minnThe Insured vs. Insured Exclusion is a standard D&O insurance policy provision. The exclusion precludes coverage for clams brought by one “Insured Person” against another “Insured Person.” But what happens when the claimants suing an Insured Person include both individuals who are Insured Persons and other individuals who are not? In a September 22, 2015 opinion (here), District of Minnesota Chief Judge John Tunheim, applying Minnesota law, held that where the underlying claim involved a lawsuit by an Insured Person against other Insured Persons, the entire claim was precluded from coverage, even though the claimants in the lawsuit included other plaintiffs who were not Insured Persons.



Gerald Paulsen founded a grocery store group called Jerry’s Enterprises. After he died in April 5, 2013, ownership in the company was divided between a testamentary trust and several of his children and grandchildren. One of his children, Cheryl Sullivan, had been an employee at the company. She also became a member of the company’s board of directors following her father’s death, but she served as director only for four months, until the company redeemed her shares and those of her children. While on the board she did not participate in meetings or vote on corporate matters.


Sullivan and her children filed a lawsuit against the company and certain of its directors and officers, alleging that the defendants had taken several actions that caused Sullivan and her daughters to redeem their shares at less than fair value. This lawsuit ultimately was settled. The company then sought to have the settlement amount and the fees the defendants incurred in defending the lawsuit to be paid by the company’s D&O insurer. The insurer denied coverage in reliance on the insurance policy’s Insured vs. Insured exclusion. The company filed an action against the insurer alleging breach of contract. The parties filed cross-motions for summary judgment.


The policy defined Insured Person to include “any past, present, of future director, officer, managing member, officer or Employee of the Insured Organization.”


The policy’s Insured vs. Insured Exclusion precluded from coverage any Claim:


brought by or on behalf of , or in the name or right of … any Insured Person, unless such Claim is:

(1) brought and maintained independently of, and without the solicitation, assistance or active participation of, the Insured Organization or any Insured Person,

(2) brought or maintained by an Insured Person for contribution or indemnity and directly results from another Claim covered under this Policy, or

(3) for an actual or alleged Employment Practices Act.


The September 22, 2015 Opinion

In his September 22, 2015 opinion, Judge Tunheim granted the insurer’s motion for summary judgment and denied the company’s motion for summary judgment.


In granting the insurer’s summary judgment motion, Judge Tunheim quickly rejected the company’s three arguments that the Sullivan’s claims in the underlying lawsuit were not precluded from coverage by the Insured vs. Insured exclusion.


First, Judge Tunheim rejected the company’s argument that coverage for Sullivan’s claims was not precluded because she has served only nominally as a director of the company and had not participated in company leadership activities. Judge Tunheim said that there was nothing in the policy to suggest that the term “director” as used in the policy applied only to those who actively conducted leadership activities.


Second, Judge Tunheim rejected the company’s argument that the exclusion did not preclude coverage for Sullivan’s claims because in bringing her claims, Sullivan was acting in her capacity as a shareholder, not in her capacity as a director. Judge Tunheim said that the exclusion’s language “includes no qualifier that the claim must be brought exclusively to protect rights that person has in their Insured Person capacity.”


Third, Judge Tunheim also rejected the company’s argument that the exclusion was intended to preclude coverage only for collusive claims. He found that the exclusion’s language was unambiguous and did not refer to collusive claims. He said that the court would not create ambiguity to look behind the plain text to the rationale for its inclusion.


Because he found that Insured vs. Insured exclusion applied to Cheryl Sullivan’s claims, Judge Tunheim granted the insurer’s motion for summary judgment as to her claims in the underlying lawsuit.


However, the underlying lawsuit included not only claims brought by Cheryl Sullivan, but also claims brought by her children. Her children asserted their claims solely as shareholders. They had not served as employees or directors of the company, and therefore they are not Insured Persons. The company argued that because the children were not Insured Persons, the Insured vs. Insured exclusion should not apply to their claims and there should be an allocation of loss costs, as required by the policy’s allocation provision.


