A New York state intermediate appeals court recently upheld the “plain meaning” of a so-called “insured v. insured” exclusion contained in a not-for-profit directors and officers liability policy, but narrowly construed the exclusion.  See Trustees of Princeton University v. National Union Fire Ins. Co. of Pittsburgh, PA, 15 Misc.3d 1118 (N.Y. Sup. April 10, 2007).  On June 5, 2008, the First Department of the New York Appellate Division affirmed the trial court’s decision.

In the underlying action, the plaintiffs, including three trustees of a charitable foundation, brought an action against Princeton University and other defendants for allegedly diverting donated funds away from their intended beneficiary, the Woodrow Wilson School of Public and International Affairs.

Princeton’s not-for-profit D&O policy contained an exclusion, commonly referred to as an “insured v. insured” exclusion, which excluded “Loss in connection with a Claim made against an Insured … which is brought by or on behalf of the Organization against any Individual Insured … provided, however, this claim shall not apply to any derivative Claim made … without the solicitation of or assistance of or active participation of or intervention of any Individual Insured.”  The policy further defined Individual Insured as “past, present or future directors, officers, trustees emeritus, department heads, faculty members, employees, and volunteers of [the Organization].”  By the terms of the policy, “Organization” included the charitable foundation of which certain of the plaintiffs were trustees.

The trial court below began by noting that “insured v. insured” exclusions are generally intended to prevent collusive lawsuits, and that there was no evidence of collusion in the underlying action.  Nonetheless, the court applied the “plain meaning” of the exclusion and held that there was no coverage for the derivative causes of actions brought by the Individual Insureds.  As to the plaintiffs’ remaining claims for relief, however, the court found that they did not implicate the “insured v. insured” exclusion because they were not brought by the “Organization.”  The court further rejected the plaintiffs’ argument that additional claims for relief brought by the plaintiffs (who were not Insureds) were “derivative in nature” because, the court held, the exclusion applies to the actual derivative claims for relief.

On appeal, the Appellate Division affirmed the lower court decision and again rejected the insurer’s argument that the policy’s “insured v. insured” exclusion should be read to exclude not only the claims brought by or on behalf of the Organization, but to exclude all claims brought by the Individual Insureds.

In its decision, the court apparently implied a severability provision that was not written into the policy at issue.  The policy exclusion at issue applied the exclusion to “Claims,” which was defined to include all of the claims for relief that are connected by common elements of the underlying factual circumstances, and that collectively gave rise to the several claims for relief.  The issue whether to apply severability to “insured v. insured” exclusions currently is receiving increased attention in D&O underwriting circles.  The Princeton decision makes it clear that D&O underwriters cannot simply rely on existing policy wording to support broad readings of these exclusions.

For a copy of the appellate court’s decision, click here.