arizonaThough the Insured vs. Insured exclusion is a standard D&O policy provision, it seems to generate a disproportionate number of D&O insurance-related coverage disputes. The exclusion precludes coverage for claims brought by one Insured Person against another Insured Person. Among the host of recurring issues are the questions surrounding the exclusion’s preclusive reach when the claimants suing an Insured include both individuals who are Insured Persons and other individuals who are not Insured Persons.


These questions arose in a coverage dispute involving a series of lawsuits brought against the board of U-Haul International Inc. parent Amerco. One of the lawsuits had been brought by a former Amerco board member (who was also related by family to the company founder) but the rest of the lawsuits had been initiated  by other shareholders who were not Insured Persons under Amerco’s D&O insurance policy. The various actions were consolidated by court order. The company’s D&O insurer denied coverage for the board’s defense expenses based on the Insured vs. Insured exclusion. In a June 6, 2016 opinion (here), the Ninth Circuit affirmed the district court’s holding that the exclusion precluded coverage for all of the claims.



In September 2002, Paul Shoen, a member of the U-Haul company’s founding family and a former Amerco board member filed an action in Nevada state court, alleging securities violations against Amerco’s directors and officers. After the Schoen action was filed, a total of four other separate actions were filed in Nevada state court by other parties, none of who were family members or board members. On its own motion, the Court consolidated the five actions.


Following the consolidation, Shoen filed a consolidated complaint, with the consolidated complaint superseding the various individual complaints. Counsel for the various claimants established a “Litigation Committee” to manage the litigation. Shoen’s attorney was designated “Co-Lead Counsel” for the consolidated action and given responsibility for, among other things, “determining litigation strategy, assigning work, entering into agreements and stipulations with Defendants, initiating and taking discovery, supervising the drafting of pleadings and motions, and conducting trial and any appeals.”


On May 8, 2003, the Nevada trial court granted defendants’ motion to dismiss the consolidated complaint. The claimants appealed. On July 13, 2006, the Nevada Supreme Court reversed the lower court’s dismissal, holding that the plaintiffs should have been permitted to amend their pleadings. The parties returned to the trial court. The plaintiffs filed a single amended consolidated complaint, filed jointly, with Shoen’s counsel acting as lead counsel. In 2012, the parties settled the case and the plaintiffs took nothing. In the course of the litigation, Amerco incurred expenses of over $9 million.


Amerco sought to have its D&O insurer reimburse it for the defense expenses. The D&O insurer denied coverage for the defense expenses, in reliance, among other things, on the policy’s Insured vs. Insured exclusion. The exclusion precludes coverage for any Loss in connection with a Claim “by an security holder of the company, whether directly or derivatively, unless the security holder’s claim is instigated and continued totally independent of, and totally without the solicitation of, or assistance of, or active participation of, or intervention of, any Insured or the Company.”


Amerco filed a lawsuit in state court in Arizona, alleging breach of contract and bad faith and seeking declaratory relief. The D&O insurer removed the lawsuit to federal court in Arizona and filed a motion to dismiss in reliance on the Insured vs. Insured exclusion. In opposing the insurer’s motion, Amerco conceded that the exclusion applied to preclude coverage for Shoen’s claim. Amerco argued that the exclusion did not preclude coverage for the other claimants’ claims, despite the consolidation of the various cases.


The District Court Ruling

In a May 20, 2014 order (here), District of Arizona Judge Paul G. Rosenblatt granted the insurer’s motion to dismiss, holding that “the consolidation of the cases, initiated by the state court and continued by the plaintiffs resulted in claims by security holders that were not continued totally independent of Shoen and totally without Shoen’s assistance or participation.” Judge Rosenblatt concluded that under the “unambiguous language of the Policy,” the security holders’ actions, which were “continued with the assistance and active participation of Paul Shoen,” were excluded from coverage. Amerco appealed.


The Ninth Circuit’s Opinion

In a short unpublished per curiam opinion dated June 6, 2016, a three-judge panel of the Ninth Circuit affirmed the district court’s dismissal. The Ninth Circuit said that the district court “properly dismissed” the complaint because Amerco “did not allege that the non-Shoen plaintiffs instigated and continued their claims totally independent of Paul Schoen, an Insured under the Policy.” The appellate court noted that Amerco conceded that Shoen participated in the underlying lawsuit. Accordingly, Americo failed to carry its burden to show that it came within an exception to the exclusion.



