“Reasonable Expectations of the Insured” Did Not Defeat Clear Policy Exclusion of “Insured vs. Insured” Claims

Abboud v. National Union Fire Ins. Co., 450 N.J. Super. 400 (App. Div. 2017).  This opinion by Judge Ostrer interpreted an “insured vs. insured” exclusion in a directors and officers liability insurance policy.  That exclusion generally bars coverage for claims by one insured against another, such as counterclaims brought against plaintiff by his fellow officers of a limited liability company and that LLC itself.  After the insurer denied coverage, plaintiff brought this declaratory judgment action against the insurer.  The Law Division granted summary judgment to the insurer, and the Appellate Division, applying the de novo standard of review applicable to summary judgment decisions and to contract interpretation, affirmed that ruling today.

“The insured vs. insured exclusion is one of several exclusions in the D&O section for which the insurer ‘shall not be liable to make any payment for Loss in connection with any Claim made against the Insured.’  The exclusion disallows claims depending on which party raises them; specifically, it excludes any claim ‘which is brought by or on behalf of a Company or an Individual Insured, other than an Employee of the Company ….'”  Judge Ostrer found “nothing ambiguous, convoluted, or opaque about this exclusion when interpreted in accord with the definitional provisions.  The exclusion disallows coverage when the claim is raised by either an executive of the company (i.e., an ‘Individual Insured’ who is not an ‘Employee’) or the company itself.”  Since the counterclaim as to which plaintiff sought coverage was brought by the company and plaintiff’s fellow officers/insureds, the exclusion applied.

Plaintiff, however, argued that his reasonable expectations were violated by the denial of coverage.  Judge Ostrer did not agree.  The principle that insurance policies are to be construed to comport with the reasonable expectations of the insured is “narrowly confined” to “exceptional circumstances.”  The insured’s expectations must be “real” and “objectively reasonable,” and the court must consider whether the insurer’s view would “largely nullify the insurance” or defeat its basic purpose.  If a public interest would be sacrificed, or if the insured is not a sophisticated consumer, the reasonable expectations doctrine is more likely to prevail.

Here, all the considerations pointed against plaintiff.  He was a “presumably sophisticated consumer” involved with commercial, not personal, insurance.  There was no public interest in finding coverage, there was no evidence that plaintiff expected coverage or that such an expectation would have been reasonable, and the policy language was straightforward and not confusing.

Plaintiff also contended that the exclusion applied only where there was collusion between the respective insureds.  Judge Ostrer noted that there was some support for the idea that the “insured vs. insured” exclusion had arisen as a response to lawsuits where “insured corporations sued their own directors to recoup operational losses caused by improvident or unauthorized actions.”  Caselaw elsewhere, however, stated that this exclusion was not limited to cases of collusion, but also applied to “bitter disputes” among members of a corporate family.  Quoting Judge Posner of the Seventh Circuit, Judge Ostrer said that plaintiff’s collusion argument “confus[es] a rule with its rationale.”  Accordingly, the panel affirmed summary judgment for the insurer.


Leave a Reply