Insured v. Insured Exclusion

A D&O Policy Does Not Apply To a Suit by an Insured Against a Co-Insured

Almost every policy of liability insurance contains an exclusion that prevents coverage to apply when one insured sues another. The reason for the exclusion is obvious: the potential for collusion between insureds to obtain money from the insurer is obvious and simply impossible to calculate by an actuary.

In Jerry’s Enterprises, Inc. v. U.S. Specialty Insurance Company, United States Court of Appeals, Eighth Circuit, — F.3d —-, 2017 WL 104468 (01/11/2017) the named insured, a closely-held corporation, sued its directors’ and officers’ liability insurer, alleging that insurer was required to provide coverage for a lawsuit brought by a former member of the corporation’s board of directors and her daughters, who were also shareholders, against insured and two other members of its board of directors. The United States District Court for the District of Minnesota, granted the insurer’s motion for summary judgment. Insured appealed.

The Eighth Circuit Court of Appeals was asked to decide the claim of Jerry’s Enterprises, Inc. (“JEI”) for breach of contract and declaratory judgment against U.S. Specialty Insurance Company (“U.S. Specialty”). The conflict concerned the insurance carrier’s refusal to indemnify JEI for the settlement of a lawsuit.


In 1950, Jerry Paulson founded JEI as a small butcher shop in Edina, Minnesota. Over the decades, JEI came to operate a score of retail and grocery stores in Minnesota, Wisconsin, and Florida. The closely held family company now employs approximately 4,000 employees. As he grew the business, Jerry Paulson gifted non-voting shares in JEI to his three daughters, including Cheryl Sullivan. He also gifted shares to his grandchildren, including Sullivan’s daughters Kelly and Monica. Paulson established an estate plan that, upon his death, appointed his daughters as members of the JEI Board of Directors. They would remain as directors until such time as their shares, and those of his grandchildren, were redeemed.

Jerry Paulson died on April 5, 2013. In accordance with Paulson’s estate plan, Sullivan became a director of JEI in April, and she held that position until August, when her shares were redeemed. At that time, Cheryl Sullivan owned 28.06% of all outstanding company shares, while Kelly and Monica owned 2.4% and 1.2%, respectively. During her stint as a company director, Sullivan raised a number of concerns with directors of JEI in regards to how her shares were being valued. These concerns were never addressed to her satisfaction.

Sullivan and her daughters filed suit against JEI, alleging multiple acts of misconduct by JEI directors designed to lower the value of their shares. The complaint contained claims for declaratory judgment, breach of fiduciary duty, aiding and abetting tortious conduct, equitable relief under Minnesota common and statutory law, breach of contract, civil conspiracy, and preliminary and permanent injunctive relief. All claims were brought jointly by all three plaintiffs. After several months of negotiation, JEI reached a confidential settlement agreement with Sullivan and her daughters. When JEI sought coverage for its defense costs and for sums paid under the settlement agreement, U.S. Specialty refused to pay.


JEI held a directors’ and officers’ liability insurance policy through U.S. Specialty. Under the policy, U.S. Specialty agreed to “pay to or on behalf of the Insured Persons [or the Insured Organization] Loss arising from Claims first made against them during the Policy Period or Discovery Period (if applicable) for Wrongful Acts.” There is no dispute that the Sullivan lawsuit is a claim made during the policy period for wrongful acts. The policy defines Insured Person as “any past, present or future director, officer, managing member, manager or Employee of the Insured Organization….” Claim is defined, in relevant part, as “any civil proceeding commenced by service of a complaint or similar pleading.”

Aside from these particular definitions, JEI’s insurance policy contains two other provisions significant to this appeal. The first is the “Insured vs. Insured” exclusion. This provision excludes from coverage under the policy any claim: “[B]rought by or on behalf of, or in the name or right of … any Insured Person, unless such Claim is: ¶ (1) brought and maintained independently of, and without the solicitation, assistance or active participation of … any Insured Person….”

The second significant provision of JEI’s policy is the allocation clause. This clause deals with a lawsuit involving both covered and uncovered loss in the following way: “If Loss covered by this Policy and loss not covered by this Policy are both incurred in connection with a single Claim, either because the Claim includes both covered and uncovered matters, or because the Claim is made both against Insureds and against others not included within the definition of Insured, the Insureds and the Insurer agree to use their best efforts to determine a fair and proper allocation of all such amounts….”


Under Minnesota law, the insured bears the initial burden of establishing that coverage exists, at which point the insurer then carries the burden of demonstrating that a policy exclusion applies. If the insurer succeeds, the burden shifts back to the insured to show that an exception to the exclusion applies.

General contract principles apply to the construction of an insurance policy. An insurance policy ‘must be construed as a whole, and unambiguous language must be given its plain and ordinary meaning.  Language in a policy is ambiguous if it is susceptible to two or more reasonable interpretations. But we will not read ambiguity into the plain language of an insurance policy. The courts ‘must fastidiously guard against the invitation to create ambiguities where none exist.


The language of the insurance policy itself, as it applies to this case, is straightforward. The policy defines Claim, in relevant part, as “any civil proceeding commenced by service of a complaint.” Finally, an Insured Person includes any past director. In essence, therefore, the Insured vs. Insured exclusion bars coverage for any lawsuit brought by a former director.

Application of the exclusion to the present case demonstrates that U.S. Specialty does not owe coverage to JEI. Cheryl Sullivan is, JEI concedes, an Insured Person under the policy due to her brief time as a director of JEI’s board. Her lawsuit was a civil proceeding commenced by service of a complaint—in other words, a Claim. She (along with her two daughters) brought the lawsuit against JEI. The Eighth Circuit concluded that loss associated with the Sullivan lawsuit is not covered under the insurance policy due to the presence of a former director—Sullivan—as an active participant.

JEI objects to this seemingly straightforward application of the exclusion clause.

JEI and U.S. Specialty entered into an agreement in which they defined the terms of that agreement. It is the responsibility of the appellate court to give effect to that contracted language.  A claim is not afforded its ordinary meaning under the insurance policy. Rather, the policy defines Claim as a civil proceeding commenced by service of a complaint, i.e. the entirety of the Sullivan lawsuit. U.S. Specialty, therefore, need only show that the exclusion clause applied to the lawsuit as brought. It has done so.


The allocation clause does not restore coverage for any part of the Sullivan lawsuit. Cheryl Sullivan was the driving force of the litigation. She owned the vast majority of shares at issue in the underlying lawsuit, and she was the former director who repeatedly raised concerns about the valuation of shares to JEI’s board of directors. She then brought the suit as one of the original plaintiffs.

The Insured vs. Insured exclusion speaks directly to lawsuits brought with the participation of Insured Persons. The allocation clause speaks generally to any claim brought with covered and uncovered matters. The exclusion clause controls.


The insurance policy surprisingly used clear and unambiguous language. By defining its important terms it took away from the court the right to interpret what a “claim” is and made it impossible to make coverage apply by interpreting the meaning of a key word. A court should never, and the Eighth Circuit would not, change the meaning of agreed language.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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