The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against the Directors or Officers:

K. by or at the behest of the Company, or any affiliate of the Company or any Director or Officer;

L.  by any security holder of the Company whether directly or derivatively unless such security holder bringing such Claim is acting totally independent of, and totally without the solicitation of, or assistance of, or participation of, or intervention of, any Director or Officer, or the Company, or any affiliate of the Company.

Great American D.100A (2/90)

A second wave of events during the 1980s brought the insured-versus-insured exclusion back into the spotlight when the Federal Deposit Insurance Corporation (FDIC), acting as the primary regulator of all federally insured depository institutions, found itself in control of a large number of failed financial institutions. When the FDIC and other federal agencies sought to bring actions against the failed financial institution's directors and officers, insurers argued against coverage and the courts generally upheld the exclusion to preclude coverage. In recent decisions the courts have not always upheld the insured-versus-insured exclusion, often citing ambiguities in the policy language or interpreting the intent of the exclusion to preclude only claims based on collusion between insured parties. Now, most insurers have adopted specific regulatory-agency exclusions to prevent coverage imposed by a liberal judicial interpretation of the insured-versus-insured exclusion. Additional information on this topic is included in the Regulatory Exclusions discussion in the Exclusions section.

The language used by insurers in drafting the insured-versus-insured exclusion varies, but it typically excludes from coverage any claim

·   By or in the right or at the behest of the corporation

·   By other directors and officers

·   By other insureds

·   By shareholders

Such exclusions leave directors and officers unprotected for many types of claims. Fortunately, most insured-versus-insured exclusions also include specific exceptions to the exclusion. Consider the sample wording that follows.

     Underwriters shall not be liable to make any payment in connection with any Claim:

F.  by, on behalf of, or in the right of or at the direction of any of the Assureds, except and to the extent such Claim is brought derivatively by a security holder of the Company who, when such Claim is first made, is acting independently of all of the Assureds except this exclusion will not apply to any Claim in the form of a cross claim, third party claim or other claim for contribution or indemnity by an Assured which is part of and results directly from a Claim which is not otherwise excluded by the terms of this Policy. This exclusion shall also not apply to a wrongful termination of employment Claim brought by a former officer.

Swett & Crawford D&OX(1)-98

Notice the conditional nature of the exception in the above example for claims brought by shareholders. Without language precluding derivative actions involving collusion with or solicitation of board members, the corporation might seek to recoup losses stemming from poor business judgement in the form of a board-inspired derivative action against one or more of the directors or officers or other insureds. Coverage under the D&O policy for such an action directly against a board member or insured officer by the corporation almost always is excluded.

Both derivative and direct actions by shareholders normally are covered when such actions are brought without the solicitation or collusion of other insureds. Since a large number of claims against directors and officers are shareholder-derivative actions, policies containing insured-versus-insured exclusions without this important exception are overly restrictive.

Policies sometimes will contain, usually by endorsement, an exclusion barring claims made by any shareholder owning in excess of a certain percentage (normally 5 percent or 10 percent) of the corporation's stock. Presumably aimed at precluding claims arising out of in-fighting and power struggles, this type of language nevertheless restricts coverage and is considered undesirable.

The insured-versus-insured exclusion sometimes includes an exception for claims made against the directors or officers by any other director or officer, in which the claims are in the form of crossclaims, third-party claims or claims for indemnification. A few D&O policies also address claims alleging wrongful termination. The following example makes specific exception to the insured-versus-insured exclusion for crossclaims, third party claims and claims for indemnification as well as wrongful-termination claims brought by or on behalf of one or more individual insureds.

The underwriter shall not be liable to make any payment for Loss in connection with any Claim made against any of the Insured Directors and Officers: