Insured vs. Insured: An Exclusion Often Conspicuous by Its Absence
Insured vs. Insured: An Exclusion Often Conspicuous by Its Absence
By David A. Gauntlett*
Introduction
An Insured vs. Insured Exclusion is, as the name suggests, a policy provision that precludes coverage for lawsuits where people or organizations insured by the policy appear on both sides. They are virtually omnipresent in Directors & Officers (“D&O”) and Errors & Omissions (“E&O”) policies, but they are far less common in other policies that can potentially cover business litigation. Knowing all the coverage options under your own policies is obviously important as a defendant, but defendants are also advised to consider the plaintiffs policies.
Standard Policy Language
Though exact language may fluctuate slightly from one policy to another, the claims effectively barred rarely differ. A prototypical example precludes coverage for “any Claim made against an Insured Person . . . by, on behalf of, or at the direction of the Company or Insured Person.”[1] An “Insured Person” is, in turn, typically defined as “any past, present, or future director or officer . . . of the Company”[2]
Exclusion Is Absent in Most CGL Policies
Although the explicit Insured vs. Insured Exclusion is absent in a typical Commercial General Liability (“CGL”) policy, insurance companies try to protect themselves by narrowing the definition of who may qualify as an “insured.”[3] Aram Logistics v. United States Liability Insurance Co.[4] is instructive. Although addressing the defendant’s policy could have embraced potential coverage for what are principally trade secret misappropriation claims but include potentially covered disparagement falling within the policy of the claimant suing Aram. There, two former employees of a logistics company (Diakon) were accused of various wrongful acts related to their founding of a competing logistics company (Aram) while still employed by Diakon.
If these former employees were tasked to make pitches to clients while still employed by Diakon, they might have used their access they secured through being Diakon employees to promote business for their new company as the preferred logistics company to service the clients of Diakon. That activity could potentially have been covered by their then-employer’s policy. That conduct might implicitly disparage or defame Diakon (even while they were still its employees) and trigger “advertising injury” coverage for disparagement or defamation. Diakon’s insurer may argue that such statements were outside the scope of their employment, but another view is that they were “performing duties related to the conduct of [the] business” (i.e., while making the pitch they were tasked to do) and offering the existing clients a context addressing other possible resources to service their needs.
Litigants Must Evaluate Both Sides’ Policies for Coverage Opportunities
Parties are always entitled to acquire copies of an opposing party’s insurance policies during discovery. In fact, the federal rules list potentially applicable insurance policies as one of the mandatory disclosures that parties must make prior to the stage at which documents are requested.[5] In some circumstances (like those described above), a defendant may even be owed a defense or indemnification under the plaintiff’s insurance policies.
This benefit could be undermined by a plaintiff amending pleadings or otherwise altering its litigation strategy upon learning that the defendant is being covered by the plaintiff’s own policy. Luckily, an insurer is not allowed to reveal such facts, even if the plaintiff were to request that information, due to the privileges between an insured, the insurer, and their chosen counsel.[6] Prompt resolution via settlement is to be expected once the insurer realizes it must fund both sides of a lawsuit.
Furthermore, there are a variety of additional reasons why counsel should always carefully evaluate the available policies for both sides of a dispute. Depending on the coverage available to an opposing party, it may be beneficial to amend the pleadings to facilitate an insurer-funded settlement.[7] It will also allow plaintiffs and their counsel to properly account for the possibility of pursuing a policy as a judgment-creditor after a ruling is secured.[8] Retaining expert coverage counsel can aid in this analysis, which is often the most critical aspect of a dispute if the defendant lacks the funds to satisfy a judgment.
CGL Exclusions to Circumvent
Insurers will rarely capitulate when a novel theory of coverage is raised. Expect resistance. For example, under the proposed facts of Aram, the insurer would likely raise the Knowing Violation Exclusion. It precludes coverage for acts “with the knowledge that the act would violate the rights of another and would inflict ‘personal and advertising injury’.”
