In Sphinx International, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, No. 03-13214, 2005 WL 1389234 (June 14, 2005), the Eleventh Circuit Court of Appeals ruled that an insured vs. insured exclusion in a directors and officers (D&O) insurance policy applied when a former director and officer filed suit against Sphinx International.

 

George Taylor was a director and an officer with Sphinx International and owned 10 percent of Sphinx's shares. He was fired when Sphinx learned he had not disclosed a covenant not to compete from his former employer and because he misrepresented his qualifications.

 

Following Taylor's termination, Sphinx missed earnings projections, and Taylor filed a securities class action suit against Sphinx. He also published a notice to recruit other shareholders to join in the suit. Sphinx sought coverage under its D&O policy, but its insurer, Genesis Indemnity, denied the claim, stating that the insured vs. insured exclusion precluded coverage.

 

The circuit court addressed three of Sphinx's arguments. First, Sphinx contended that Taylor was not a duly elected director and officer because of his failure to disclose the covenant not to compete and his misrepresentation of his qualifications. The court, though, countered that “the plain language of the policy in general, and the word 'duly' in particular, unambiguously includes Taylor as a former director or officer.” The court looked to the dictionary definition of “duly”: “in due manner, time, and degree.” The court concluded that Taylor attained director and officer status through the regular channels—in due manner.

 

Sphinx's next argument was that the rationale behind the insured vs. insured exclusion “was to bar coverage for 'collusive suits[,] such as suits in which a corporation sues its officers or directors in an effort to recoup the consequences of their business mistakes.'” The court disagreed and said that “the exclusion's rationale does not trump its text.” Florida law requires that insurance contracts be interpreted by the plain meaning of their terms. The court found the policy to be unambiguous, and declined to “search for a countervailing rationale.”

 

Finally, Sphinx claimed that, if the insured vs. insured exclusion did apply, only the percentage of the claim attributable to Taylor should be barred. The court noted that “Taylor brought the lawsuit and recruited every other plaintiff.” The court also stated that the policy unambiguously excludes claims brought by any director or officer. The court added that Sphinx seemed to be inviting it to rewrite its D&O policy, and the court declined the invitation.