Insured v. Insured Exclusion Bars Coverage for Shareholders’ Suit Spearheaded by Former Director

Applying Minnesota law, the United States Court of Appeals for the Eighth Circuit has held that a policy’s insured versus insured exclusion bars coverage for a suit filed against the insured company by a former director and two other shareholders regarding share value.  Jerry’s Enterprises, Inc. v. U.S. Specialty Ins. Co., 2017 WL 104468 (8th Cir. Jan. 11, 2017).  The court refused to allocate any portion of the claim brought by the former director’s non-insured shareholder daughters to covered loss. 

The daughter of a founder of a closely held corporation was appointed to the board of directors, wherein she raised concerns about the value of her shares and those of her daughters.  After her resignation from the board, she and her two daughters filed suit against the company and certain of its directors and officers alleging misconduct that had lowered the value of their shares.  The company’s D&O insurer denied coverage for the claim based on the policy’s insured versus insured exclusion, which barred coverage for any claim “brought by or on behalf of, or in the name or right of . . . any Insured Person, unless such Claim is: (1) brought and maintained independently of, and without the solicitation, assistance or active participate of . . . any Insured Person.”

The district court held that the exclusion barred coverage for the claim, and the appellate court affirmed.  The appellate court determined that the former director, undisputedly an Insured Person under the policy, was an active participant in the lawsuit, and thus the exclusion was triggered and the assistance carve-out did not apply.  The court rejected the insured company’s argument that the claims of the former director should be treated differently from the claims of her non-insured daughters, holding that the lawsuit is a single claim to which the exclusion applies.  Similarly, the court rejected the company’s request to apply the policy’s allocation provision, finding that the insured director was the “driving force of the litigation,” and thus her assistance in the litigation defeated coverage for her non-insured daughters.