Capacity Issues, Personal Profit Exclusion, and Insured v. Insured Exclusion Do Not Preclude Duty to Defend

A federal appellate court, applying Utah law, has held that an insured v. insured exclusion did not preclude a duty to defend where one insured entity had changed its name and disaffiliated from the other insured entity. Church Mut. Ins. Co. v. Ma’afu, 2016 WL 3997212 (10th Cir. July 21, 2016). The court also held that the insurer had to defend the suit notwithstanding uncertainty over whether the capacity provisions in the policy and the personal profit exclusion would ultimately operate to preclude a duty to defend.

A power struggle at a local church led to a lawsuit in which two different entities sought control over the church assets. One of the entities asserted a claim for breach of fiduciary duty against a church trustee. The trustee tendered the suit to a D&O insurance carrier, which denied coverage on several independent grounds.

In the ensuing coverage litigation, the court granted summary judgment to the insured trustee, holding that he was entitled to a defense. The court first rejected the insurer’s argument that the trustee was not entitled to coverage because he was acting outside of his authority as a director or officer and was thus not sued in an insured capacity. The court reviewed the underlying complaint and determined that it was “unclear” whether the trustee was sued for acting outside of his authority. Because it was “plausible” that the trustee was sued in his capacity as a trustee for the church named as an insured, the court held that the insurer could not avoid a defense on these grounds.

The court then determined that an insured v. insured exclusion did not bar coverage. The relevant exclusion precluded coverage for claims brought by or on behalf of any insured. In the course of the dispute, the church congregation had changed its name. The church was a named insured on the D&O policy under its old name, and was identified as an “affiliated congregation.” The court stated that it was therefore possible to read the policy language as covering the church only when it was “affiliated” with the relevant national religious entity. The court determined that the complaint could plausibly be read to allege that the church had disaffiliated with the national entity. As a result, the court held that the insurer could not avoid a defense on these grounds.

Next, the court rejected the insurer’s argument that the personal profit exclusion in the policy precluded coverage. While the complaint asserted that the church trustee improperly converted church assets, the court noted that this did not mean that he personally profited from those assets.


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