Meaning
Exclusionary clauses in Directors and Officers liability insurance policies that prevent coverage for lawsuits brought by one person or entity covered by the policy against another. The insured versus insured provision was originally designed to stop companies from using their insurance as a source of capital by filing friendly lawsuits. It creates a boundary that limits the insurer’s exposure to internal conflicts.
Coverage Limitation
If a former board member sues the current officer, the policy might not pay for the defense. This insured versus insured language forces the parties to resolve their issues without drawing on the shared insurance pool. It ensures that the policy is used for protection against outside threats rather than internal disputes.
Carve Back
Many modern policies include exceptions that restore coverage for certain types of internal claims. These often apply to employment disputes or lawsuits brought by individuals who have been away from the company for several years. The insured versus insured rule is thus modified to provide a safety net for legitimate grievances while still blocking collusive behavior.
Policy Strategy
Understanding the scope of this exclusion is necessary when structuring a departure. An outgoing founder needs to know if their future actions could trigger the insured versus insured clause and leave them without a funded defense. This knowledge influences how resolution and separation agreements are written to preserve insurance rights.
