Applicability of Insured v. Insured Exclusion Can Be Determined By Reference to Complaint Alone

The United States District Court for the Southern District of Indiana has held that an insured v. insured exclusion barred coverage for a lawsuit brought in the name of a music fraternity against its president and executive director, even though the plaintiff in the underlying suit ultimately was determined not to have standing to bring the suit in the name of the fraternity.  RSUI Indem. Co. v. Lichtenberg, 2022 WL 740756 (S.D. Ind. Feb. 25, 2022).  The court held that the applicability of the insured v. insured exclusion could be determined by reference to the underlying complaint alone, regardless of the results of the underlying lawsuit.  Id.

A music fraternity, by and through its national executive committee, filed a lawsuit against the fraternity’s president and executive director seeking, among other things, an order barring them from performing their duties, disposing of the fraternity’s assets, or entering the fraternity’s headquarters.  The circuit court dismissed the lawsuit on the basis that the executive committee lacked standing to sue in the fraternity’s name.  The court of appeals affirmed.  The president and director noticed the lawsuit under the fraternity’s management liability policy, and the insurer denied coverage on the basis that the insured v. insured exclusion applied.

In the ensuing coverage litigation, the insureds argued that the insured v. insured exclusion did not apply because the underlying lawsuit was not brought “by or on behalf of” the fraternity, as evidenced by the underlying courts’ determination that the executive committee lacked authority to sue in the fraternity’s name.  The insurer, on the other hand, argued that the exclusion’s applicability could be determined by reference to the complaint alone, which was captioned in the name of the (insured) fraternity.  According to the insureds, if that were the rule, the insurer “could defeat coverage even where ‘a total stranger decided to bring a complaint [against him] and caption it in the name of the Fraternity.’”

The court determined that the applicability of the insured v. insured exclusion could be determined solely by reference to the complaint because “[i]t is the nature of the claim that defines an insurer’s duty to defend, not its merits.”  Although the court acknowledged as “true enough” the insureds’ assertion about a stranger-filed complaint possibly triggering the exclusion, it dismissed that scenario as “quite unlikely,” since any attorney who filed such a complaint would almost certainly be sanctioned.  The court held that “because the complaint reveals a claim clearly subject to the [insured v. insured] exclusion,” the exclusion applied, and the insurer did not owe a duty to defend.

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