On December 9, 2022, the U.S. District Court for the Southern District of New York considered whether an “insured v. insured” (IvI) exclusion applied to bar coverage for an underlying lawsuit brought against insureds under a directors & officers (D&O) liability policy by another insured under the same policy, and another noninsured party. Thomas L. Gregory v. Navigators Insurance Company, Case No. 1:22-cv-04834.

Thomas Gregory (Gregory) was an employee of Tarter Gate Company d/b/a Tarter Farm & Ranch Equipment (Tarter Gate). Navigators Insurance Company (Navigators) issued a D&O policy to Tarter Gate, which provided insurance to Tarter Gate’s directors and employees (Policy), subject to its terms and conditions. Insurance afforded by the Policy was subject to an IvI exclusion, which excluded coverage for “any Claim made against any Insured . . . by or on behalf of any Insured or any security holder of the Company.” A carve-out to the IvI exclusion stated that it did not apply to a claim “brought by any security holder of the Company, whether directly or derivatively, if the security holder bringing such Claim is acting totally independently of, and without the solicitation, assistance, active participation or intervention of, the Company or any Insured Person.” The Policy also contained an allocation clause, which required allocating between covered loss and uninsured amounts if a claim includes “both covered and uncovered matters, or is made against any Insured and others.”

During the policy period, three security holders of Tarter Gate (including one insured) filed a shareholder derivative action against Gregory and Josh Tarter (Tarter). Navigators denied coverage for the lawsuit based upon the Policy’s IvI exclusion. The lawsuit was dismissed without prejudice, after which the same plaintiffs filed another lawsuit based upon the same conduct (Lawsuit). The Lawsuit also included C-Ville Fabricating, Inc. (C-Ville), which was not an insured under the Policy. Once again, Navigators denied coverage based on the IvI exclusion.

Following Navigators’ denial of coverage, Tarter filed suit against Navigators in the U.S. District Court for the Eastern District of Kentucky, seeking a declaration that Navigators had a duty to defend and indemnify him in connection with the Lawsuit. The court dismissed Tarter’s suit, finding the IvI exclusion barred coverage. The Sixth Circuit affirmed.

Gregory then filed a separate coverage action in the Southern District of New York, again seeking a defense and indemnity for the Lawsuit. Navigators moved to dismiss the New York suit, arguing that the IvI exclusion barred Gregory’s claim. Although the New York court held that the Kentucky decision did not operate to bar Gregory’s claims on res judicata grounds, it nevertheless followed the Kentucky court’s rationale, and found the IvI exclusion barred coverage for the Lawsuit under Kentucky law. In so holding, the court reasoned that the IvI exclusion was triggered because the Lawsuit was brought by three security holders, including at least one insured. The court also found the carve-out to the IvI exclusion was inapplicable. While the Lawsuit was brought by “security holders,” the court emphasized that the security holders who spearheaded the underlying litigation included an insured under the Policy, such that the security holders could not have been acting “totally independently of” insureds, as required for the carve-out to the IvI exclusion to apply.

Gregory attempted to avoid this conclusion based on the Policy’s allocation clause. He argued that, pursuant to the allocation provision, the claims by C-Ville, a noninsured, would be a “covered … matter,” and thus, an allocation should be made between the C-Ville claims and any claims barred by the IvI exclusion. The court disagreed, reasoning that the IvI exclusion and its carve-out specifically addressed claims brought by insureds and noninsureds, whereas the general allocation clause did not. Accordingly, the court held that the IvI exclusion applied to bar coverage for the Lawsuit in its entirety.