Illinois Federal Court D&O Policy Interpretation

“Insured Versus Insured” Exclusion Does Not Require Collusiveness

An Illinois federal court, applying Illinois law, held that based on the clear and unambiguous language of the applicable insurance policy, an “Insured Versus Insured” exclusion in a directors and officers’ liability policy barred coverage in a lawsuit filed by the named insured against another insured. Moreover, the court found that Illinois law itself does not require a showing of collusiveness for such an exclusion to apply.

Andrew Bernhardt, the president, CEO and Chairman of Town Center Bank (“TCB”), was sued by TCB for breach of fiduciary duty and negligence arising from his decision to issue certain loans while he was an employee and officer of TCB. During the relevant time frame, Travelers issued TCB Directors and Officers Liability coverage (the “D&O Policy”). As a result of the lawsuit against Bernhardt, he submitted a claim to Travelers, as an Insured, for coverage under the policy. There was no dispute that both Bernhardt and TCB qualified as insureds under the policy definition. Travelers denied coverage based on the D&O Policy’s “Insured Versus Insured” exclusion which precludes coverage for claims where an insured makes a claim against another insured.

In conducting its analysis of whether the denial of coverage based on the exclusion was proper, the court relied upon the fundamental principle of policy interpretation that ambiguities will not be read into clear policy language. The court noted that “[a]lthough ambiguities are construed in the insured’s favor, a court will not search for ambiguity where there is none.”  The court also stated:  “Insurers have the burden of proving that an exclusion applies. Insureds, in turn, have the burden to prove that an exception to an exclusion restores coverage.”

Bernhardt argued that in order for the policy’s “Insured Versus Insured” exclusion to apply, Travelers must establish that the complaint was a collusive suit. He did not, however, cite any legal authority or policy language that would require Travelers to prove collusiveness to apply the exclusion, but rather, argued that historically the exclusion was designed to preclude coverage for collusive suits. The court disagreed and found that the “Insured Versus Insured” exclusion was clear and unambiguous and therefore extrinsic historical evidence was not relevant. The court stated that there was no requirement pursuant to the terms of the policy or Illinois law that would require a showing of collusiveness for the exclusion to preclude coverage. Travelers Cas. and Sur. Co. of Am. v. Bernhardt, No. 14-CV-128 (N.D. Ill. Oct. 28, 2014).


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