The traditional justification for the inclusion of the Insured vs. Insured exclusion in the D&O insurance policy is that exclusion is necessary to prevent coverage for collusive suits. As time has gone by, this explanation has been expanded to include the added justification that the exclusion is necessary to preclude coverage for claims that involve in-fighting disputes – as might be involved in claims between board members—which often are about something other than money, can be vexatious, and difficult to resolve.


The first of the lawsuits filed against the Amerco  and its board, the one filed by Shoen, clearly was precluded by the exclusion, because Shoen was a former Amerco board member. Amerco conceded as much in the coverage litigation. There appears to have been no suggestion that Shoen’s lawsuit was collusive, so the application of the exclusion’s preclusive effect would have to be justified, if at all, by the exclusion’s intention to preclude claims that arise from in-fighting.


The claimants in the other four lawsuit filed against Amerco and its board were not former board members. These claimants were not Insured Persons under Amerco’s D&O insurance policy. Their lawsuits were separately instituted in separate proceedings. The four other separate lawsuits were only consolidated when the Court, acting on its own motion, consolidated the cases. Were that all that had happened, Amerco might well have had a better argument that the exclusion did not apply. However, the subsequent involvement of Shoen’s counsel in the consolidated action, in which the parties actions were coordinatedand Shoen’s counsel took the lead, clearly made it more difficult for Amerco to argue that the consolidated action was “continued totally independent of, and totally without the … assistance of, or active participation of … any Insured.”


There is no suggestion that the four other claimants’ claims were collusive, so the application of the exclusion to preclude coverage for their claims would be justified, if at all, on the grounds that their claims represented in-fighting. Again, it does not seem to be the case with respect to their claims. Because of the way the exclusion is worded, the actions of Shoen’s counsel in taking the lead in the consolidated litigation had the effect of extending the exclusion’s preclusive effect to exclude coverage for the four other claimants’ claims, which otherwise would have been covered.


Given the exclusion’s wording, the carrier was clearly justified in taking the coverage position it took with respect to the other four claimants’ claims, and the courts were correct in applying the exclusions as they did. However, the preclusion of coverage for these four claimants’ claims is hard to square with the standard justifications for the exclusion’s inclusion in the policy. The four claimants’ claims were not collusive and did not represent in-fighting. The fact that the claimants coordinated activities for efficiency’s sake does not seem to present at all the same kinds of concerns the exclusion is intended to prevent. There is an argument that the exclusion’s broad language (“totally independent” “totally without the … assistance or active participation of”) sweeps too broadly.


While some carrier-side representatives might instinctively resist the idea that there should be any revision of this type of wording, the fact is that in recent years there have been some significantly different variations on the standard Insured vs. Insured exclusion available in the marketplace. For example, many D&O insurers’ policies (particularly in the public company D&O space) no longer have an Insured vs. Insured exclusion, but instead have only an Entity vs. Insured exclusion, precluding coverage only for claims brought by the insured organization against an insured person, but not for claims brought by an insured individual against another insured individual. This type of policy wording was not available in the marketplace at the time Amerco purchased its D&O insurance policy, but it is worth noting that if its policy had the Entity vs. Insured exclusionary wording, the defense expenses the company incurred in defending against the consolidated litigation would have been covered, notwithstanding the involvement of Shoen and Shoen’s counsel in the consolidated litigation.


In view of the arguable absence from this case of any of the concerns that usually are cited to justify the Insured vs. Insured exclusion’s preclusive effect, this provision of coverage for these kinds of expenses arguably is more consistent with the overall purposes of the policy and its terms and conditions.


As I noted at the outset, one of the recurring problems that arises in connection with the application of the Insured vs. Insured exclusion is the issue of how the exclusion applies when the claimants asserting a claim include both Insured Persons and individuals who are not Insured Persons. For a discussion of a recent decision of the federal court in Minnesota involving these same issues, refer here.