One of the standard D&O policy exclusions is the Insured vs. Insured (IvI) Exclusion, which precludes coverage for claims brought by one insured against another insured. This exclusion is usually subject to a number of coverage carve-backs preserving coverage for certain kinds of claims that would otherwise be excluded. Many exclusions include carve backs for dilution claims (the Dilution Claims Exception), a provision that is not often tested. In the following guest post, Sarah Abrams, Head of Claims Baleen Specialty, a division of Bowhead Specialty, takes a look at the larger context of AI regulation, takes a look at a recent case interpreting and apply in the Dilution Claims Exception. I would like to thank Sarah for allowing me to publish her article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Sarah’s article.

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On June 23, 2025, the USDC of the Southern District of California ordered that Scottsdale Insurance Co. (Scottsdale) provide coverage to an Insured investor in a previously resolved merger lawsuit. The case is noteworthy because the Court found that the “Dilution Claims Exception” to a Scottsdale D&O policy’s “Insured Versus Insured” (IvI) exclusion applied.  As readers of the D&O Diary may recall, while rare, exceptions to the IvI have been found to require carriers to defend and indemnify parties that are “Insureds” under the policy.  The following discusses the origins of the recently decided coverage case against Scottsdale, the Court’s Opinion, and potential impact on D&O underwriters.

Background

Scottsdale Insurance Company issued a Directors & Officers (D&O) insurance policy to Perspectium Corp., a data analytics firm co-founded by David Loo (Loo). Loo and Steven Hamerslag (Hamerslag) served as directors of Perspectium. Scottsdale filed a declaratory judgment that it had no duty to defend or indemnify Hamerslag in an underlying lawsuit filed by Loo, his wife Sarah Loo, and the Loo Family Trust against Hamerslag alleging breach of fiduciary duty and interference as the result of a merger transaction that purportedly benefited Hamerslag alone, to the detriment of Loo and Pespectium shareholders.

The underlying complaint allegations relating to that merger transaction are as follows. Hamerslag became a director in Perspectium after investing $16 million into the company.  Loo claimed that Hamerslag convinced him, in October 2020, to merge Perspectium into data migration company BitTitan Inc. As part of the transaction, Loo would take an 8% ownership interest in BitTitan, 3% of which was subject to a vesting schedule. Hamerslag immediately sold the post-merger BitTitan to Idera, Inc., resulting in an alleged windfall for Hamerslag and his venture capital firm, TVC Capital, LLC. Loo was laid off following BitTitan’s sale to Idera.

Scottsdale denied coverage under its D&O policy after Hamerslag tendered the underlying lawsuit for coverage, citing the policy’s “Insured vs. Insured” exclusion (IvI). The IvI bars claims brought by one insured against another. Hamerslag filed a complaint against Scottsdale seeking coverage under the D&O Policy.  On top of IvI, Scottsdale asserted in its denial of coverage that the policy’s Dilution Claims Exception did not apply.

Relevant Policy Language

Scottsdale’s IvI exclusion states in relevant part:

Insurer shall not be liable for Loss under this Coverage Section on account of any Claim brought or maintained by, on behalf of, in the right of, or at the direction of any Insured in any capacity, any Outside Entity or any person or entity that is an owner of or joint venture participant in any Subsidiary in any respect and whether or not collusive . . .

The Dilution Claims Exception to IvI restores coverage for a claim if the claim:

…is brought or maintained by any former Director or Officer of the Company solely in their capacity as a securities holder of the Company and where such Claim is solely based upon and arising out of any actual or alleged unfair dilution of such securities holder’s securities interest, but only if such Claim is first made within two (2) years after the date such Director or Officer ceased to be a Director or Officer of the Company and such Claim is made in connection with the sale of a majority of the assets of the Company, the merger of the Company with or into another entity, or the initial public offering of the securities of the Company.

The Court’s Opinion

The Court denied Scottsdale’s Motion for Judgment on the Pleadings (MJP) and granted Hamerslag’s Motion for Summary Judgment (MSJ). First, the Court found Scottsdale was not able to establish on the pleadings that the Loo Family Trust was an “Insured” under the D&O policy.  Second, the Court found that the four-element test put forth by Hamerslag fell within the IvI’s Dilution Claims Exception.

Specifically, the court was persuaded with Hamerslag’s argument that (1) the underlying lawsuit was brought solely in Loo’s capacity as a securities holder of the company; (2) the underlying suit was solely based upon and arising out of alleged unfair dilution[resulting from the BitTitan merger and subsequent sale]; (3) the underlying suit was filed within two years of when the underlying plaintiff ceased to be a Director or Officer of the company; and (4) the underlying suit was brought in connection with the majority sale, merger, or initial public offering of the company.

The court was not, however, persuaded by Scottsdale’s argument that the Loo Plaintiffs brought the underlying lawsuit in a dual capacity, not just as Perspectium shareholders but also as BitTitan employees, BitTitan shareholders, and an Idera employee.  In finding that Scottsdale owed Hamerslag defense and indemnity in the underlying lawsuit under the IvI Dillution Claims Exception, the Court recognized that “California courts…take a more liberal approach that allows for the inclusion of allegations that bear only incidentally on the core of the complaint,” and that, in insurance coverage disputes, California courts construe policy language in favor of an Insured.

Discussion

D&O underwriters may appreciate that D&O coverage is not meant to cover in-fighting, and the IvI exclusion is intended to preclude such claims. Exceptions to the IvI exclusion, including Dilution Exception, may be highly fact-specific. However, as was the case involving Loo and Hamerslag in the case discussed above, a merger and turnaround sale may trigger allegations of dilution by an insured party involved in the transaction.  Thus, it may be important for D&O underwriters to be aware of an anticipated merger involving the Insured company and current Ds and Os.

Finally, it should also be noted that, like the Hamerslag coverage case against Scottsdale, the outcome of a coverage case may depend on the jurisdiction in which the dispute was filed.  As the D&O Diary has previously noted, location can make a difference.  Thus, when underwriting D&O in California, it may be helpful to keep in mind that a court will broadly construe coverage in favor of an insured.

The views expressed in this article are exclusively those of the author, and all of the content in this article has been created solely in the author’s individual capacity. This article is not affiliated with her company, colleagues, or clients. The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any subject matter.