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Rust, Boone, Ayala and Sheiffer Prevail on Motion to Dismiss D&O Coverage Dispute

January 28, 2021

Lynsie Rust (Partner-Louisville, KY), Rich Boone (Partner-New York, NY), Kerry Ayala (Associate-New York, NY) and David Sheiffer (Partner-New York, NY) prevailed on a Rule 12 (b) (6) motion in the Eastern District of Kentucky to dismiss a D&O coverage dispute on behalf of a major insurer. The decision is significant as it strictly enforced both the Insured versus Insured (“IvI”) Exclusion and Specific Persons Exclusion of the policy, despite an allocation clause requiring defense costs to be paid when covered and uncovered claims are made.

Several underlying lawsuits asserting direct and derivative claims had been filed by certain shareholders against certain directors and officers of the insured, a family-owned global agricultural fencing and equipment supplier, charging violations of RICO and price gauging in the sale of products by the insured and affiliated companies to companies controlled by the defendant directors and officers. In the underlying litigation, the court had described the corporate structure of the family-controlled companies as “exceedingly complex.”

Our client, despite having issued a duty to defend policy, declined coverage on the basis that two of the individual plaintiffs were within the scope of a Specific Person Exclusion and the remaining individual plaintiff qualified as an Insured Person under the terms of the policy, thereby triggering the IvI Exclusion.

Immediately upon filing suit, even though the underlying lawsuits had been pending for two years, the CEO of the Insured, a significant shareholder of the insured who participated in the alleged scheme, filed for a preliminary injunction seeking to have our client fully fund his defense, arguing that he faced irreparable harm as he no longer had sufficient resources to pay for his defense. In responding to that motion, the Wilson Elser team filed a motion seeking dismissal pursuant to Rule 12(b) (6), arguing that under the clear terms of the IvI Exclusion and Specific Persons Exclusion coverage was not afforded, and that the supplier in securing the policy failed to disclose key information in its application, which barred coverage as well.

As regards the IvI Exclusion, the insured opposed the motion by arguing that the “assistance” exception applied, meaning the exclusion does not apply where the underlying suit is commenced and maintained without any assistance of an insured person. The CEO also argued that, because the allocation clause of the policy required a defense when both covered and uncovered claims were present and the plaintiffs included entities that were not within the IvI Exclusion or Specific Persons Exclusion, this created an ambiguity obligating the carrier to defend.

Significantly, the court, after reviewing IvI Exclusion decisions throughout the United States, held that both exclusions were clear and sufficiently broad to bar coverage in its entirety, rejecting that the allocation clause required that a defense be provided. The court thus determined that, because individual plaintiffs were either an “Insured” under the policy falling within the IvI Exclusion or identified in the Specific Person Exclusion, both applied to bar coverage.

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