Insured Versus Insured—Archived Article
October 2004
Insured-versus-insured exclusions, sometimes called cross-claim exclusions, are routinely incorporated into most D&O policy forms. These exclusions generally preclude from coverage claims made against the directors and officers by other insured persons, the corporation, and in some instances by shareholders making claims against directors and officers with the solicitation or participation of other insureds.
The development of insured-versus-insured exclusions largely was in response to a case brought by the Bank of America against its own officers for losses suffered by the bank from improperly administered loans. When the bank eventually was reimbursed by the D&O insurer, the insurance community was shocked that claims brought by the corporation against its own officers could be considered the proper subject of a D&O insurance policy. Insured-versus- insured exclusions like the example below were adopted by most insurers to prevent a repeat of the Bank of America episode.
The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against the Directors or Officers:
K. by or at the behest of the Company, or any affiliate of the Company or any Director or Officer;
L. by any security holder of the Company whether directly or derivatively unless such security holder bringing such Claim is acting totally independent of, and totally without the solicitation of, or assistance of, or participation of, or intervention of, any Director or Officer, or the Company, or any affiliate of the Company.
Great American D.100A (2/90)
A second wave of events during the 1980s brought the insured-versus-insured exclusion back into the spotlight when the Federal Deposit Insurance Corporation (FDIC), acting as the primary regulator of all federally insured depository institutions, found itself in control of a large number of failed financial institutions. When the FDIC and other federal agencies sought to bring actions against the failed financial institution's directors and officers, insurers argued against coverage and the courts generally upheld the exclusion to preclude coverage. In recent decisions the courts have not always upheld the insured-versus-insured exclusion, often citing ambiguities in the policy language or interpreting the intent of the exclusion to preclude only claims based on collusion between insured parties. Now, most insurers have adopted specific regulatory-agency exclusions to prevent coverage imposed by a liberal judicial interpretation of the insured-versus-insured exclusion. Additional information on this topic is included in the Regulatory Exclusions discussion in the Exclusions section.
The language used by insurers in drafting the insured-versus-insured exclusion varies, but it typically excludes from coverage any claim
· By or in the right or at the behest of the corporation
· By other directors and officers
· By other insureds
· By shareholders
Such exclusions leave directors and officers unprotected for many types of claims. Fortunately, most insured-versus-insured exclusions also include specific exceptions to the exclusion. Consider the sample wording that follows.
Underwriters shall not be liable to make any payment in connection with any Claim:
F. by, on behalf of, or in the right of or at the direction of any of the Assureds, except and to the extent such Claim is brought derivatively by a security holder of the Company who, when such Claim is first made, is acting independently of all of the Assureds except this exclusion will not apply to any Claim in the form of a cross claim, third party claim or other claim for contribution or indemnity by an Assured which is part of and results directly from a Claim which is not otherwise excluded by the terms of this Policy. This exclusion shall also not apply to a wrongful termination of employment Claim brought by a former officer.
Swett & Crawford D&OX(1)-98
Notice the conditional nature of the exception in the above example for claims brought by shareholders. Without language precluding derivative actions involving collusion with or solicitation of board members, the corporation might seek to recoup losses stemming from poor business judgement in the form of a board-inspired derivative action against one or more of the directors or officers or other insureds. Coverage under the D&O policy for such an action directly against a board member or insured officer by the corporation almost always is excluded.
Both derivative and direct actions by shareholders normally are covered when such actions are brought without the solicitation or collusion of other insureds. Since a large number of claims against directors and officers are shareholder-derivative actions, policies containing insured-versus-insured exclusions without this important exception are overly restrictive.
Policies sometimes will contain, usually by endorsement, an exclusion barring claims made by any shareholder owning in excess of a certain percentage (normally 5 percent or 10 percent) of the corporation's stock. Presumably aimed at precluding claims arising out of in-fighting and power struggles, this type of language nevertheless restricts coverage and is considered undesirable.
The insured-versus-insured exclusion sometimes includes an exception for claims made against the directors or officers by any other director or officer, in which the claims are in the form of crossclaims, third-party claims or claims for indemnification. A few D&O policies also address claims alleging wrongful termination. The following example makes specific exception to the insured-versus-insured exclusion for crossclaims, third party claims and claims for indemnification as well as wrongful-termination claims brought by or on behalf of one or more individual insureds.
The underwriter shall not be liable to make any payment for Loss in connection with any Claim made against any of the Insured Directors and Officers:
9. by or on behalf of any Insured, provided that this Exclusion shall not apply to:
a. A Claim that is a derivative action brought on behalf of the Insured Organization if such action is brought and maintained without the solicitation, assistance, participation or intervention of any Insured,
b. A Claim by an Insured Person for contribution or indemnity, if such Claim directly results from another Claim covered under the Policy, or
c. A Claim by an Insured Person for the actual or alleged wrongful termination of that same Insured Person.
Northland Insurance Co. N-2700 (2/97)
Because language often differs between policy forms, it is important to determine if the exception applies to both directors and officers, only to directors, or only to officers. Any coverage for wrongful-termination claims would be limited to claims made against an individual insured and not against the corporation.
Questions sometimes arise regarding the effect insured-versus-insured exclusions have on wrongful-termination claims by employees. In most instances claims by employees are not prevented by the exclusion because employees who are not officers normally are not insureds under a D&O policy. Most policy forms neither expressly grant coverage for nor specifically exclude claims of wrongful termination made by employees, and it is necessary to review the four corners of the policy in order to determine if there is coverage.
When employees are insureds, and if the policy also contains an insured-versus-insured exclusion, that exclusion may eliminate coverage for wrongful-termination claims. However, the insurer may be willing to either eliminates the insured-versus-insured exclusion or modify the exclusion so that it does not apply to claims by employees who are not officers or directors.
The following example uses somewhat-tortuous language to make an exception to the exclusion for wrongful-termination claims made by former employees other than those who are or were directors of the corporation.
The Insurer shall not be liable to make any payment for Loss in connection with a claim or claim made against an Insured:
which is brought by any Director or Officer or by the Corporation; or which are brought by any security holder of the Corporation, whether directly or derivatively, unless such security holder's claim is instigated and continued totally independent of, and totally without solicitation of, or assistance of, or active participation of, or intervention of, any Director or Officer or the Corporation; provided, however, this exclusion shall not apply to a wrongful termination of employment claim brought by a former Officer;
Westport Ins. Group WC DO-103 (7/96)
Wrongful-termination claims made directly against the corporation are not within the scope of the usual D&O policy. However, some insurers will include the entity as an insured for direct actions against.
Additional information on this subject is provided in the Employment-Related Exclusions discussion and the discussion of entity coverage for EPL claims insuring agreements in the Coverage Format section.