Insured v. Insured Exclusion, Allocation Do Not Apply to Related Claims

A Delaware trial court has affirmed its ruling that an Insured v. Insured exclusion does not apply to a shareholder derivative demand brought by a director of the company because the demand constitutes a single Claim with an earlier demand made by the same individual before he became a director. Ameritrans Capital Corp. v. XL Specialty Ins. Co., 2016 WL 3475108 (Del. Super. Ct. Jun 15, 2016).  The court also held that the insurer was not entitled to an allocation because the Insured v. Insured exclusion did not apply.

The insured, an investment company, sought coverage for investigation costs related to two shareholder derivative demands made by a single individual in November 2012 and December 2013. Because the individual who made the demands was a director of the company when he made the December 2013 demand, the company’s D&O insurer denied coverage for that demand, citing the Insured v. Insured exclusion.

After the investment company sued the insurer, the court ruled for the policyholder. The court adhered to its ruling on the insurer’s motion for reconsideration. The court held that, under the policy, the two derivative demands constituted a single Claim first made at the time of the first demand. The court held that the Insured v. Insured exclusion did not apply to the single Claim because the shareholder did not make the November 2012 demand on the investment company when he was an Insured Person. The court opined that its holding did not frustrate the “purpose” of the Insured v. Insured exclusion, as the facts revealed an individual’s “shift[] from being an unhappy stockholder to being an officer and board member,” not collusion.

Finally, the court rejected the insurer’s argument that the policy’s allocation clause would necessitate an allocation between costs incurred for the November 2012 demand and the December 2013 demand. The court held that the Insured v. Insured exclusion did not apply, and therefore there were no non-covered losses necessitating an allocation.