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No Wacky Result Here: Insured v. Insured Exclusion Bars Suit Brought by Former Directors
Insurance Law Update
U.S. District Court for the Central District of Illinois
In Strategic Capital Bancorp Inc. v. St. Paul Mercury Ins. Co., ___F.Supp.2d ___, 2010 WL 2663083 (C.D. Ill. July 1, 2010), the federal district court held that an insurer has no obligation to advance any defense costs in light of its policy’s “insured versus insured” exclusion, even though some of the plaintiffs were not insureds.
Strategic Capital Bancorp Inc. (SCBI) and certain of its directors and officers were sued for fraud in connection with a public offering by the company. Three of the five plaintiffs prosecuting the underlying action were former directors of SCBI. St. Paul provided directors and officers insurance for both the directors and officers who were defendants as well as for the three plaintiffs who were former directors. Relying on the “insured v. insured” exclusion, St. Paul denied coverage for the lawsuit on the basis that the suit constituted a “[c]laim made against … Insured[s],” SCBI and certain of its directors and officers, which had been “brought … on behalf of … Insured[s],” namely three former directors of the company.
SCBI filed a motion for a preliminary injunction, seeking coverage for “all [of] the loss SCBI incurred and continues to incur in defending the [underlying action].” Relying on Level 3 Communications, Inc. v. Federal Ins. Co., 168 F.3d 956 (7th Cir. 1999), SCBI argued that because two of the five plaintiffs were not insureds, at least part of the underlying action fell outside the insured v. insured exclusion, thereby triggering St. Paul’s duty to defend the entire lawsuit. Alternatively, SCBI argued that it was entitled to an allocated advancement of defense costs, for that portion of fees and expenses attributed to the non-insured plaintiffs’ claims.
The court distinguished Level 3, noting that “Level 3 did not deal with a case in which the majority of plaintiffs were Insureds,” that the “damages sought by the three former directors amount[ed] to 81 percent of the total damages sought[,]” and that it would not be “truly wacky . . . for the entire action to be barred.” As for allocation, the court indicated that SCBI had done “little more than suggest that allocation is appropriate.” The court held that SCBI had fallen short of its burden of demonstrating a likelihood of success on the merits, and thus denied SCBI’s motion for a preliminary injunction.
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