The Supreme Court of Texas ruled Friday that a $220 million settlement agreement between an oil and gas exploration company and investment funds cannot be used to establish how much insurers must pay to cover the policyholder’s loss.

The court ruled unanimously in In re: Illinois National Insurance Co. that an agreement between Houston-based Cobalt International Energy and a number of investment funds to resolve a securities fraud case was inadmissible because it did not arise out of an adversarial proceeding.

GAMCO Global Gold, Natural Resources & Income Trust; GAMCO Natural Resources, Gold & Income Trust; and other investors sued Cobalt in 2014 for securities fraud after its stock price plummeted following an announcement by the U.S. Securities & Exchange Commission that it was investigating allegedly illegal payments to Angolan government officials. The proposed class action included 8,000 investors who claimed losses of $1.8 billion, court records say.

Cobalt’s insurers, which included American International Group Inc. unit Illinois National Insurance Co., issued directors and officers policies and refused to provide coverage on grounds that notice of the suits was untimely and that certain exclusions were applicable.

Cobalt spent $25.5 million funding its own defense against the suits and filed for bankruptcy in 2017. GAMCO and Cobalt began negotiating the settlement without the consent of Illinois National and other insurers. The $220 million settlement was approved by a federal judge and a bankruptcy judge in Texas.

Prior to the approval of the settlement, Cobalt sued 12 insurers over their refusal to advance defense costs and denied coverage. GAMCO intervened in the coverage suit after the settlement was approved.

The insurers moved for summary judgment in the coverage fight, arguing that Cobalt’s directors and officers did not suffer a covered loss, that GAMCO lacked standing to sue the insurers and that the settlement was not admissible to establish coverage or the amount of the loss.

The trial court denied the insurers’ motion. A Texas Court of Appeals refused to review the ruling, but the Supreme Court of Texas agreed to take up the dispute.

The justices agreed with the trial court that Cobalt did suffer a loss since the settlement obligates it to pay GAMCO even though it does not admit liability or any wrongdoing. The justices also found that even though Texas law prohibits an injured party from directly suing a defendant’s insurer until it has been established that there is a legal obligation to pay damages, the no-direct-action rule does not apply to prevent GAMCO.

“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,” the opinion says.

Representatives for the parties did not respond to requests for comment.