The Superior Court of New Jersey, Appellate Division, applying New Jersey law, has held that an insured vs. insured exclusion bars coverage under a directors and officers liability policy for counterclaims brought against an officer by the company and fellow officers.  Abboud v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 2017 WL 2665133 (N.J. Super. Ct. App. Div. June 21, 2017).

The insured officer brought suit against the company and four of its managers for allegedly attempting to remove him from the board of managers and from his position as chief executive officer.  The company and other managers asserted various counterclaims against the officer, alleging that he had engaged in self-dealing and exploited the company’s opportunities for his own personal gain.  They then obtained partial coverage for the former officer’s claim from the company’s D&O and EPL insurer for the lawsuit under the EPL insuring agreement.  However, the officer did not notify the insurer until seven months after the counterclaim against him was filed.  The insurer did not respond to the officer’s notice, and the officer filed a declaratory judgment action against the insurer, seeking indemnity and defense coverage for the counterclaims under the D&O coverage part.  The insurer argued in its motion for summary judgment that the insured vs. insured exclusion, which in relevant part bars coverage for any claim “made against the Insured . . . which is brought by or on behalf of a Company or Individual Insured, other than an Employee of the Company,” precluded coverage for the counterclaims.  The trial court granted the insurer’s motion for summary judgment, determining that the insured vs. insured exclusion plainly barred coverage for the counterclaims.  In so holding, the court rejected the officer’s arguments that the exclusion applied only if there was collusion among the insureds and that the enforcement of the exclusion would frustrate his reasonable expectations.

On appeal, the court held that the insured vs. insured exclusion plainly and unambiguously barred coverage.  The court noted that the exclusion barred coverage when the claim was made by either an executive of the company or the company itself.  Because the counterclaims asserted against the officer were brought by the company itself and four of its executives, the exclusion applied.  The court rejected the officer’s collusion and reasonable expectations arguments.  As to the officer’s collusion argument, the court examined the history behind the insured vs. insured exclusion and highlighted that its original purpose was to bar coverage both for collusive suits and for suits arising out of disputes between members of a corporation.  In rejecting the officer’s reasonable expectations argument, the court recognized that the policy language was straightforward, that the policy had been issued to a sophisticated consumer, and that the public at large had no identified interest in finding coverage.