Insured v. Insured exclusions, which exclude from coverage losses for claims brought by one insured against another insured, are frequently enforced. However, litigation can arise when both insured and non-insured entities jointly file a complaint against an insured company, or where the status of a party as an “Insured” comes into question. Both issues were addressed by the Seventh Circuit in Miller v. St. Paul Mercury Insurance Company, 2012 WL 2479552 (7th Cir. June 29, 2012).
The court held that when an insured company is sued by both insured and non-insured plaintiffs, the D&O insurer must defend and indemnify the claims brought by the non-insured plaintiffs but not those brought by the “Insured” plaintiffs. Relying on Seventh Circuit precedent, the court held that the allocation clause of the policy requires defense and indemnification for losses alleged by non-insured plaintiffs, even if co-plaintiffs fall within the insured v. insured exclusion. Such allocation is based on the “relative legal exposure of the parties to covered and uncovered matters,” the court held. In so ruling, the court rejected the notion that the presence of one insured plaintiff “taints the entire suit” so as to eliminate all defense and indemnity obligations under the policy. The court also declined to adopt a “majority rule” where by coverage in this context would be based on the number of claims or the proportion of damages asserted by insured plaintiffs as opposed to noninsured plaintiffs.
The court also held that a trustee who was a former director of the company and who brought suit on behalf of a trust of which the trustee was also a beneficiary was an “Insured” party within the meaning of the exception. The court reasoned that because the former director was the ultimate beneficiary of the plaintiff trust, and as trustee she was suing on behalf of the trust, she fell squarely within the scope of the term “Insured” for purposes of applying the exclusion.