Breakaway Church Not an “Insured” Under Original Church’s D&O Policy

A federal district court in Massachusetts has held that an insurer properly denied coverage for a claim against an insured church brought by another church that had broken away from the original entity because the breakaway church was not an “insured” under the original church’s policy.  Newton Covenant Church, et al. v. Great Am. Ins. Co., 2019 WL 3464705 (D. Mass. Jul. 31, 2019).

An insured church decided to allow LGBT persons into the clergy and recognize same-sex marriage.  In response, a majority of its members voted to break away from the original church and take control of its property in order to establish a new church.  The original church brought suit against the new church and its directors and officers, seeking a declaratory judgment that the original church was the owner of the property.  The new church sought coverage for the action and the resulting settlement under the original church’s D&O policy.  The insurer denied coverage on the grounds that the new church was not an “insured” under the policy.

In the coverage litigation that followed, the court sided with the insurer, first holding that the new church was not an “insured” under the policy because it was a legal entity distinct from the original church.  The court further determined that no coverage was available for the individual plaintiffs because they were not sued for acts taken in their capacity as directors or officers of the original insured church.  Finally, the court determined that, even if the new church and its members were “insureds,” the “insured versus insured” exclusion barred coverage for the claim against them by the original church.