Opinion ID: 3064897
Heading Depth: 3
Heading Rank: 1

Heading: The meaning of the exclusion.

Text: As shareholder’s derivative suits and class actions against directors and officers became more common, people began to demand that companies indemnify them against the risks of liability if they were to serve as directors and officers. Corporations accordingly bought liability insurance for their directors and officers to induce qualified people to serve.9 Insured versus insured exclusions are boilerplate in these and other kinds of liability policies.10 Directors and officers liability policies are colloquially called “D & O insurance.” The exclusion arose in D & O policies as a reaction to several lawsuits in the mid-1980s in which insured corporations sued their own directors to recoup operational losses caused by improvident or unauthorized actions.11 Such lawsuits created prob- 7 Cholla Ready Mix, Inc. v. Civish, 382 F.3d 969, 973 (9th Cir. 2004). 8 Adams v. Johnson, 355 F.3d 1179, 1183 (9th Cir. 2004). 9 See generally Michael D. Sousa, Making Sense of the Bramble-Filled Thicket: The “Insured vs. Insured” Exclusion in the Bankruptcy Context, 23 Emory Bankr. Dev. J. 365, 372-77 (2007). 10 Barry R. Ostrager & Thomas R. Newman, 2 Handbook on Insurance Coverage Disputes § 20.02[g], at 1384 (14th ed. 2008). 11 See, e.g., Nat’l Union Fire Ins. Co. v. Seafirst Corp., No. C85-396R, 1986 WL 1174695, at  (W.D. Wash. Mar. 19, 1986) (“After carefully BILTMORE ASSOCIATES v. TWIN CITY FIRE 8575 lems of moral hazard, collusion, and unintended expansion of coverage. The reasonable expectations of the parties were that they were protecting against claims by outsiders, not intracompany claims. [1] The exclusion at issue in this case provides “[t]he Insurer shall not be liable to make any payment for Loss in connection with any Claim made against the Directors and Officers . . . brought or maintained by or on behalf of an Insured in any capacity.” This is not the gobbledygook it sounds like to the uninitiated on an overly rapid reading. Insurance against shareholders derivative suits and employment claims is essentially liability insurance. The trigger for liability insurance is a claim by someone not under the control of the insured himself. By contrast, people buy casualty insurance against the risks created by their own bad luck or carelessness. Thus, one buys fire insurance and gets indemnified even for carelessly leaving a lit candle untended and burning down one’s own house. And one buys automobile comprehensive and collision coverage to get indemnified for carelessly damaging one’s own car. Though there is overlap, many of the risks that affect the price of liability insurance differ from the risks that affect casualty insurance, particularly moral hazard and collusion. For example, almost nobody intentionally induces someone else to collide with his car, but someone might have an interest in burning down his own house if he owed more on it than it was worth. Companies have traditionally purchased “fidelity bonds” to insure the company against employees’ dishonesty.12 Thus if an employee was “bonded” and stole from the reviewing the language of the policy, the court concludes that the policy plainly and unambiguously covers direct actions by Seafirst itself against its own directors and officers. According to the policy terms, National Union must pay for loss suffered as a result of ‘any claim or claims’ against the directors and officers.”). 12 David L. Bickelhaupt, General Insurance 748-50 (9th ed. 1974); William R. Vance & Buist M. Anderson, Handbook on the Law of Insurance § 197 (3d ed. 1951). 8576 BILTMORE ASSOCIATES v. TWIN CITY FIRE company, the insurance company that had issued the bond would have to indemnify the company for the loss. Because risks such as collusion and moral hazard are much greater for claims by one insured against another insured on the same policy than for claims by strangers, liability policies typically exclude them from coverage. Allowing such claims would turn liability insurance into casualty insurance, because the company would be able to collect from the insurance company for its own mistakes, since it acts through its directors and officers. The exclusion protects of course against collusion, and also against the risk of selling liability insurance for what amounts to a fidelity bond. If the exclusion were ignored, then those companies who only want to pay for protection against third party claims they cannot control would have to bear the additional financial burden of paying for claims over which companies have more control. [2] Biltmore does not (and could not) argue that the exceptions to the insured versus insured exclusion apply. The claim is not by a fired director for wrongful termination or one of the other excepted employment practice claims, and the claim is not brought “by . . . a security holder,” as the exception to the exclusion for shareholders’ derivative actions requires. The only question before us on the language of the exclusion is whether the underlying suit was “brought or maintained on behalf of an Insured in any capacity.” [3] Appellant argues that this claim is on behalf of the creditors and brought by the creditors’ trustee, Biltmore, so it is not “brought or maintained on behalf of an Insured in any capacity.” We conclude that this argument is mistaken. First, the underlying lawsuit, for which coverage is sought, alleged that the directors and officers of Visitalk breached their statutory and fiduciary duties. A cause of action for mismanagement belongs to the corporation.13 Shareholders and creditors 13 Ross v. Bernhard, 396 U.S. 531, 538-39 (1970); Hidalgo v. McCauley, 70 P.2d 443, 445-46 (Ariz. 1937); Realty Exch. Corp. v. Cadillac Land & Dev. Co., 475 P.2d 522, 545-46 (Ariz. Ct. App. 1970). See generally 18B Am. Jur. 2d Corporations § 1597. BILTMORE ASSOCIATES v. TWIN CITY FIRE 8577 can bring a suit for mismanagement only derivatively, on behalf of the corporation. True, the directors and officers have coverage for derivative claims, but not for claims by Visitalk. Coverage is excluded if Visitalk sues them, and it did. The lawsuit was “instigated and continued” by Visitalk. That the creditors rather than the shareholders will get whatever money the insurer pays does not avoid the exclusion. Creditors get much, most, or even all of the money any business collects, as part of the business’s overhead, which is why a landlord is always happy to see diners in his tenant’s restaurant. [4] Second, the claim has to be made by an insured party for it to have any contractual basis in the insurance policies. The named insured and others insured are defined in all the policies here to be Visitalk, Inc., and its directors and officers, and no one else. None of the insurance companies issued any policies to Biltmore, or to Visitalk’s creditors. Sometimes a promisee buys insurance to protect against a potential debtor’s risk, as when a concert promoter buys life insurance on a star, but Visitalk’s creditors bought no insurance on Visitalk and its principals. The creditors have no independent contractual claim against the insurance companies, because they are not insureds. [5] Third, the claim for which coverage is sought was indeed “instigated and continued” by Visitalk, as a chapter 11 “debtor and debtor in possession.” The First Amended Complaint says in paragraphs 22 and 24 that Visitalk filed a complaint in the underlying case against the four directors and officers, and then assigned its claims to the creditors’ trust with Biltmore as trustee. Biltmore sued the insurers as assignee of the directors’ and officers’ claims for failure to cover and its bad faith in so doing. An assignee of a claim against an insurance company can have no stronger claim than the assignor who assigned the claim.14 Biltmore has to 14 Bassidji v. Goe, 413 F.3d 928, 939 (9th Cir. 2005); Stephens v. Textron, Inc., 619 P.2d 736, 739 (Ariz. 1980); Carpenter v. Superior Court, 422 P.2d 129, 131 (Ariz. 1966). 8578 BILTMORE ASSOCIATES v. TWIN CITY FIRE step into an insured’s shoes as assignee to have any claim against their insurers, since Biltmore is not an insured. And in those shoes, it is barred by the exclusion. Biltmore cannot jump into the insureds’ shoes to bring the lawsuit, out of their shoes to claim not to be suing as though it were the insureds, and then back into their shoes to get compensatory and punitive damages for the insurers’ failure to cover their liabilities.