Insurance Law

Insured vs. Insured Exclusion – One Insured Can’t Get a Defense When Sued by Another Insured

Robert D. Redmond sued ACE American Insurance Company (“ACE”) after it refused to provide insurance coverage in connection with a civil suit Redmond’s former employer brought against him. The District Court dismissed Redmond’s complaint because the language of the insurance policy under which he sought coverage excluded his claim.

FACTS

Industrial Enterprises of America, Inc. (“IEAM”) purchased a “Management Protection” insurance policy (the “Policy”) from ACE. The Policy provided insurance coverage for the “Company,” defined as IEAM, its subsidiaries, “any such organization as a debtor-in-possession,” as well as “Insured Persons,” including IEAM executives. Subject to certain conditions and exclusions, the Policy required ACE to cover losses arising from, among other things, “misleading statement[s]” and other “act[s and] omission[s],” by the insureds and to pay costs “arising out of” civil proceedings related to such acts. The Policy also included an “insured versus insured” exclusion (the “Exclusion”), under which ACE was not liable for losses arising from any “[c]laim brought or maintained by, on behalf of, or in the right of … the Company, in any respect.”

During the relevant time, Redmond was an “Insured Person” under the Policy. In November 2007, shareholders sued IEAM for securities violations and accounting fraud. In 2009, IEAM filed for bankruptcy protection, and in 2011, brought an adversary proceeding (the “Adversary Proceeding”) in bankruptcy court against several former executives and employees, including Redmond. Acting as a debtor-in-possession, IEAM sought damages “on behalf of itself and as assignee of its shareholders,” alleging that the defendants, including Redmond, had engaged in a fraudulent scheme to manipulate the company’s stock price. In 2013, a Chapter 11 trustee was appointed to pursue IEAM’s claim.

Redmond asked ACE “to provide his defense in the matter” or otherwise cover his costs. ACE denied Redmond’s request, and Redmond sued ACE in Delaware state court, alleging that ACE had breached its contractual obligations under the Policy, acted “in bad faith,” and “wrongfully conspired with IEAM … to deny [him] his right to coverage of his defense costs.” The District Court held that the Exclusion relieved ACE of its obligation to assume the cost of Redmond’s defense and dismissed his complaint. Redmond appealed.

ANALYSIS

In Redmond v. ACE American Ins. Co., — Fed.Appx. —-, 2015 U.S. App. LEXIS 9392 (C.A.3 (Del.) 6/5/2015), [enhanced version available to lexis.com subscribers], the Third Circuit resolved the dispute. It noted that under New York law, an insurance contract is interpreted to give effect to the intent of the parties as expressed in the clear language of the contract. This is a matter of law for the court to decide, and requires the court to determine, in the first instance, whether the terms of the insurance contract are ambiguous.

Policy language is not ambiguous if it has a “definite and precise meaning, unattended by danger of misconception in the purport of the policy itself, and concerning which there is no reasonable basis for a difference of opinion.” Breed v. Ins. Co. of N. Am., 385 N.E .2d 1280, 1282 (N.Y.1978), [enhanced version available to lexis.com subscribers].

Noting that in this case the Exclusion provides that ACE shall not be liable for losses arising from any “[c]laim brought or maintained by, on behalf of, or in the right of … the Company, in any respect.” Generally speaking, a claim or proceeding is brought when in law it is commenced, and the same holds true in the policy exclusion context. The phrase “brought … by” as used in the Exclusion means “commence” and is not ambiguous. Having so concluded, the court concluded that it must apply the exclusion as written.

IEAM, the insured “Company,” commenced the Adversary Proceeding against Redmond, another insured. Under the Exclusion, ACE is not liable for suits commenced, or “brought,” by the “Company,” and thus it is not obligated to cover Redmond’s defense costs. The fact that the Chapter 11 trustee has been substituted as the plaintiff in the action under Fed. R. Bankr.P.2012(a), [enhanced version available to lexis.com subscribers], and is now pursuing the action on behalf of IEAM does not mean the trustee initiated the suit or change the fact that IEAM commenced, or “brought,” the action.

While the action now proceeds as if it had been originally commenced by the real party does not change the fact that IEAM “brought” it. Therefore, the plain language of the Exclusion allows ACE to deny Redmond’s request for defense costs, and the District Court did not err in dismissing Redmond’s complaint.

ZALMA OPINION

Insurance Companies just don’t like insuring inter-family suits whether the family is a domestic one or a commercial family. In this case the insurer refused to insure any actions by one corporate insured against another corporate insured. As a result there was no coverage at all to defend or indemnify one insured for a suit brought by another insured. The plain language of the policy applied.

    By Barry Zalma, Attorney and Consultant

Reprinted with Permission from Zalma on Insurance, (c) 2015, Barry Zalma.

Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.

Mr. Zalma can be contacted at or zalma@zalma.com, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.

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