An Illinois federal court recently granted an insurer’s motion for judgment on the pleadings based on an insured v. insured exclusion, which the court found was triggered by a claim brought “on behalf of” the insured by the insured’s receiver. Oliver v. Indian Harbor Insurance Company, No. 07-C-5002 (N.D. Ill. Feb. 27, 2008).
The insurer issued to an investment management firm a “financial services liability policy” that provided coverage for investment fund management liability and professional liability. During the policy period, the Securities and Exchange Commission investigated the insured company and ultimately placed it into receivership. The appointed receiver then brought an action for breach of fiduciary duty and other claims for relief against the founders of the insured company, who were also insureds under the policy. One of the individual insureds then sought coverage from the insurer.
The Court held that no coverage existed for the receiver’s action because the action was excluded from coverage under the plain meaning of the policy’s so-called “insured v. insured” exclusion, which excluded claims brought “on behalf of” any insured. The individual insured argued that (1) the phrase “on behalf of” contained in the insured v. insured exclusion should be understood as “for the benefit of” and that the action should, therefore, not be excluded because, although brought in the name of the insured company, the ultimate beneficiaries of the receiver’s action would be the company’s investors and creditors; and (2) the insured v. insured exclusion should not be enforced because the underlying purpose of such exclusions (i.e., to prevent collusive lawsuits ) did not apply to the matter. The court rejected both arguments, finding that the language of the exclusion was unambiguous and therefore declining to consider the exclusion’s purported underlying purpose.
It should be noted that many director and officer liability (“D&O”) and other management liability insurance policies contain express carvebacks to insured v. insured exclusions that exempt from these exclusions claims brought by receivers or trustees of the insured company. In the face of such a carveback, the court’s analysis above probably would not apply.
