disputes to stop the bleeding, avoid discovery costs, and move on. That is commercially rational. However, if the settlement includes stipulations about unauthorized access, confidential information, or trade secrets, the insurer may later use those words to support a denial. Coverage counsel should review settlement terms before they are signed, especially when insurance recovery is expected.

Policyholders also learn quickly that “IP exclusion” does not always mean “no coverage for anything touching intellectual property.” Some exclusions are limited to classic infringement claims, such as copyright, patent, or trademark infringement. Others sweep in trade secrets, confidential information, unfair competition, software, ideas, advertising injury, or data access. The label is less important than the actual words. In insurance, the heading is the appetizer; the operative clause is the meal.

For brokers and risk managers, Paloma is a useful renewal-season reminder. When comparing D&O or E&O policies, ask for redlines of exclusions. Look closely at whether “actual or alleged” is repeated. Check whether the exclusion has exceptions. Review whether confidential information claims are excluded entirely or only when tied to IP infringement. These details may seem small during placement, but they become enormous after a lawsuit arrives.

The decision also teaches a communication lesson. When a company receives a denial, the response should be precise. Instead of simply arguing that the insurer is being unfair, the insured should identify the exact policy language, explain the reasonable alternative interpretation, connect that interpretation to governing state law, and preserve the duty to defend and indemnify arguments separately. Courts respond better to careful textual analysis than to dramatic sighing, although the sighing may be emotionally understandable.

Finally, Paloma is a reminder that grammar is not decorative in contracts. It is structural. A determiner, comma, modifier, or repeated phrase can change the legal outcome. That may sound absurd to non-lawyers, but contracts are built from words. If the words are unclear, the party that drafted them may have to live with the uncertainty. In this case, the small word “the” helped reopen the door to coverage. Not bad for three letters.

Conclusion

The Fifth Circuit’s decision in Paloma Resources v. Axis Insurance is more than a quirky grammar story. It is a serious reminder that insurance exclusions must be clear, precise, and carefully applied. The court backed the insured because Paloma offered a reasonable interpretation of the IP exclusion, and under Texas law, that was enough to defeat the insurer’s broad reading at summary judgment.

For policyholders, the ruling is encouraging: challenge overbroad denials, review exclusions closely, and never underestimate small words. For insurers, the message is equally clear: draft exclusions with precision, because ambiguity does not age well in court.

Note: This article is for general informational and SEO publishing purposes only. It is not legal advice. Businesses facing insurance coverage disputes should consult qualified coverage counsel.