US Appeal Court Considers Insured vs. Insured Exclusion

In a recent American case – Foodtown Inc. v. National Union Fire Insurance Company of Pittsburgh, Nos. 08-3940 and 08-4083, United States Court of Appeals, Third Circuit (January 6, 2011) – the Court considered an “Organization vs. Insured” exclusion in a directors and officers insurance policy.

Foodtown is a close-held grocery cooperative whose members operate supermarkets.    Food King Inc., a member of Foodtown, brought an action against Foodtown and members of its Board of Directors.   National Union had issued an insurance policy to Foodtown and its directors and officers.

National Union denied coverage for all of Food King’s claims, in part on the basis of the “Organization vs. Insured” exclusion (i.e., with respect to three of the four Counts contained in a Second Amended Complaint).

The Court of Appeals for the Third Circuit found that the exclusion clause only applied to one of the Counts, namely, a derivative claim brought by or on behalf of the Organization against an “Individual Insured”.  Specifically, the President of Food King was a former President of Foodtown and a former member of Foodtown’s Board of Directors, and was now actively participating in the litigation against Foodtown.    Foodtown unsuccessfully argued that the prior status of the President of Food King was irrelevant.  The Court of Appeals noted that the National Union insurance policy defined an “Individual Insured” to include a past director or officer.

The Court of Appeals declined to apply the exclusion to two other Counts.

David Cherepacha