On February 17, 2009, the Northern District of Texas issued a decision in which they applied an Insured v. Insured exclusion to a shareholder derivative action brought by two plaintiffs, only one of which was an “Insured.” The Court concluded that the action was excluded in its entirety based on the plain meaning of the Insured v. Insured exclusion. SeeCarolina Cas. Ins. Co. v. Sowell et al., No. 07-CV-1783 (N.D. Tex. Feb. 17, 2009).
Carolina Casualty issued a directors and officers liability policy to a group of affiliated companies that were engaged in the oil and gas supply business in New Orleans. Subsequently, certain properties leased by the Insureds suffered damage following Hurricane Katrina. An individual Iinsured, Mr. James Sowell, brought a shareholder derivative suit against several directors and officers of one of the insured entities, DOUS, LLC. Mr. Sowell alleged, inter alia, that the individual defendants had breached their fiduciary duties by failing to procure adequate insurance for the damaged property. Another DOUS shareholder, Robert Welsh, who was not an Insured under the terms of the policy, later intervened as a plaintiff in the litigation.
The Insured v. Insured exclusion at issue excluded claims made “by, on behalf of, or in the right of the Insured Entity, or by any Directors or Officers,” but contained an exception for “any derivative action by any security holder of the Insured Entity, but only if such Claim is instigated and continued totally independent of, and totally without the solicitation of, or assistance of, or active participation of, or intervention of any Insured or the Insured Entity.”
The Court held that the Insured v. Insured exclusion was unambiguous and therefore applied its plain meaning. Specifically, the Court held that the shareholder derivative action was excluded by the Insured v. Insured exclusion because it was brought by an Insured, Mr. Sowell, on behalf of an Insured, DOUS. In addition, the Court noted that although Mr. Welsh, who was not an Insured, was serving as plaintiff of this action, the entire claim was nevertheless excluded because Mr. Welsh was not bringing his claims “totally independent of any Insured.” Thus, Mr. Sowell’s presence as a co-plaintiff was sufficient to preclude the application of the exception to the shareholder derivative action exception of the Insured v. Insured exclusion.
In so holding, the Court distinguished an earlier case decided by the Western District of Texas, Federal Insurance Co. v. Infoglide Corp., 05-CV-189 (W.D. Tex July 18, 2006), which had interpreted a similar Insured v. Insured exclusion. That court had held that “the proper construction of the insured v. insured exclusion is that the inclusion of an ‘insured’ as a plaintiff where there are also plaintiffs who are not ‘insureds’ does not bar coverage.” The Sowell Court declined to follow Infoglide because the Infoglide court had interpreted the portion of the Insured v. Insured exclusion that applied to direct, rather than derivative, actions.