No “Collusion” Requirement for I-v-I Exclusion

An Illinois federal court has rejected an insured’s argument that an “insured v. insured” exclusion bars coverage only where the underlying suit is “collusive.”  Travelers Cas. & Sur. Co. v. Bernhardt, 2014 WL 5461871 (N.D. Ill. Sept. 30, 2014). 

A policyholder bank sued its former CEO for alleged breach of fiduciary duty and negligence arising out of his decisions to issue certain questionable, high risk, commercial loans.  The former CEO sought coverage under the bank’s D&O liability policy, which excluded coverage for claims “brought or maintained by or on behalf of any Insured in any capacity,” subject to several enumerated exceptions.  Without reference to any supporting legal authorities or specific policy language, the former CEO argued that, in order for the insured v. insured exclusion to apply, the insurer must show that the underlying suit was collusive.

The court concluded that the language of the insured v. insured exclusion was clear and unambiguous and that none of the exceptions to the exclusion was applicable.  The court then held that neither the policy terms nor Illinois law required a showing of collusiveness for the exclusion to preclude coverage.  Accordingly, the court held that the insured v. insured exclusion precluded coverage for the bank’s claim against its former CEO.