The United States District Court for the Northern District of Ohio, applying Ohio law, has held that an insured v. insured exclusion in a D&O policy does not bar coverage for a suit by six shareholders of the policyholder company alleging breach of fiduciary duty, even though one of the six plaintiffs was a former director of the company. Home Federal Savings & Loan Assoc. of Niles v. Federal Ins. Co., 2007 WL 2713060 (N.D. Ohio Sept. 14, 2007). The court held instead that the exclusion barred coverage only for the portion of the claim allocable to the former director.
The insured v. insured exclusion in the D&O policy at issue excluded coverage for all "Loss on account of any D&O Claim or Insured Organization Claim (a) brought or maintained by or on behalf of any Insured. . . ." The policy defined "D&O Claim" to mean "a civil proceeding commenced by the service of a complaint or similar pleading . . . against any Insured Person." The policy further provided for an allocation in the event a Claim gives rise to "Loss that is covered by this Policy and also Loss that is not covered by this Policy."
In the underlying action, six shareholders brought suit against the company's directors and officers, alleging that the directors and officers breached their fiduciary duties. One of the six shareholder plaintiffs was a former director of the company. The insurer denied coverage for the entirety of the suit based on the insured v. insured exclusion, and the company brought this coverage action in response.
The court first held that the plain language of the exclusion barred coverage for litigation by the former director. In so holding, it rejected the argument that the insured v. insured exclusion should be read only to bar coverage for "collusive" suits. The court found this argument "unpersuasive" and ruled that it must apply the exclusion "as written" rather than in accord with an alleged purpose to exclude only collusive suits. The court also rejected the argument that the exclusion should not apply to a suit by a former director when that individual is suing as a shareholder and not in his capacity as a former director. The court reasoned that "[n]othing in the policy's terms distinguishes among the various capacities [in which] an insured could bring a claim."
The court held that the claim against the five uninsured shareholders was covered, and the allocation provision of the policy should apply to address the non-covered claim by the former director. The court opined that each of the plaintiffs could have brought suit separately and that, as such, each of their severable actions constitutes a separate "claim" under the policy. The court then adopted the reasoning in Level 3 Communications v. Federal Insurance Co., 168 F.3d 956 (7th Cir. 1999), and Federal Insurance Co. v. Infoglide Corp., 2006 WL 2050694 (W.D. Tex. July 18, 2006), which held that the allocation provision governed coverage for the portions of a suit brought by noninsured plaintiffs. The court held that in the alternative, the policy was ambiguous and therefore provided coverage for the suit as brought by the remaining shareholder plaintiffs.