In Travelers Casualty and Surety Co. of America v. Bernhardt, Case No. 14-CV-128, 2014 WL 5461871, *1, 6 (N.D. Ill. Oct. 28, 2014), the federal district court of northern Illinois (eastern division) granted the insurer’s motion for summary judgment and ordered that declaratory judgment be entered in its favor. The court held that based on the plain language of the policy’s “Directors and Officers Liability Coverage Insuring Agreement” (D&O policy), the insurer need not defend the former president and CEO of the policyholder in a suit brought by the policyholder itself. Id. at *6.
The defendant in Bernhardt, a former president and CEO of a bank (the policyholder), was sued in Illinois state court for breach of fiduciary duty and negligence. Id. at *3. The policyholder claimed, among other things, that the defendant issued several “questionable” loans without adhering to bank policies or good banking practices. Id. The insurance policy contained a D&O Policy where the insurer would pay the loss “not indemnified by the Insured Organization [policyholder]” for which the “Insured Person” becomes obligated to pay during the covered policy period, and advance defense costs under certain conditions to an “Insured Person”. Id. at *1-2. An “Insured Person” is defined by the policy as any person “duly elected or appointed director, officer, Manager . . . or any functional equivalent position.” Id. at *2. Once the policyholder filed suit, the defendant sought coverage from the insurer under the D&O Policy. Id. at *3. However, the insurer denied coverage based on the policy’s “Insured Versus Insured Exclusion,” which precludes coverage for claims where an Insured Person is involved in a suit with the policyholder. See id. at *3, 2.
The court granted the insurer’s motion for summary judgment in its suit for declaratory judgment. Id.at *1, 6. Though the defendant argued that historically, the relevant exclusion only applies to “collusive suit[s],” id. at *5, the court reasoned that such a “historical context” creates no duty for the insurer to prove collusiveness if “the policy itself does not require such a showing.” Id. at *6. Moreover, the court reasoned that the Seventh Circuit specifically identified situations where the exclusion applied without collusiveness (e.g., suits arising between members of a corporate family). Id. Thus, according to the court, the exclusion language was “clear and unambiguous” in precluding coverage. Id.
Bernhardt serves as an example of a court applying the unambiguous policy language to enforce an agreement between the policyholder and the insurer. In the D&O liability context, both the policyholder and the insured person claiming coverage are bound by the policy itself, and despite attempts by claimants to expand coverage, courts may continue to rely on the policy terms to define the contours of coverage.