7th Circuit Addresses Insured vs. Insured Exclusion

by Traub Lieberman Straus & Shrewsberry LLP
Contact

In its recent decision in Miller v. St. Paul Mercury Ins. Co., 2012 U.S. App. LEXIS 13298 (7th Cir. June 29, 2012), the United States Court of Appeals for the Seventh Circuit, addressing Illinois law, had occasion to consider the application of an insured vs. insured exclusion in a D&O policy.
St. Paul’s insured, Strategic Capital Bancorp, Inc. (“SCBI”), was sued by five plaintiffs for alleged fraud, civil conspiracy, and violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. Of these plaintiffs, three qualified as “insureds” under the St. Paul policy as former directors of SCBI. The other two plaintiffs were never directors or officers of SCBI, nor did they otherwise qualify as insureds. St. Paul denied coverage to SCBI for the lawsuit on the basis of an insured vs. insured exclusion barring coverage for “Loss on account of any Claim made against any Insured : … brought or maintained by or on behalf of any Insured or Company in any capacity … .” On motion to dismiss, the United States District Court for the Central District of Illinois held in favor of St. Paul.
On appeal, the Seventh Circuit noted that insured vs. insured exclusions are standard in D&O policies and that were the underlying suit brought solely by former SCBI directors, the exclusion would operate to bar coverage. Alternatively, were the underlying suit brought solely by non-insureds, it would not apply. The dilemma presented to the court, therefore, was “how to apply the policy when insured and non-insured plaintiffs join their individual claims in one lawsuit.”
The court identified three potential ways to resolve this question. The first would be that as long as at least one non-insured plaintiff is not part of the lawsuit, then the exclusion is inapplicable. The court acknowledged that this “rule would produce arbitrary results depending on whether insured plaintiffs did or did not have a non-insured plaintiff join in the same lawsuit.” Moreover, this rule “would also make it easy for insured plaintiffs to evade the terms and purposes of the insured vs. insured exclusion by recruiting just one non-insured plaintiff to join an otherwise collusive or intramural lawsuit.” The second alternative, proposed by St. Paul, would be that the presence of one insured plaintiff voids coverage for the entire lawsuit, regardless of how many non-insured plaintiffs were in the lawsuit. St. Paul, at oral argument, conceded that under this rule if a lawsuit is brought by ninety-nine non-insured plaintiffs, and just a single insured plaintiff, then coverage would be unavailable. The court found this proposed resolution unavailing as well, explaining that it too invited “arbitrary results depending on whether many people with similar claims file one consolidated lawsuit or many separate lawsuits.”
In light of the arbitrariness of these two potential approaches, the court revisited its reasoning as set forth in Level 3 Communications, Inc. v. Federal Ins. Co., 168 F.3d 956 (7th Cir. 1999), wherein the court required an allocation of indemnity and defense costs for a lawsuit brought by both insured and non-insured plaintiffs.  The Miller court found that this approach:
… minimizes the risk of arbitrary results and discourages efforts to manipulate the result by the ways in which individual claims happen to be combined or separated. This answer also has the advantage of conforming to the parties' reasonable expectations: the insurer owes no duty to indemnify for claims brought by insured plaintiffs but does owe that duty for claims brought by others.
The court observed that the St. Paul policy, similar to the policy in Level 3, required allocation of defense and indemnity costs between covered and non-covered claims. A lawsuit brought by insureds and non-insureds, explained the court, presents a claim “that includes both covered and uncovered matters, depending on the status of the different plaintiffs” and thus, under the reasoning in Level 3, St. Paul owed a coverage obligation to SCBI for the claims brought by non-insureds, but not for those brought by insureds.
St. Paul argued that Level 3 was distinguishable on several grounds, none of which were persuasive to the court. First, St. Paul argued that in Level 3, the insured plaintiff did not join the underlying suit until well after it had been filed. The court, however, concluded that issues of timing, and which plaintiffs are part of the original pleading, are not valid considerations under Level 3. St. Paul also advocated for a “majority” rule, under which the insured vs. insured exclusion would apply to an entire suit if the damages claimed by insured plaintiffs outweighed those claimed by non-insured plaintiffs. The court rejected this theory as well, explaining that:
This proposed additional requirement for a majority of non-insured claimants or dollars has no basis in the St. Paul policy language. It would also invite similarly arbitrary results, depending again on whether insured and non-insured plaintiffs filed separate or joint complaints. What would happen if one or more plaintiffs settled so as to shift the balance one way or the other? And should the relevant majority be the number of claimants or the number of dollars? By contrast, the allocation provision in the St. Paul policy gives us a fairly clear answer: coverage is not all-or-nothing based on one of these (perhaps unstable) majorities. Coverage is allocated based on "the relative legal exposure of the parties to covered and uncovered matters."
Finally, St. Paul argued that certain exceptions to the insured vs. insured exclusion as stated in the policy, by negative implication, operated to bar coverage of an entire claim when it includes the “active” participation of any insured plaintiff, regardless of whether the other plaintiffs are insured or not. The court rejected this argument as well, finding that the “exceptions provide no guidance on how to treat claims by non-insured plaintiffs who were never subject to the exclusion.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Traub Lieberman Straus & Shrewsberry LLP | Attorney Advertising

Written by:

Traub Lieberman Straus & Shrewsberry LLP
Contact
more
less

Traub Lieberman Straus & Shrewsberry LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!