Court Analyzes “Former Director and Officer” and “Shareholder Derivative” Exceptions to Insured v. Insured Exclusion
The U.S. District Court for the District of Massachusetts, applying Massachusetts law, has held that a “former director and officer” exception to an insured v. insured exclusion in a private company management liability policy applied to save coverage under the policy. See Bay Club Member’s LLC v. Selective Ins. Co. of Am., 2023 WL 7413665 (D. Mass. Nov. 9, 2023). The court declined to hold that a separate “shareholder derivative” exception to the exclusion applied.
In 2019, the insured, a club community, proposed a financial transaction that would change how property was transferred to club members. The proposal resulted in two disputes: one with the club’s former board member and managing director, and the other with trustees of a trust, a unitholder of the club (the Trust). The Trust commenced an arbitration, and the board member and managing director joined the arbitration.
The policy contained an insured v. insured exclusion that barred coverage for claims made by or on behalf of the “company,” or any security holder of the “company,” or any “insured person.” However, the exclusion did not apply to “any ‘claim’ brought by any former director or officer who has not served ... for the ‘company’ for at least three (3) years ... , if the former directors or officer bringing such ‘claim’ is acting totally independent of, and without the solicitation, assistance, active participation or intervention of any Directors or Officers or the ‘company.’” The exclusion also did not apply to a “shareholder derivative action,” but only if brought and maintained “without the solicitation, approval, assistance, active participation or intervention of any ‘insured.’”
In analyzing the exceptions to the exclusion, the court held that the insurer had a duty to defend the claims by the former board member and managing director, but not the Trust. According to the court, the claim by the former board member and managing director of the company “clear[ed] the hurdles” of the “former director and officer” exception because the individual had not been a director or officer for well over a decade and his claims were brought independently of the current directors and officers of the company.
However, the court held that the insurer had no obligation to defend the club with respect to the claims brought by the Trust because the “shareholder derivative exception” to the insured v. insured exclusion did not apply. In this regard, the court first noted that the policy defined “shareholder derivative suits” as civil proceedings brought in a “court of law.” Because the Trust brought its claims in arbitration, “[t]hat fact alone disqualifie[d] th[e] action from coverage” because it was not an “actual shareholder derivative suit.” The court further reasoned that, because the former board member and managing director of the company qualified as an “insured,” the Trust’s action was not brought and maintained “without the participation of an insured.” As a result, the court held that the insurer correctly declined to defend the Trust’s claims asserted in the arbitration and the Trust’s state court suit to partially vacate the arbitration award.