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Ninth Circuit: Insured v. Insured Exclusion Applies to Debtor in Possession in D&O Case
Insurance Law Update
Ninth Circuit Court of Appeals
In Biltmore Assoc., LLC v. Twin City Fire Ins. Co., 572 F.3d 663 (9th Cir. (Ariz.) July 10, 2009), the Ninth Circuit Court of Appeals held that the insured v. insured exclusion contained in a directors and officers (D&O) liability policy excluded coverage for an action brought by a bankrupt company against certain of the company’s former officers and directors.
Visitalk had a D&O insurance policy that contained an “insured versus insured” exclusion barring coverage when a claim is brought by one insured against another insured. Visitalk filed for Chapter 11 bankruptcy and, as debtor and debtor in possession, thereafter sued its discharged directors and officers for breaches of fiduciary duties. The D&O insurers denied coverage for Visitalk’s lawsuit, relying on the insured v. insured exclusion.
Visitalk then assigned its claims against its directors and officers to Biltmore, its creditors’ trustee. Biltmore settled with the directors and officers for $175 million and an assignment of claims against the D&O insurers. Biltmore sued the insurers to recover the settlement amount under the D&O policies, arguing that the insured v. insured exclusion did not apply because Visitalk was a debtor in possession at the time it filed its lawsuit against the directors and officers.
The Ninth Circuit upheld the dismissal of Biltmore’s claim against the insurers, finding that the insured v. insured exclusion barred coverage “because a post-bankruptcy debtor in possession acts in the same capacity as the pre-bankruptcy debtor” for purposes of D&O liability insurance. The court rejected Biltmore’s claim that the action was actually brought on behalf of the Visitalk creditors by the creditors’ trustee, rather than by the insured company, Visitalk. The Ninth Circuit noted that the claim against the directors and officers for mismanagement belongs to the corporation, and creditors can only bring such a suit derivatively on behalf of the corporation.
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