Richard W. Boone Jr. (Partner-New York, NY), David Sheiffer (Partner-New York, NY), and Siobhán A. Mueller (Associate-New York, NY), recently prevailed on a Rule 12(b)(6) motion in the U.S.D.C. for the Southern District of New York, where the Court again strictly enforced the insured versus insured exclusion (“IvI Exclusion”) in the at-issue policy (the “Policy”), despite an allocation clause requiring defense costs to be paid when covered and uncovered claims are made.  

That decision, which applied Kentucky law, stemmed from the same underlying lawsuit and Policy that was at issue in a prior case where Boone and Sheiffer, with the assistance of Lynsie Rust (Partner-Louisville, KY), prevailed on the same issue in the U.S.D.C. for the Eastern District of Kentucky, which was affirmed by the United States Court of Appeals for the Sixth Circuit.

As in the prior suit, 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.”

In response to the prior suit, our client, despite having issued a duty to defend, declined coverage on the basis that, among other things, one of the individual plaintiffs qualified as an insured under the terms of the Policy, thereby triggering the IvI Exclusion.  The Kentucky District Court agreed, dismissing the coverage action in its entirety, and was later affirmed by the Sixth Circuit.  Notwithstanding, a second insured defendant named in the underlying actions later sought coverage, which our client declined for the same reasons.  This insured then filed a second coverage action, this time hoping for a different result in the Southern District of New York.

In so doing, while noting the result in the prior Kentucky case, the insured argued that the Policy’s IvI Exclusion was inapplicable because “the purpose of an [IvI] Exclusion is in no way served by excluding coverage for [the insured], who is neither a family member, director, or officer of the [insured company].”  Notwithstanding, as before, the insured argued that because the Policy contained an allocation clause which required a defense when both covered and uncovered claims were present and because the plaintiffs in the underlying actions included entities that were not within the IvI Exclusion, the carrier was obligated to defend.  However, Judge Valerie Caproni disagreed, holding that the IvI Exclusion barred coverage for the underlying actions, in their entirety.

Before reaching the insured’s allocation clause arguments, however, the Court first addressed the “assistance exception” in the IvI Exclusion, which preserves coverage for a “Claim” otherwise excluded from coverage by the IvI Exclusion if it was “brought by any security holder of the Company” and the security holder “is acting totally independently of, and without the solicitation, assistance, active participation or intervention of, the Company or any Insured Person.”  The Court noted that this provision did not preserve coverage because “it is undisputed that Ms. Tarter Smith (an insured) spearheaded the litigation from its inception.”  

The Court then considered the Policy’s allocation clause, which the Court concluded “does not change this analysis.”  Under the Policy’s allocation clause, the insurer was specifically required to provide a full defense if a “Claim” includes “both covered and uncovered matters” or if it is made “against any Insured and others.”  However, as the Court noted, the allocation clause “does not expressly address claims brought by an insured and others.”  Rather, “[s]uch claims are expressly governed by the IvI Exclusion, which bars coverage for the underlying litigation as a whole unless the Assistance Exception applies.” Accordingly, the Court held that the IvI Exclusion barred coverage for the Claim in its entirety.

Significantly, in so holding, the Court did not entirely rely on the holdings in the prior Kentucky litigation.  Instead, the Court reviewed decisions involving similar IvI Exclusions throughout the United States.  Accordingly, although decided under Kentucky law, this decision arguably has broader significance for the interpretation of similar IvI Exclusions in the Southern District of New York and perhaps beyond.  

In this regard, we note that the matter is also presently on appeal to the United States Court of Appeals for the Second Circuit, Case No. 23-17.