Insured v. Insured Exclusion in Directors and Officers Policies

A typical directors and officers liability insurance policy provides coverage for officers and directors of a corporation for all loss that is not indemnified by the corporation resulting from a covered claim for a wrongful act as defined by the policy. Virtually all D&O policies also include an “Insured v. Insured Exclusion,” which precludes coverage for claims brought by or on behalf of or at the direction of any of the insureds (with some exceptions). One of the reasons for this exclusion is to prevent collusion between the company and an officer or director.

In a recent case before the Second Circuit Court of Appeals, the court had occasion to address the application of the Insured v. Insured Exclusion.

In Intelligent Digital Systems, LLC v. Beazley Ins. Co., Inc., plaintiffs were related companies and individuals. The plaintiff corporation sold its assets to a non-party company. As part of the deal, the non-party company agreed to add the controlling individual plaintiff to its board of directors and hire him as a consultant. He was ultimately appointed to the board and participated and was paid for 3 board meetings. Ultimately, things went south and the controlling individual plaintiff resigned from the board and sued the non-party company and its remaining directors. The case was ultimately settled, entry of judgment was agreed and held in abeyance, and the rights to collect on the judgment against any insurance policy were assigned to the plaintiffs.

The non-party company had a D&O policy with an Insured v. Insured Exclusion. Directors and officers were defined as insureds under the policy. The insurance carrier denied the non-party company coverage under the policy because of the Insured v. Insured Exclusion. Plaintiffs brought an action against the insurance company individually and as assignees of the rights of the directors seeking indemnification for the unpaid amounts of the judgment. The case ultimately went to trial and the jury found that the controlling individual was duly elected or appointed to the board within the meaning of the insurance policy and that the exclusion applied. Judgment was entered in favor of the insurance company and this appeal ensued.

In a Summary Order with no precedential effect, the Second Circuit affirmed the district court’s judgment. The court found that because the district court limited the trial to whether the controlling individual was duly elected or appointed to the board, the district court had essentially ruled as a matter of law that the Insured v. Insured Exclusion applied. The Second Circuit agreed with the district court. The court stated that the exclusion, on its face, excepts from coverage any claim brought by, on behalf of, or at the direction of an insured director (with exceptions not relevant here). Notably, the court stated that the exclusion is not limited to claims brought by an insured in the insured’s capacity as a director. It applies to any claim (except employment-related claims) “regardless of whether the director brings the claims in an individual or fiduciary capacity.”

This clarification is especially important because it demonstrates that under New York law, the Insured v. Insured Exclusion is not limited to claims brought by an insured director solely in the her capacity as director, but in any capacity.