A recent Sixth Circuit decision highlights a split among courts regarding the application of the “insured v. insured” exclusion in D&O policies to “mixed” lawsuits, i.e., suits brought by multiple plaintiffs (who are both insured and non-insured) against insured defendants. In Tarter v. Navigators Insurance Company, No. 21-5129 (6th Cir. Oct. 25, 2021), the court applied the insured v. insured article to bar coverage for a lawsuit brought by an insured shareholder, along with other non-insured plaintiffs, against the insured shareholder’s nephew–who was also an insured. This decision diverges from other circuit court decisions–such as Level 3 Communications v. Federal Insurance Co., 168 F.3d 956, 960-61 (7th Cir. 1999) and Miller v. St. Paul Mercury Insurance Co., 683 F.3d 871, 866 (7th Cir. 2012)–where the courts held that the exclusions did not apply to claims brought by non-insured plaintiffs in “mixed” lawsuits.
When faced with “mixed” lawsuits and a policy with an insured v. insured exclusion, policyholders can and should challenge the insurer’s denial of coverage. Policyholders should:
- Focus on the purpose of this exclusion, which is to prevent truly “collusive suits” brought by an insured against directors and officers to recoup losses resulting from business mistakes.
- Highlight the policy’s allocation provision. Some courts find the allocation provision supports finding coverage for the claims in the lawsuit brought by non-insured plaintiffs.
- Emphasize the arbitrariness of a rule holding that the presence of just one insured plaintiff–even if numerous uninsured plaintiffs are parties–bars coverage for the entirety of the underlying lawsuit.