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HNRK Coverage Corner

“Insured versus Insured” Exclusion Did Not Preclude Coverage for Claims By Creditor Trust In Chapter 11 Bankruptcy

On April 25, 2019, Justice Sherwood of the New York County Commercial Division issued a decision in Westchester Fire Ins. Co. v. Schorsch, 2019 NY Slip Op 31188(U), holding that a D&O policy's “insured versus insured” exclusion did not preclude coverage for claims against corporate officers by a Creditor Trust. In Schorsch, corporate officers sought coverage under the corporation’s D&O policies for claims brought against them by a Creditor Trust set up in the corporation’s Chapter 11 bankruptcy proceedings.  Two of the excess insurers disclaimed coverage based on an “insured versus insured” exclusion that precludes coverage for losses in connection with any claim brought “by, on behalf of, or at the direction of the Company or Insured Person.”  Justice Sherwood disagreed, and granted summary judgment to the insureds, explaining:

. . . [T]he insured versus insured exclusion . . . is intended to prevent a company from recovering business losses that it was in a position to avoid by more carefully supervising its own officers and directors.  The exclusion has exceptions for a bankruptcy trustee or a similar authority, since the funds recovered will be used for the benefit of creditors, rather than the company, and are subject to supervision by the bankruptcy court or a regulatory authority. Plaintiff has asserted that the Creditor Trust is not a bankruptcy trustee, examiner, receiver, liquidator or a creditor committee. However, the Primary Policy uses the phrase "comparable authority" which phrase is not defined.  The phrase is ambiguous and therefore must be construed against the insurer, particularly since it is being invoked to exclude coverage.  Plaintiff and RSUI have not shown that the exclusion prevents defense and coverage under their respective policies.

(Citations omitted).

This decision underscores the well-established principle that coverage exclusions are narrowly construed, with any ambiguities resolved in favor of coverage.  Also of note: because the insurers initiated this coverage action (and lost), the insureds were entitled to fee shifting under the Court of Appeals' decision in Mighty Midgets, Inc. v. Centennial Ins. Co., 47 N.Y.2d 12, 21 (1979).

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