In many insurance policies, particularly directors and officers liability policies, coverage is precluded if one insured brings a claim against another insured. But what happens if one of the named plaintiffs is not an insured party? A recent Sixth Circuit Court of Appeals case addresses this issue.
In Tarter v. Navigators Insurance Co., No. 21-5129 (6th Cir. Oct. 25, 2021) (Not Recommended for Publication), the owners of a family business ended up in a dispute with each other, which the court described as a high stakes family feud. One faction of the family sued the other alleging overcharging and embezzling trade secrets. The defendant insured sought coverage under the family company’s directors and officers liability policy. The insurer disclaimed coverage and the insured sued.
The district court, granted the insurer’s motion to dismiss and the Sixth Circuit affirmed. The policy contained the following exclusion:
[A]ny Claims made against any Insured . . . by or on behalf of any Insured or any
security holder of the Company; provided, however, that this exclusion shall not
apply to any Claim . . . brought by any security holder of the Company, whether
directly or derivatively, if the security holder bringing such Claim is acting totally
independently of, and without the solicitation, assistance, active participation or
intervention of, the Company or any Insured Person[.]
Importantly, “Claim” was defined in part as “a civil . . . proceeding brought against any Insured seeking monetary or non-monetary relief and commenced by the service of a complaint . . . .”
The insurer argued that because at least one insured party had commenced a civil proceeding against another
insured party by service of a complaint, it had no duty to defend the lawsuit despite the presence of an uninsured party as an additional plaintiff. The defendant insured argued that because there was a non-insured plaintiff the insured vs insured exclusion did not apply and that the allocation provision allowed for defense of the lawsuit.
In affirming the district court’s order dismissing the complaint, the circuit court relied upon the district court’s analysis and, in particular, its reliance on the reasoning in a similar case from the Eighth Circuit, Jerry’s Enterprises,
Inc. v. U.S. Specialty Insurance Co., 845 F.3d 883 (8th Cir. 2017). In Jerry’s Enterprises, Inc., the Eighth Circuit held as follows:
A claim is not afforded its ordinary meaning under the insurance policy. Rather, the policy defines Claim as a civil proceeding commenced by service of a complaint, i.e., the entirety of the . . . lawsuit. U.S. Specialty, therefore, need only show that the exclusion clause applied to the lawsuit as brought. It has done so. We have no room under the language of the exclusion clause to apply the clause to
some parts of a lawsuit but not others. Id. at 888.
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“the allocation clause does not restore coverage for any part of the” lawsuit, and “applying the allocation clause to the . . . claim would render the assistance exception superfluous, effectively reading that exception out of the contract.” Id. at 890 (citation omitted).
Based on the district court’s opinion, the circuit court affirmed the order dismissing the complaint.