Insured v. Insured exclusion bars coverage; policy was not illusory even though no derivative coverage.

Thomas Engineering Co. Inc. v. Twin City Fire Ins. Co., Civ. No. 10-902 (D. Minn., December 2, 2010) (applying Minn. law)

Type of Case: Insurance Coverage

Practice Area(s): Insurance Coverage

Lawyer(s): Amy J Woodworth Erin D. Doran

Office(s): Minneapolis

Date: Dec 2 2010

Thomas Engineering Company, Inc. brought suit against Twin City Fire Insurance Co. (“TCFI”) claiming that TCFI breached the terms of its insurance policy by refusing to defend Thomas Engineering and its officers and directors in a lawsuit brought by a former manager who asserted both derivative and non-derivative claims. Thomas Engineering sought to recover over $750,000 in defense costs. The manager filed the underlying action in his individual capacity and as a trustee for a revocable trust that held his shares in the company. TCFI moved for summary judgment, asserting that it had no duty to defend the underlying action under the Policy because the manager was an insured and the “Insured v. Insured” exclusion bars coverage. The court found that the “Insured v. Insured” exclusion unambiguously precluded coverage for all claims because the underlying litigation was brought and maintained by an insured.

The court also rejected Thomas Engineering’s argument that the application of the “Insured v. Insured” exclusion rendered coverage under the policy illusory. The court recognized that the “Insured v. Insured” exclusion precluded coverage for all derivative claims under Thomas Engineering’s current management and ownership structure. A derivative claim can only be asserted by a shareholder, and Thomas Engineering had no shareholders who were not also directors or officers (and thus, ‘Insureds’ under the Policy). The court found, however, that Thomas Engineering had not shown that it paid a specific premium for the derivative coverage, and thus its illusory coverage argument failed.

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