The U.S. Court of Appeals for the Second Circuit, affirming a decision by the U.S. District Court for the Southern District of New York, has ruled that an “insured v. insured” exclusion in a directors and officers insurance policy applied to claims brought by a director even if they were not brought in the director's “capacity” as a director.
The Case
In January 2008, Intelligent Digital Systems, LLC (“IDS”), a technology company in the digital recording industry, agreed to sell its assets to Visual Management Systems, Inc. (“VMS”), a company in the video technology business. VMS agreed to pay IDS $1.5 million over time and issued a promissory note to that effect, and it agreed also to add Jay Edmond Russ, a New York attorney who founded IDS, to its board of directors and to hire him as a consultant.
On February 26, 2008, the VMS board of directors met and, after a motion was made and seconded, approved the transaction and Mr. Russ' appointment, conditioned upon completion of the transaction. The transaction closed on April 2, 2008. VMS's general counsel confirmed to Mr. Russ that he would be a director as of its May 2008 meeting. Mr. Russ participated in three board meetings and was paid for his services as a board member.
In December 2008, Mr. Russ announced that he was resigning from the board and might sue VMS for payments owed under the promissory note.
Then, in March 2009, Mr. Russ, IDS, and the Russ & Russ PC Defined Benefit Pension Plan (collectively, the “plaintiffs”) sued VMS and the other five directors.
Beazley Insurance Company, Inc., which had issued a directors and officers insurance policy to VMS, denied coverage under the policy, citing its “insured v. insured” exclusion.
The litigating parties settled the action, with four directors agreeing to pay a total of $75,000, all five directors agreeing to the entry of judgments against them in amounts exceeding $2 million, the plaintiffs agreeing to “unconditionally forbear collection” of the judgments against the five directors, and all five directors assigning their rights under the Beazley policy to the plaintiffs.
The plaintiffs then sued Beazley and sought indemnification for the unpaid amounts of the judgments. The district court ruled in favor of Beazley, dismissing the plaintiffs' complaint.
The plaintiffs appealed to the Second Circuit, arguing among other things that there was ambiguity in the insured v. insured exclusion and that it could be read as applying only to claims brought by directors in their capacities as directors.
The Beazley D&O Policy
The Beazley policy provided that:
The Insurer shall pay on behalf of the Directors and Officers all Loss which is not indemnified by the Company resulting from any Claim first made against the Directors and Officers during the Policy Period for a Wrongful Act.
(Emphasis omitted.)
The policy defined:
Directors and Officers
to include:
all persons who were, now are, or shall be duly elected or appointed directors.
Section III(F) of the policy excluded coverage for:
any Claim . . . by, on behalf of, or at the direction of any of the Insureds, except and to the extent such Claim . . . is employment-related and brought by or on behalf of any of the Directors and Officers.
(Emphasis omitted.)
The policy defined:
Insureds
as:
the Directors and Officers and the Company.
(Emphasis omitted.)
The Second Circuit's Decision
The circuit court affirmed.
In its decision, it explained that the insured v. insured exclusion, on its face, exempted from coverage “any” claim brought by, on behalf of, or at the direction of an insured director, unless the claim was employment-related.
It then said that the exclusion was not limited to claims brought by an insured in his or her “capacity” as a director. On its face, the circuit court continued, the exclusion applied to all claims (except employment-related claims) regardless of whether the director brought the claims in an individual or fiduciary capacity.
Moreover, the circuit court added, the employment-related exception to the exclusion applied only to claims brought by employees – not by consultants such as Mr. Russ.
Accordingly, the circuit court concluded, the plaintiffs' challenge to the application of the insured v. insured exclusion to Mr. Russ' claims failed on the merits.
The case is Intelligent Digital Systems, LLC v. Beazley Ins. Co., No., 16-3548-cv (2d Cir. Sep. 19, 2017). Attorneys involved include: FOR PLAINTIFFS-APPELLANTS: IRA LEVINE, Law Office of Ira Levine, Esq., Massapequa, New York. FOR DEFENDANT-APPELLEE: CHRISTOPHER M. STRONGOSKY (Joseph G. Finnerty III, Neal F. Kronley, on the brief), DLA Piper LLP (US), New York, New York.
Steven A. Meyerowitz
Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. He may be contacted at [email protected].