Insured v. Insured Exclusion Bars Coverage for Liquidation Trust’s Claim Against Insured Directors and Officers
A Michigan federal court has held that an insured v. insured exclusion barred coverage for a claim asserted by a liquidation trust against the insured debtor’s former officers and directors. Indian Harbor Ins. Co. v. Zucker, 2016 WL 1253040 (W.D. Mich. Mar. 31, 2016).
A bank holding company filed for Chapter 11. During the proceedings, the creditors’ committee and the debtor agreed to a settlement agreement in which various causes of action belonging to the debtor were transferred to a liquidation trust. The agreement also required the liquidation trustee to pursue those assigned causes of action in court for the benefit of the creditors. The bankruptcy court approved the settlement agreement and eventually approved a liquidating plan. The liquidation trustee filed a complaint against various former directors and officers of the bank, alleging breach of fiduciary duty, which was a claim assigned to the trust by the debtor.
The bank holding company held a D&O policy that provided specified coverage to the former directors and officers sued by the trustee. The D&O policy also provided specified coverage to the “Company,” which was defined to include the bank holding company and various subsidiaries and affiliated entities. The D&O policy included an insured v. insured exclusion that barred coverage for claims made against “Insured Persons” and brought “by, on behalf of, or in the name or right of, the Company or any Insured Person.” The insured v. insured exclusion included several carve-backs, but none of the carve-backs dealt with any circumstance involving bankruptcy of an insured. The D&O insurer denied the directors’ and officers’ request for coverage for the liquidation trustee’s suit, asserting that this exclusion applied.
The court overseeing the ensuing coverage action granted the insurer’s motion for summary judgment, holding that the insured v. insured exclusion barred coverage. The court began by detailing what it described as “inconsistent decisions across the country
from courts encountering disputes over the insured v. insured exclusion,” and endorsed a fact-specific view as to whether such exclusions apply in any given circumstance. Here, the court pointed to the fact that the Company agreed to create the liquidation trust in a voluntary agreement and transferred the causes of action that it had against its former directors and officers, and that the liquidation trustee’s suit asserted those causes of action. Under these circumstances, the court found that the suit was therefore brought “in the name or right of . . . the Company” because there was a “direct connection between the debtor/company/insureds and the Liquidation Trust, which was created by agreement of the Debtors and the Creditors’ Committee,” and the liquidation trust asserted the causes of action transferred to it by the insured debtor in the underlying claim at issue in the coverage action.