Insured Failed to Show Claim Fell Within Exception to Insured v. Insured Exclusion

Applying Arizona law, the United States Court of Appeals for the Ninth Circuit has affirmed the dismissal of a coverage action brought by an insured on the grounds that the insured failed to demonstrate the applicability of an exception to the Insured v. Insured exclusion in a D&O liability policy. AMERCO v. National Union Fire Insurance Co. of Pittsburgh, PA, 2016 WL 3157301 (9th Cir. Jun. 6, 2016).

Five plaintiffs filed separate shareholder derivative lawsuits against the insured holding company and a number of its directors and officers. Those suits subsequently were consolidated into one action. The insured company sought coverage for the consolidated action under its D&O policy.  Because one of the plaintiffs was an insured under the policy, the insurer denied coverage for the entire consolidated action based on the Insured v. Insured exclusion. This exclusion barred coverage for any claim by a security holder except when “such security holder’s claim is instigated and continued totally independent of” any Insured.

In the coverage action that followed, the court found that the insured had failed to allege facts sufficient to establish that the Insured v. Insured exclusion did not apply. Specifically, the court held that the insured company failed to allege that the claims by the other four shareholder plaintiffs were totally independent of the claim by the insured shareholder plaintiff such that the exception to the exclusion applied. The court explained that while the “insurer has the burden of proving that a policy exclusion is applicable . . . the insured carries the burden of proving that his claim falls within an exception to that exclusionary clause.” Here, according to the court, the insured did not meet its burden.