The Insured vs. Insured Exclusion in D&O Policies

In the realm of Directors and Officers (D&O) liability insurance, the Insured vs. Insured (IvI) exclusion is one of the most significant and frequently litigated provisions. At its core, this exclusion states that the insurer will not provide coverage for any claim brought by one insured party against another insured party. For candidates preparing for the complete Professional Liability exam guide, understanding the nuances of this exclusion is essential, as it defines the boundaries of corporate governance coverage.

The exclusion was originally designed to prevent a company from using its D&O policy as a "corporate ATM" by filing a lawsuit against its own directors or officers to recover financial losses caused by poor business decisions. Without this exclusion, a company could theoretically sue its own leadership for mismanagement simply to trigger an insurance payout, effectively turning a liability policy into a first-party indemnity policy.

To understand the exclusion, one must first identify who qualifies as an "Insured." In a standard D&O policy, the definition typically includes:

• Individual Insureds: Past, present, and future directors, officers, and sometimes employees or committee members.
• The Entity: The corporation or organization itself (often referred to as the "Company").
• Subsidiaries: Any entity controlled by the parent organization.

When any of these parties initiates a lawsuit against another (e.g., the Company suing a former CEO), the IvI exclusion is triggered. This is a common topic when reviewing practice Professional Liability questions, as candidates must distinguish between third-party claims (covered) and internal disputes (excluded).

Because the IvI exclusion is so broad, insurers provide several carve-backs (exceptions) to ensure that legitimate, non-collusive disputes are still covered. These exceptions are the "meat" of professional liability underwriting and are critical for exam mastery.

• Shareholder Derivative Actions: If a shareholder brings a suit on behalf of the company without the assistance or solicitation of an insured person, the exclusion usually does not apply. This is because the shareholder is viewed as a third party protecting their investment.
• Employment Practices Claims: Many D&O policies include a carve-back for claims brought by an insured person (like a former officer) alleging wrongful termination, discrimination, or harassment. This ensures that internal labor disputes aren't caught in the broad IvI net.
• Bankruptcy and Insolvency: If the company enters bankruptcy, a court-appointed trustee or liquidator may sue the former directors. Since the trustee represents the creditors rather than the "Insured Entity," most modern policies carve back coverage for these claims.
• Defense Costs for Independent Counsel: Some policies allow for defense costs even if the exclusion might apply, provided the insured is forced to defend themselves against an internal investigation.
• Outside Directorships: Claims arising from an insured serving on the board of a non-profit at the request of the company are often excepted.

In recent years, particularly in policies for private companies and non-profit organizations, the traditional "Insured vs. Insured" exclusion has evolved into the Entity vs. Insured (EvI) exclusion. The distinction is subtle but important for the Professional Liability exam.

Under Entity vs. Insured wording, the exclusion only applies if the lawsuit is brought by the organization itself. It does not necessarily exclude a claim brought by one director against another director, provided the organization is not a party to the suit. This provides broader protection for individual board members who may have internal disagreements that result in litigation without the company's formal involvement.