Insured v. Insured Exclusion Applies

Court Must Enforce an Exclusion that is Neither Ambiguous, Convoluted Nor Opaque

Insurers are entitled to write a policy wording that an insured is willing to accept. For decades liability insurance policies have included an insured v. insured exclusion. The original purpose for the exclusion was to avoid cases where insureds colluded with each other to defraud an insurer. That collusion between insureds was a risk insurers were not willing to take nor were insurers willing to leave in their liability insurance policies a moral hazard that might tempt an insured to collude to use insurance for a purpose not intended. As a result the insured v. insured exclusion was born.

In Abboud v. National Union Fire Insurance Company of Pittsburgh, Superior Court of New Jersey, Appellate Division PA, — A.3d —-, 2017 WL 2665133 (June 21, 2017) the Appellate Division was asked to make the exclusion unenforceable.

THE EXCLUSION

Generally speaking, an “insured v. insured” exclusion bars coverage for claims by one insured director or officer against another. Plaintiff Michael Abboud sought indemnity and a defense in connection with counterclaims made against him by fellow officers of Monarch Medical PET Services, LLC (Monarch). Defendant National Union Fire Insurance Company of Pittsburgh, Pa., eventually denied coverage based on the insured vs. insured exclusion. Abboud filed a declaratory judgment action against National Union, which ended in summary judgment dismissal and the an appeal.

FACTS

Abboud sued Monarch; four of its members and managers — Patrick Collins, Andrew Kreamer Rooke, Sr., Gary Moyers and William McCue; and a non-member officer, Andrew Kreamer Rooke, Jr. (collectively, “the defendants”). Abboud was a forty-percent owner of Monarch, which operates and leases PET/CT equipment.  Aboud sought reinstatement, salary and other employment benefits; an injunction restraining the defendants from interfering with his access to the premises, its computers and its employees; as well as attorneys’ fees and expenses.

All the defendants in Abboud’s underlying lawsuit sought and obtained an acknowledgement of partial coverage from National Union, subject to a reservation of rights, under the Employment Practices Liability (EPL) section of Monarch’s multi-coverage policy, which also included a D & O liability section.

By contrast, Abboud did not notify National Union of the counterclaims against him until November 20, 2013, when his attorney gave “notice of claims covered” under the D & O section of the policy. The attorney asserted the notice was late because Monarch and National Union had delayed responding to his requests for information about coverage. National Union did not respond to the notice.

National Union denied its policy provided indemnity or defense costs coverage for the counterclaims against Abboud. In granting the motion, Judge Katie A. Gummer found that the insured vs. insured exclusion plainly barred Abboud’s claim for coverage.

ANALYSIS

The movant is entitled to summary judgment if the record shows there is no genuine issue as to any material fact challenged and the moving party is entitled to a judgment or order as a matter of law. Applying the rules of construction of contracts, if the plain language of the policy is unambiguous, we will not engage in a strained construction to support the imposition of liability or write a better policy for the insured than the one purchased.

Looking to the policy language which the court concluded plainly and unambiguously bars coverage because the counterclaims against Abboud fall within its insured vs. insured exclusion. The insured vs. insured exclusion is one of several exclusions in the D & O section for which the insurer “shall not be liable to make any payment for Loss in connection with any Claim made against the Insured.” The exclusion disallows claims depending on which party raises them; specifically, it excludes any claim which is brought by or on behalf of a Company or Individual Insured, other than an Employee of the Company.

There is nothing ambiguous, convoluted, or opaque about this exclusion when interpreted in accord with the definitional provisions. The exclusion disallows coverage when the claim is raised by either an executive of the company (i.e., an “Individual Insured” who is not an “Employee”) or the company itself. Its application here is equally clear. The claims raised against Abboud were brought by Monarch and five of its executives (whose status within the company Abboud does not contest). Therefore, the court concluded that the insured vs. insured exclusion bars his claims.

Abboud seeks to avoid the plain import of the exclusion on two grounds. First, he contends it violates his reasonable expectations. Second, he contends the exclusion applies only in cases of collusion between the individual insureds, about which there remains an issue of fact.

New Jersey courts have recognized the importance of construing contracts of insurance to reflect the reasonable expectations of the insured in the face of ambiguous language and phrasing, and in exceptional circumstances, when the literal meaning of the policy is plain.

The “reasonable expectations” doctrine applies to policy forms that have the characteristics of an adhesion contract. Courts are more inclined to apply the doctrine in cases of personal lines of insurance obtained by an unsophisticated consumer.  Courts may vindicate the insured’s reasonable expectations over the policy’s literal meaning if the text appears overly technical or contains hidden pitfalls, cannot be understood without employing subtle or legalistic distinctions, is obscured by fine print, or requires strenuous study to comprehend.

The expectations of coverage must be real. In assessing whether the expectations are objectively reasonable, a court will consider communications regarding the coverage between the insured or its broker and the insurer or its agent that relate to the insured’s expectations. Applying rules of interpretation the appellate court was unable to discern a basis to set aside the insured vs. insured exclusion based on Abboud’s alleged expectations of coverage. The policy provides commercial insurance to a presumably sophisticated consumer. The record is devoid of competent evidence of Abboud’s expectations of coverage or proof that such expectations would be objectively reasonable, given that D & O insurance typically covers liability for third-party claims and enforcement of the exclusion nonetheless leaves broad D & O coverage. In sum, the policy’s plain language need not be tailored to conform to Abboud’s alleged expectations.

The appellate court also rejected Abboud’s contention that proof of collusion is a prerequisite to applying the insured vs. insured exclusion. Although the specific formulation of this exclusion may vary from policy to policy, its purpose was not simply to bar collusive claims — as Abboud implies. Instead, it was intended to exclude coverage both of collusive suits — such as suits in which a corporation sues its officers or directors in an effort to recoup the consequences of their business mistakes, thus turning liability insurance into business-loss insurance — and of suits arising out of those particularly bitter disputes that erupt when members of a corporate, as of a personal, family have a falling out and fall to quarreling.

The argument that collusion must be proved “confuses a rule with its rationale. It is clear from the face of Abboud’s verified complaint, and the counterclaims, that what we was presented to the New Jersey courts, is one of those particularly bitter disputes that erupt when members of a corporate family have a falling out.

Guided by the rules of construction that place dispositive weight on the plain language of a provision that is neither ambiguous, convoluted nor opaque, the court rejected Abboud’s proposed gloss on the insured vs. insured exclusion’s plain language.

ZALMA COMMENTS

On this, my 75th birthday I wish to thank everyone who reads this blog, everyone who I have represented as a consultant or as a lawyer, and remind you that although I am 75-Years-Old I am still working 8 hours a day writing about insurance, insurance coverage and working as a consultant and expert witness for anyone who has a need for assistance with an insurance dispute.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

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.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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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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