Judge Tunheim rejected the company’s arguments and held that the exclusion applies to preclude the entire underlying lawsuit, even the claims brought by Sullivan’s children.


In reaching this conclusion, he relied heavily on the fact that in the underlying complaint, Sullivan had joined each and every claim asserted. There were no claims, he said, brought by a non-insured plaintiff on his or her behalf. There were, Judge Tunheim said, no claims asserted by the non-insured children “wholly independent of, and without the solicitation, assistance or active participation of” Sullivan. Because the Insured vs. Insured exclusion “only allows coverage for claims related to Insured Persons if they are brought independently, and without the active participation, of the Insured Persons, the Court concludes that none of the claims in the Sullivan Complaint are subject to coverage under policy.”


He also noted based on the fact presented that Sullivan unequivocally was the “driving force” behind the complaint, and therefore even if the underlying complaint had not been framed as joint claims, “it is not plausible that any of the claims in the complaint would be free of Sullivan’s participation and assistance.”



Given that she had served as both an employee and a director, Judge Tunheim’s conclusion that the Insured vs. Insured exclusion precluded coverage for Cheryl Sullivan’s claims is unsurprising and unexceptional.


There is more room for discussion about his conclusion that the exclusion precludes coverage for Sullivan’s children’s claims. The children were shareholders in their own right and they themselves had not served as officers, directors or employees of the company. They are not Insured Persons.  They were asserting their claims on their own behalf, not on behalf of Sullivan. It seems a fair argument that their claims were not, as the exclusion requires,  “brought by or on behalf of, or in the right of any Insured Person.” The fact that Sullivan’s claims were the same as her children’s claims does not mean that the children’s claims were “brought by or on behalf of” Sullivan. In that regard, I am not sure the basis on which Judge Tunheim concludes that there were no claims in the underlying complaint that were brought by a non-insured plaintiffs on his or her own behalf. (I don’t k now if they are or were minor children, but if they were, that was not the basis of Judge Tunheim’s conclusion.)  I don’t see anything in the discussion to suggest that the children brought their claims other than on their own behalf.


Suppose that rather than filing their claims together in a single complaint, the children’s claims were brought in one complaint and Sullivan’s claims were brought in a separate complaint. I think in that situation it would be easier to see that the children’s claims were not “brought by or on behalf of” Sullivan. But to say that because the claims that easily could have been filed separately instead were filed in a single complaint, the entire combined complaint was “brought by or on behalf of” Sullivan is a triumph of form over substance.


If there were to be coverage for the children’s claims, there would be a difficult allocation issues. But there are difficult allocation issues all the time and merely because an issue is difficult is not a good enough reason to sidestep it. I think there is a good argument that because the children were not Insured Persons, the Insured vs. Insured exclusion does not apply to their claims, and therefore there should be an allocation under the terms of the policy between the covered and the non-covered claims asserted in the underlying lawsuit.


I know that there may be those on the carrier side who may disagree with this analysis, and I encourage and welcome contrasting points of view. I hope that those who disagree with me with post their views using the blog’s comment feature.


Special thanks to a loyal reader for sending me a copy of Judge Tunheim’s opinion.


Continuing Education Event: On Friday, October 16, 2015, the New Jersey State Bar Association will be hosting a continuing education event at the East Brunswick Hilton, in East Brunswick, New Jersey, entitled “Industry and Law Enforcement Insiders on Financial Fraud.” The event, which will go from 9 a.m. to 12:30 p.m., will feature a number of high-profile speakers, including among others the chief regional litigation Counsel for FINRA, the SEC’s assistant regional director, and the chief of the Bureau of Securities in the New Jersey Attorney General’s office. The event is registered for CLE credit in New Jersey, New York and Pennsylvania. Information about this event including registration instructions and the full roster of speakers can be found here.