Insured Versus Insured Exclusion Does Not Bar Coverage for Claims Brought by Member of Insured LLC

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Applying Washington law, a federal district court has held that an insured versus insured exclusion does not bar coverage for claims asserted by a member of an insured limited liability company. Starr Indem. & Liab. Co. v. Point Ruston LLC, 2021 WL 3630511 (W.D. Wash. Aug. 17, 2021). The court also held that a lawsuit is not brought “on behalf of” an insured solely because an insured is a principal of the claimant.

The insurer issued a claims-made policy to a limited liability company. The policy excluded coverage for “any Loss in connection with any Claim . . . brought by or on behalf of an Insured” (the “IvI Exclusion”). The Policy defined Insured to include an “Insured Person,” which included an “Executive.” The Policy further defined “Executive” 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.”

On March 11, 2020, sixteen Insureds were named as defendants in a lawsuit alleging that they mismanaged a commercial housing development project in which the plaintiffs invested.  The first investor entity plaintiff was a member of multiple limited liability companies that were Insureds under the policy and defendants in the underlying lawsuit.  The president of the second investor entity plaintiff was also a principal of the first investor plaintiff and an Insured under the policy.  The insurer brought suit seeking a declaration that the policy’s IvI Exclusion barred coverage for the underlying lawsuit.

On summary judgment, the insurer argued that the first investor entity plaintiff constituted an insured because it was a member of multiple Insured limited liability companies. The court held that the entity was not an “Executive” under the policy because it was not a Member of an Insured’s “management committee” or “board of managers.” The court rejected the insurer’s argument that this reading rendered the definition of “Member” superfluous, holding that the policy instead clarified that not all “Members” of an Insured limited liability corporation were “Managers.”

The insurer also argued that the IvI Exclusion barred coverage for the underlying lawsuit because the investor entity plaintiffs brought the lawsuit “on behalf of” their principal, who was also an Insured under the Policy. In support of this argument, the insurer noted that the principal signed the verification in the underlying complaint on behalf of, and served as the authorized representative of, the first investor entity plaintiff. The court rejected this argument, holding that the investor plaintiffs were distinct legal entities from their members, owners, and principals, and that the underlying lawsuit could not be construed as being brought “on behalf” of said members, owners, or principals. 

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