eighth circuitYou know that the Insured vs. Insured Exclusion is a frequent source of D&O insurance coverage disputes when on consecutive days two federal appellate courts issue opinions interpreting and applying the provision. As I noted yesterday, on January 10, 2017, it was the Ninth Circuit’s turn; the next day, it was the Eighth Circuit’s turn. On January 11, 2017, the Eighth Circuit affirmed a district court’s holding that the Insured vs. Insured exclusion in a grocery store chain’s D&O insurance policy precluded coverage for claims brought by the chain’s founder’s daughter, who had served briefly as a director of the company. The appellate court also affirmed the district court’s holding that the exclusion precluded coverage not just for the daughter’s claims, but also for the claims of her two children, who were shareholders but not directors of the company. The court, applying Minnesota law, held that the exclusion precluded coverage for both the claims of the daughter (who was an insured person) and those of the children (who were not). The Eighth Circuit’s opinion can be found here.



Gerald Paulsen founded a grocery store group called Jerry’s Enterprises. After he died in April  2013, company ownership 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 raised concerns about the company’s share price.


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 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.


As discussed here, in September 2015, 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 underlying lawsuit included plaintiffs who were not Insured Persons. The claimants appealed the decision to the Eighth Circuit.


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 that is “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….”


The policy’s allocation provision specified that


If Loss covered by this Policy and loss not covered by this Policy are both incurred in connection with a single Claim, either because the Claim includes both covered and uncovered matters, or because the Claim is made both against Insureds and against others not included within the definition of Insured, the Insureds and the Insurer agree to use their best efforts to determine a fair and proper allocation of all such amounts….”


The January 11 Opinion

On January 11, 2017, the Eighth Circuit, in an opinion by Judge Bobby Shepherd for a unanimous three judge panel,affirmed the district court’s decision, holding that the Insured vs. Insured exclusion in the grocery store chain’s D&O insurance policy precluded coverage for all of the claims in the underlying lawsuit, including those of the two children, and not just Sullivan’s claims.


The exclusion’s language, the court said, as it applies to this case, “is straightforward.” Sullivan had served as a director; the definition of Insured Person includes any past director; and the exclusion, “in essence,” precludes coverage for any lawsuit brought by a former director.


The appellate court noted the provision in the exclusion preserving coverage for claims brought independently from the former direct and without their active participation.  The court found this provision inapplicable to preserve coverage for the children’s claims, because Sullivan was an “active participant” in bringing the suit. The court also noted that Sullivan was “the driving force in the litigation,” adding that she owned the vast majority of the shares at issue in the underlying lawsuit. While Sullivan’s children may well have had their own claims to assert, a “Claim” as defined in the policy is a civil proceeding commenced by the service of a complaint. The exclusion applies to the lawsuit as brought, and so coverage for the entire Claim is precluded.


The appellate court also rejected the claimants’ argument based on the allocation clause, which the claimants argued requires an allocation between Sullivan’s uncovered claims and her children’s covered claims. The court reviewed several appellate cases from other circuits in which the courts interpreted allocation provisions in D&O insurance policies, in the context of cases in which coverage was otherwise precluded on the Insured vs. Insured exclusion. The Eighth Circuit concluded that the various cases could be understood and could be reconciled depending on the specific language in the exclusion.  Some of the cases had the “active assistance” language of the type present in the exclusion here, and some did not.  The presence of the “active assistance” language prevents the kind of “whacky result” about which the Seventh Circuit was concerned in the Level 3 case (here).


While noting that there is a “tension” between the Insured vs. Insured exclusion and the allocation clause, and that the claimants had asserted arguments in favor of coverage based on this tension that “are not wholly without merit,” the appellate court ultimately concluded that the preclusive effect of the exclusion should control the outcome. Applying the allocation clause to preserve coverage for the children’s claims, the court said, would “render the assistance exception superfluous, effectively reading the exception out of the contract.” By contrast, applying the exclusion to preclude coverage, the court said, does read the allocation clause out of the contract; it “simply limits the reach of the allocation clause when more specific language exists elsewhere in the contract.”



As I noted at the time when the district court rendered its opinion, the conclusion that coverage is precluded for Sullivan is unremarkable. There ismore room for discussion when it comes to the children’s claims. There is nothing in the opinion to suggest that the children are minors. I assume that they were asserting their own claims and asserting their own rights as shareholders of the grocery store chain. Their claims were brought on their own behalf, not on behalf of an Insured Person.


It is true that the children’s claims were brought in the same complaint in which their mother (an Insured Person under the policy) was also asserting claims. Their claims could easily have been asserted in a separate complaint. Had the children asserted their claims in a separate complaint, it certainly would be easier to see that their claims were not brought by or on behalf of an insured person.  But to say the claims were not covered simply because instead of being filed separately the claims were filed in a single complaint arguably elevates form over substance.


In addition, I am not sure I agree with the appellate court’s conclusion that its decision does not read the allocation provision out of the policy.  The court said that its ruling was justifiable because it was simply limiting the reach of the allocation provision based on the more specific language in the exclusion. It seems to me that both clauses could have been given effect. That is, the exclusion could be applied to preclude coverage for Sullivan’s claims, and the allocation provision could have been applied in order to preserve coverage for the children’s claims. Indeed, I think it could be argued that the court’s refusal to give effect to both provisions this way does, in fact, and contrary to the appellate court’s assertion, read the allocation clause out of the policy.


To be sure, the exclusion precludes coverage for “Claims.” A “Claim”is a defined term in the policy. As interpreted by the appellate court, a Claim is, in relevant terms, a matter asserted in a complaint. In this case, the complaint asserted claims by a former director, triggering the insured vs. insured exclusion.  The exclusion as written precludes coverage for the Claim, and since the children’s claims were not independent of or filed without the assistance of Sullivan, the entire Claim is precluded from coverage. According to this analysis, it doesn’t matter that the children might have filed their claims in a complaint separate from that filed by their mother; that wasn’t what happened here, so that hypothetical possibility is irrelevant.


Anyway, I think this case presents interesting issues; it kind of sounds like the Eighth Circuit thought so too, commenting as it did that there is “tension” between the Insured vs. Insured exclusion and the allocation provision, and noting that the arguments in favor of an allocation “are not wholly without merit.”  That’s the way it is with the Insured vs. Insured exclusion. Coverage issues under this provision come up over and over again, and it seems like it is always something new. For all I know, there could be yet another appellate decision interpreting the exclusion again tomorrow.