Insured versus insured exclusion
An exclusion in a directors' liability policy that removes claims brought by one insured against another, to prevent collusion, with carve-backs for shareholder, employee and liquidator actions.
A directors' liability policy covers both the directors and, often, the company itself. Without safeguards, a company could sue its own directors over a bad business decision and have the insurer pay the loss, turning liability insurance into insurance of results. The insured versus insured exclusion closes that door by removing claims brought by an insured, or by the company, against another insured. It also targets internal disputes among directors, which the insurer does not want to fund. But an absolute exclusion would empty the policy of substance, because many legitimate claims come from inside. Modern wordings therefore provide carve-backs: derivative actions brought by shareholders on the company's behalf without the participation of the directors concerned, employees' employment claims, contribution claims between directors, and above all actions brought by an administrator or liquidator on behalf of the insolvent company. The underwriter weighs these carve-backs, which determine the real scope of cover in the situations where it matters most.
Textbook case: after a company's bankruptcy, its liquidator sues the former directors for 15 million euros of asset shortfall, alleging they continued a loss-making business. Without a carve-back for liquidator actions, the exclusion would have removed this claim brought in the company's name; with it, the policy funds their defense and any judgment.
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