As I readers of this blog well know, a frequently recurring D&O insurance question is whether or not the policy’s insured vs. insured exclusion operates to preclude coverage. One of the many issues that can arise under the exclusion is whether or not the exclusion precludes coverage if the underlying claim is brought both by claimants that are insured persons under the policy and persons that are not insured persons. In a January 30, 2017 decision applying Florida law (here), Southern District of Florida Judge Beth Bloom ruled that a condominium association’s D&O insurance policy’s insured vs. insured exclusion barred coverage for the a claim brought by two claimants, one of whom was insured under the policy and one of whom was not.
The Marbella Condominium Association hired a contractor to install hurricane impact windows in the association’s condominium building. The windows were not compliant with city requirements. The city issued a notice of violation to the association. Two condominium owners, Jack Leone and Franklyn Field, sued the association, the contractor that installed the windows, and Norman Sloane, the association’s president. Leone previously was the association’s president. The association submitted the claim to its D&O insurer, which denied coverage for the claim, in reliance on the policy’s insured vs. insured exclusion. The association and Sloane filed a civil action seeking a judicial declaration that they were entitled to coverage under the policy. The insurer filed a motion for judgment on the pleadings.
The policy defines Insured to mean “any Insured Organization and/or any Insured Person.” The policy defines the term “Insured Person” to mean “any past, present or future director, officer, trustee, Employee, or any committee member of a duly constituted committee of the Insured Organization.”
The policy’s Insured vs. Insured exclusion provides that “The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against any Insured … Brought by or on behalf of any Insured.” (A provision in the exclusion preserving coverage for claims brought by officers who have not served in the capacity for at least three years prior apparently did not apply; in any event, it does not appear that arguments based on the this provision.)
The January 30, 2017 Order
On January 30, 2017, Judge Bloom granted the insurer’s motion, finding that the insured vs. insured exclusion operated to preclude coverage, even though the underlying lawsuit involved claims by a non-insured person (Field) as well as by an insured person (Leone). Bloom cited and expressly relied on two cases in support of her decision, PowerSports, Inc. v. Royal & Sunalliance Insurance Company, 307 F. Supp. 2d 1355 (S.D. Fla. 2004) and Sphinx International, Inc. v. National Union Fire Insurance Company of Pittsburgh, Pennsylvania, 412 F.3d 1224 (11th Cir. 2005).
The association and Sloan had tried to argue that the exclusion did not apply, relying on the Seventh Circuit’s 1999 decision in Level 3 Communications, Inc. v. Federal Insurance Company. In that case, plaintiffs who were not insured persons initially brought the underlying claim. An additional plaintiff who was an insured person under the policy at issue was later added as a claimant in the case. The Seventh Circuit held that the insured vs. insured exclusion did not preclude coverage, because applying the exclusion to preclude coverage “would produce the odd result that a claim fully covered when made could become fully uncovered when another plaintiff was permitted to join it.”
Judge Bloom said that the circumstances involved in the Level 3 case were not present here, since here, unlike in Level 3, the underlying action at the outset involved claims by both an insured person (Leone) and an individual not insured under the Policy (Field), and “was therefore not covered from the inception,” and the exclusion operates “to bar coverage for the entire Underlying Action.”
Judge Bloom rejected the argument that the two underlying plaintiffs’ claims could be distinguished on the basis that they each sought distinct damages. Apparently this argument was made in reliance on the policy’s allocation provision, which allow loss to be allocated between covered and non-covered matters. She said that “while the measure of damages may be different by virtue of Field and Leone owning separate units, the claim asserted were brought on behalf of both together, and stemmed from the same installation of non-compliant glass.” Judge Bloom added that “As such, the allocation provision of the Policy does not apply since the duty to defend was not triggered.” Judge Bloom cited with approval from an earlier Southern District of Florida decision as saying that “allocation clauses only become relevant in the event that a loss involves both covered and uncovered claims. Whereas this action involves uncovered claims only, the allocation question is moot.”
The outcome of this case is consistent with the January 2017 decision of the Eighth Circuit (discussed here), in which the appellate court affirmed a district court holding that the insured vs. insured exclusion in the relevant D&O insurance policy operated to preclude coverage for the underlying action, which involved claims brought both by an insured person and by her children who were not insured persons under the policy.
As I said in my discussion of the Eighth Circuit decision, the claims in the underlying action (both in that prior case and in this one) could have been brought as separate complaints. In neither case did the non-insured person’s claims depend on the claims of the insured person. To say that the claims by the non-insured person — which could have been brought separately and, if they had, would have not been precluded from coverage – are precluded because they were brought in an action that included both claimants’ claims arguably elevates from over substance.
As I also noted in my discussion of the Eighth Circuit decision, there is an argument that the insured vs. insured exclusion could be read together with the allocation provision so that both provisions in the policy are given effect. That is, the exclusion could operate to preclude coverage for the insured person’s claim but not for the claim brought by the non-insured person, and the allocation provision could be applied to separate covered amounts from non-covered amounts.
All of that said, I recognize that the recent court decisions are lining up in favor of the point of view that the exclusion applies to preclude coverage for an entire claim, even if the claimants include persons who are not insured persons under the policy. And I suppose that makes sense. It certainly could be argued that it doesn’t matter that hypothetically the claims of the insured person and the non-insured person could have been brought separately, since that didn’t happen here.