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Insured vs. insured exclusion shields Beazley in D&O coverage dispute

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Beazley Insurance Co. Inc. is not obligated to indemnify the directors of a now-dissolved company based on the insured vs. insured exclusion in its directors and officers liability policy, says a federal appeals court in affirming a lower court ruling.

Jay Edmund Russ, who founded Massapequa, New York-based Intelligent Digital Systems L.L.C., a technology company in the digital recording industry, sold his firm’s assets to Toms River, New Jersey-based Visual Managements Systems Inc. and became a company director as of May 2008, according to Tuesday’s ruling by the 2nd U.S. Circuit Court of Appeals in New York in Intelligent Digital Systems L.L.C. et al. v. Beazley Insurance Co. Inc. The company also agreed to hire him as a consultant.

In December 2008, Mr. Russ announced he was resigning from the board and might sue VMS for payments owed him under a $1.5 million promissory note issued to him by VMS at the time of the acquisition.

Mr. Russ filed suit against VMS and the other five directors in March 2009. VMS’ D&O insurer, Farmington, Connecticut-based Beazley, a unit of Beazley P.L.C., denied coverage under its policy, citing its insured vs. insured exclusion.

The litigating parties settled the action, with four directors agreeing to pay a total of $75,000, all five directors agreeing to the entry of judgments against them in amounts exceeding $2 million, and all five directors assigning their rights under the policy to plaintiffs, according to the ruling.

Plaintiffs filed suit against Beazley in March 2012, seeking indemnification of the unpaid amounts of the judgments. After a jury trial in U.S. District Court in Central Islip, New York, judgment was entered in Beazley’s favor.

This was unanimously affirmed by a three-judge panel of the 2nd Circuit on appeal. The insured vs. insured exclusion applies, said the ruling.

“The insured v. insured exclusion, on its face, exempts for coverage ‘any’ claim brought by, on behalf of, or at the direction of an insured director, unless the claim is employment-related,” said the ruling.

“Moreover, the employment-related exception to the exclusion applies only to claims brought by employees — not by consultants, like Russ. Indeed, his consultant’s agreement specified that he was an independent contractor and not an employee,” the ruling said.

The ruling said also Mr. Russ was duly elected or appointed a director. Plaintiffs in the case say the policy language on this was ambiguous, but “Our de novo review indicates that no such ambiguity exists in the policy,” said the decision, in affirming the lower court’s ruling.

In 2015, an appeals court held an “insured vs. insured” exclusion in a primary and excess public entity management liability policy issued by Travelers Cos. Inc. units to the city of Burlington, Vermont, meant the insurer was not obligated to defend or indemnify a city official.