Federal District Court finds that “Insured vs. Insured” Exclusion Does Not Bar Coverage
January, 2007
In Megavail Inc., et. al. v. Illinois Union Ins. Co., No. 05-1374, 2006 WL 2045862 (D. Or. July 19, 2006), the U.S. District Court for the District of Oregon found that an "insured vs. insured" exclusion did not excuse an insurer for paying for the defense of directors and officers of Megavail Inc., a cable television advertising provider, in an underlying shareholder derivative suit because some plaintiffs had no connection to Megavail.
In the underlying (consolidated) derivative breach of fiduciary duty actions, two of the six shareholders who sued Megavail were former directors, officers, and insiders. Illinois Union Insurance Company denied Megavail's request to pay for the defense of the shareholder suits, claiming, among other things, that the "insured vs. insured" exclusion barred coverage for suits brought against the insured company by insured directors and officers. Megavail and four defendants from the underlying suit filed a coverage action against Illinois Union claiming breach of insurance contract for failing to pay for the defense.
At summary judgment, the Magistrate Judge found that the "insured vs. insured" exclusion barred coverage for any action brought by or in the name of the company. Megavail and the directors and officers filed objections to the Magistrate's findings. Chief U.S. Oregon District Judge Ancer Haggerty acknowledged that D&O policies commonly bar coverage suits brought by insured companies against their own insured directors and officers because of the possibility of collusion, but further stated that, under Oregon law, if a Complaint provides any possible basis for recovery that could be covered by an insurance policy, the Court should interpret the policy strictly against the insurer.
Judge Haggerty held that, although the shareholders' suits were combined, at least four plaintiffs had no management ties to Megavail, and the other two could be acting as independent shareholders in bringing their claims. Judge Haggerty commented that the purpose of the "insured vs. insured" exclusion is to thwart collusion, but that collusion does not appear to be a major threat in this case. The Court granted summary judgment to Megavail and its directors and officers on their coverage claims accordingly, finding that at least some of the plaintiffs suing on behalf of the company could not be in league with Megavail.
Megavail interpreted Judge Haggerty's ruling to mean that the Court was ready to order Illinois Union to pay, and filed a subsequent Motion for Partial Summary Judgment on Illinois Union's duty to defend. Illinois Union responded that there are other reasons besides the "insured vs. insured" exclusion for why it should not have to pay for the underlying suit, and the Court should not force it to pay before ruling on those other defenses. The Court denied the Motion for Partial Summary Judgment by Megavail and will soon decide whether the insurer has any other defenses to coverage or must otherwise pay. Stay tuned.