Insured v. Insured Exclusion

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The United States Court of Appeals for the Third Circuit, applying Delaware law, has held that a D&O policy’s Major Shareholder Exclusion, barring claims brought against the insured entity by a company owning five percent or more of the entity, was ambiguous as applied to a company acquiring one hundred percent of the insured’s stock after the policy period.  EMSI Acquisition, Inc. v. RSUI Indem. Co., 2019 WL 4511948 (3d Cir. Sept. 19, 2019).  The court also rejected the insurer’s argument that the insured’s settlement with the acquiring company did not constitute “Loss” under the policy.
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A Texas intermediate appellate court, applying Texas law, has held that an insured-versus-insured (IvI) exclusion did not bar coverage for an arbitration award because the underlying dispute arose from alleged wrongful employment practices, bringing the claim within an exception to the exclusion.  Prophet Equity LP v. Twin City Fire Ins. Co., 2019 WL 3886651 (Tex. App. Aug. 19, 2019).  The court also determined that the insurer had not met its burden of proving that any portion of the arbitration award constituted uncovered loss such that an allocation should be imposed.  Id.
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A federal district court in Massachusetts has held that an insurer properly denied coverage for a claim against an insured church brought by another church that had broken away from the original entity because the breakaway church was not an “insured” under the original church’s policy.  Newton Covenant Church, et al. v. Great Am. Ins. Co., 2019 WL 3464705 (D. Mass. Jul. 31, 2019).
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The United States District Court for the Northern District of Illinois, applying Oklahoma law, has held that the insured bears the burden of demonstrating that an exception to an otherwise applicable exclusion applies to restore coverage.  World Water Works Holdings, Inc. v. Continental Cas. Co., 2019 WL 2576560 (N.D. Ill. June 24, 2019).
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The United States District Court for the Central District of California, applying California law, has held that an insurer lacked adequate information to deny coverage under an insured vs. insured exclusion in a D&O policy.  MJC Supply, LLC v. Scottsdale Ins. Co., 2019 WL 2372279 (C.D. Cal. June 4, 2019).  The court also held that the insureds’ notice under one policy constituted sufficient notice of the claim under two policies issued to a different named insured.  However, the court held that the insureds were not entitled to recover the difference between a judgment entered in their favor and a subsequent settlement of multiple lawsuits because the insureds did not sustain a “Loss.”
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Applying Massachusetts law, a federal district court has held that an insurer owed a duty to defend based on allegations regarding a law firm’s failures to notify clients of an attorney’s departure and to transfer client materials.  Governo v. Allied World Ins. Co., 2018 WL4685566 (D. Mass. Sept. 28, 2018).  In reaching this determination, the court determined the alleged conduct satisfied the policy’s definition of “Legal Services Wrongful Acts.”
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Applying both New York and Nevada law, the United States Court of Appeals for the Second Circuit has held that an insurer correctly denied coverage under its directors and officers liability policy based on the insured v. insured exclusion.  Intelligent Digital Sys. L.L.C. et al. v. Beazley Ins. Co., 2017 WL 4127540 (2d Cir. Sept. 19, 2017).  This conclusion was reached despite arguments that the exclusion was ambiguous, or, in the alternative, that because the company’s bylaws were not followed, the claimant was not “duly elected or appointed” as a director of the company under the meaning of the Policy.
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The United States District Court for the Northern District of California has found that an insurer was not obligated to cover an insured’s settlement in a wage and hour class action lawsuit because the failure to pay wages was not a “wrongful act” under the policy.  W.G. Hall, LLC v. Zurich Am. Ins. Co., 2017 WL 3782771 (N.D. Cal. Aug. 31, 2017).
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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).
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The United States Court of Appeals for the Sixth Circuit, applying Michigan law, has held that an insured vs. insured exclusion bars coverage for a claim against an insured company’s former officers assigned during bankruptcy to a liquidating trust. Indian Harbor Ins. Co. v. Zucker, 2017 WL 2641085 (6th Cir. June 20, 2017).
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