Defamation and disparagement, however, can be performed in a manner that is negligent or reckless.[9] This exclusion has been held to not bar a defense in analogous fact scenarios where the nature of the asserted conduct can be established without knowledge that the conduct would cause advertising injury. Under the logic of Ohio Cas. Ins. Co. v. Cloud Nine, LLC[10] and similar cases, the Knowing Violation Exclusion cannot apply where the insured might be liable for the potentially covered injury without the requisite scienter.
A First Publication Exclusion may also be raised. It precludes coverage for material first published prior to the policy’s inception, but “fresh wrongs” stand outside the scope of its provisions. Variations in a pitch exposing customers to other options not considered under their existing contractual relationship may implicate wrongful acts if proven but might simply be an appropriate survey to deepen relationships with existing clients that could lead them to then re-evaluate their existing relationship with Diakon upon the creation of a competing entity which the existing employees envisioned creating.[11]
Conclusion
Insurers have effectively eliminated the potential for coverage in an Insured vs. Insured dispute under D&O and E&O policies by incorporating an explicit exclusion. CGL policies (as well as others, such as Homeowner’s) lack that exclusion. While they attempt to achieve the same goal by narrowly defining who qualifies as an insured, those attempts have left holes through which experienced counsel can navigate in order to find coverage in the right circumstances. This is just one of many reasons why it is essential to retain coverage counsel to evaluate insurance policies available on both sides of any litigation.
*David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 553-1010 by voicemail or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[1] Westchester Fire Ins. Co. v. Schorsch, 129 N.Y.S.3d 67, 72 (App. Div. 2020).
[2] Id.
[3] For example, an employee is only an insured for acts “within the scope of their employment or while performing duties related to the conduct of [the] business.”
[4] Aram Logistics v. United States Liability Insurance Co., No. 3:23-CV-01869-H-DEB, 2024 WL 390076 (S.D. Cal. Jan. 31, 2024).
[5] Fed. R. Civ. P. 26(a)(1)(A)(iv) (“[A] party must, without awaiting a discovery request, provide to the other parties . . . any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment.”)
[6] Lectrolarm Custom Sys., Inc. v. Pelco Sales, Inc., 212 F.R.D. 567, 571 (E.D. Cal. 2002) (“The Court finds that the common interest doctrine applies to protect at least those communications between Pelco and Fireman's Fund relating to the claims and defenses in the underlying lawsuit. As to these communications, there is a commonality of interest and the attorney client privilege and the attorney work product privilege are not waived by the disclosure to Fireman's Fund.”)
[7] See David A. Gauntlett, What a CEO Needs to Know About Insurance, https://www.gauntlettlaw.com/news/what-a-ceo-needs-to-know-about-insurance (Aug. 28, 2019).
[8] Cal. Ins. Code § 11580 (“[W]henever judgment is secured against the insured or the executor or administrator of a deceased insured in an action based upon bodily injury, death, or property damage, then an action may be brought against the insurer on the policy and subject to its terms and limitations, by such judgment creditor to recover on the judgment.”)
[9] Aloha Petroleum, Ltd. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, No. SCCQ-23-0000515, 2024 WL 4431797, *9–11 (Haw. Oct. 7, 2024) (“The District Court frames the issue as whether reckless conduct can be an ‘accident’ and thus a covered ‘occurrence.’ . . . Reckless conduct – awareness of risk of harm - falls short of practical certainty [and is therefore covered].”)
[10] 464 F. Supp. 2d 1161, 1168–69 (D. Utah 2006), rev’d on other grounds, 458 Fed. App’x 705 (10th Cir. 2012).
[11] Kim Seng Co. v. Great American Ins. Co. of New York, 179 Cal. App. 4th 1030, 1073 (2009) (“[The First Publication Exclusion] cannot save the insurer when the republication contains new matter that the plaintiff in the liability suit against the insured alleges as fresh wrongs.”) (emphasis added).