The United States District Court for the Northern District of California, applying California law, has held that an “insured v. insured” clause exclusion in a D&O policy for claims asserted by an insured against an insured did not preclude the insurer from paying for the entire defense costs incurred by insured and non-insured claimants. See Chartrand v. Ill. Union Ins. Co., No. C 08-05905 (N.D. Cal. Aug. 28, 2009). A copy of the decision can be found here.
In the underlying litigation, the recent purchasers of Mentura claimed that they over-paid for the company due to former directors’ and officers’ failure to disclose information regarding patent and trademark disputes. The lawsuit was brought by several plaintiffs, including the company’s chairman of the board of directors and named as a defendant the insured company. When the claim was submitted to the insurer by one of the defendants, the insurer denied coverage based on the fact that the chairman was an insured, asserting that the policy’s insured versus insured exclusion applied. The exclusion provided that it applied to any Claim “brought or maintained by, or on behalf of, or at the direction of any Insured in any capacity, any Outside Entity or any person or entity that is an owner of or joint venture participant in any Subsidiary in any respect and whether or not collusive.”
Coverage litigation ensued, with both parties seeking summary judgment. The Court held in favor of the insured finding that the exclusion at issue must be construed narrowly and concluded that it did not apply to amounts associated with allegations asserted by parties who did not qualify as insureds under the policy. The court noted that under California law “all insurance policies incorporate principles of allocation, whether or not the policy contains an explicit allocation clause.” Based on this reasoning, the court found that as there was the potential for indemnity coverage under the policy with respect to the allegations by the other plaintiffs, the insurer had a duty to defend the suit subject to an allocation.