Ninth Circuit Rejects Insurer's Attempt to Apply D&O Policy's "Insured vs. Insured" Exclusion to Defeat Coverage

The Ninth Circuit recently affirmed a lower court's ruling that a Directors and Officers Liability ("D&O") insurer had a duty to defend against a lawsuit brought by investors in an insured's commercial development project. In a victory for policyholders, the Ninth Circuit rejected the insurer's interpretation of the D&O policy's "Insured vs. Insured" exclusion. While such exclusions are designed to limit coverage for certain intracompany claims, and thus typically purport to limit coverage for claims made by one insured against another insured, the company, and/or any of the company's securityholders, insurers frequently seek to apply the exclusions more broadly.  

In Starr Indemnity & Liability Co. v. Point Ruston LLC, No. 21-35702, 2022 WL 1769645 (9th Cir. June 1, 2022), the Ninth Circuit found inapplicable an exclusion that precluded coverage for "any Loss in connection with any Claim … brought by or on behalf of an Insured …" (the "Insured vs. Insured Exclusion"). An "Insured" included an "Executive," which was further defined to include a "management committee Member" and "Member of the board of managers." "Member" was in turn defined as the "owner of a limited liability company represented by its membership interest, who may serve as a Manager." 

The policyholder sought coverage for a lawsuit brought by Thomsen Ruston, LLC ("TRL") and Jess Thomsen, Inc. ("JTI") alleging mismanagement of insured entities involved in a large commercial development in which the two plaintiffs had invested. The lawsuit alleged that the developer mismanaged defendant Point Ruston, LLC and its affiliates, resulting in them becoming deeply in debt. Point Ruston, LLC had two members, one of which was the plaintiff TRL. A principal of plaintiff JTI was an "Insured" under the policy. On that basis, the insurer denied coverage under the Insured vs. Insured Exclusion.  

The Ninth Circuit found that the insurer failed to prove that the exclusion applied. In doing so, the court rejected the insurer's reading of the policy to conclude that "[t]he plain and unambiguous definition of Executive [within the definition of 'Insured'] does not include any Member; rather, it only includes certain types of Members: any 'management committee Member or Member of the board of managers.'" The court reasoned that although plaintiff TRL was a member of defendant Point Ruston, LLC, TRL was not a "management committee Member or Member of the board of managers," and thus not an "Executive" that qualified as an "Insured."  

The Ninth Circuit also rejected the insurer's argument that the underlying lawsuit was brought "on behalf of" an insured because an insured was a principal of plaintiff JTI. The court explained that "[a]s a matter of basic corporate law, officers and principals of companies bring lawsuits on behalf of the companies, not the other way around." 

The Point Ruston decision serves as an important reminder that where there is policy language limiting the scope of an "Insured vs. Insured" exclusion, insurers will face a high bar to prove such an exclusion applies. Accordingly, when faced with an investor or intracompany lawsuit, policyholders should carefully review their D&O policy language and the entities and officers involved, and vigorously contest insurers' efforts to use "Insured vs. Insured" provisions to avoid their coverage obligations.