The Insured vs. Insured exclusion is a standard provision found in most D&O insurance policies. As its name implies, the exclusion precludes coverage for claims brought by one insured against another insured. The exclusion is a frequent source of coverage disputes, particularly in the bankruptcy context, due to frequent disagreements over the exclusion’s application to claims brought against company management by representatives of the creditors or of the bankrupt estate. One recurring dispute of this type is the question of the exclusion’s applicability to claims brought against company management by the company as debtor-in-possession. A recent appellate question considered a variation of this question – that is, whether the exclusion precluded coverage for claims brought against company management by the trustee of a liquidation trust as an assignee of the company as debtor in possession. In a June 20, 2017 opinion (here), the Sixth Circuit (applying Michigan law) held that the exclusion precluded coverage for the liquidation trustee’s claim. The appellate ruling raises some interesting issues, discussed below.
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Insured vs. Insured Exclusion: No Coverage When Claim Includes Both Non-Insured and Insured Claimants
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.
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Eighth Circuit: Insured vs. Insured Exclusion Precludes Coverage for Claims Brought by Both Insured and Non-Insured Persons
You 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.
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Ninth Circuit: Insured vs. Insured Exclusion Unambiguously Excludes FDIC’s Failed Bank Claims
During the bank failure wave that followed the global financial crisis, one of the recurring questions was whether or not the failed banks’ D&O insurance policies’ insured vs. insured exclusion precluded coverage for the FDIC’s liability claims as receiver for the failed bank against the banks’ former directors and officers . As I noted in a post late last year, the general consensus among the federal appellate courts is that the exclusion’s applicability to FDIC-R claims is ambiguous and therefore that the exclusion does not preclude coverage. As I also noted, however, there was an exception to this consensus, reflecting important wording differences sometimes found in the exclusion.
Consistent with this exception to the consensus, on January 10, 2017, the Ninth Circuit, applying California law, held in an unpublished opinion that the applicable D&O policy’s insured vs. insured exclusion was not ambiguous and precluded coverage for the FDIC’s claims against the former directors and officers of the failed Security Pacific bank. Unlike the exclusion found in many D&O insurance policies, the policy at issue in the Ninth Circuit’s case specifically precluded coverage for claims brought by any “successor” or “receiver.” The Ninth Circuit’s opinion can be found here.
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Ninth Circuit Holds Applicability of Insured vs. Insured Exclusion to FDIC-R Claims to be Ambiguous
During the course of the wave of failed bank litigation following in the wake of the global financial crisis has been a raft of related coverage litigation addressing the question of whether coverage for claims by the FDIC as receiver of the failed bank against the bank’s former directors and officers is precluded by the D&O insurance policy’s Insured vs. Insured exclusion. A number of courts have found the exclusion to be ambiguous and therefore that the exclusion does not preclude coverage for the FDIC-R’s claims (for example, refer here), while other courts have found the specific exclusions at issue to unambiguously preclude coverage (refer for example here). In the most recent court decision to address these issues, the Ninth Circuit, in a short unpublished October 19, 2016 per curiam opinion (here) affirmed the holding of the district court finding the Insured vs. Insured exclusion applicability to claims brought by the FDIC as receiver is ambiguous, and therefore the exclusion cannot be applied to preclude coverage for the FDIC’s claims against the former directors and officers of the failed Pacific Coast National Bank.
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Thinking About Exceptions and Alterations to the Insured vs. Insured Exclusion
Among the terms and conditions typically found in a D&O insurance policy is the so-called “Insured vs. Insured” exclusion, which precludes coverage for claims brought by one insured against another insured. The exclusion often figures in D&O insurance coverage disputes, as I have frequently noted on this blog. While the exclusion broadly precludes coverage for an entire category of claims, the exclusion often also has exceptions that preserve coverage for certain types of claims that would otherwise be excluded.
In a recent case in the Northern District of California, a D&O insurance policyholder tried to argue that the underlying claim came within one of the standard coverage carve-backs typically found in this type of exclusion, a provision preserving coverage for derivative claims. In a September 26, 2016 order (here), Northern District of California Judge Haywood S. Gilliam, Jr., applying California law, held that the Insured vs. Insured Exclusion applied to preclude coverage and that the underlying lawsuit did not come within the coverage carve-back. The parties’ dispute and the court’s ruling provide a useful backdrop to think about the exclusion and alternative wordings that are sometimes available in the marketplace.
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D&O Insurance: Thinking About the Insured vs. Insured Exclusion
Though 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.
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Guest Post: Court Holds Insured vs. Insured Exclusion Unambiguous, Precluding Coverage
As I have frequently noted on this blog, most recently here, the question of whether or not the Insured vs. Insured applies to preclude coverage is a frequently recurring D&O insurance coverage issue. In the following guest post, Peter Webster of the Carlton Fields law firm takes a look at a recent Florida intermediate appellate court decision interpreting and applying a D&O insurance policy’s Insured vs. Insured exclusion. Peter and his Carlton Fields colleague Patricia Thompson represented the insurer in the proceeding. I would like to thank Peter for his willingness to publish his 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 Peter’s guest post.
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Insured vs. Insured Exclusion Bars Coverage for Liquidation Trust’s Claim Against Bankrupt Firm’s Execs
Many issues become complicated in the bankruptcy context. That is certainly true of D&O insurance coverage issues. A recent coverage decision out of the Western District of Michigan illustrates this point. In a March 31, 2016 opinion (here), Judge Janet Neff, applying Michigan law, held that the relevant D&O insurance policies’ Insured vs. Insured exclusion precluded coverage for a claim that was first transferred by a bankrupt company to a Liquidation Trust and then asserted by the Liquidation Trust against the company’s former directors and officers.
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D&O Insurance: Insured vs. Insured Exclusion Applies Even When Claimants Include Both Insureds and Non-Insureds?
The 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.
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