Insured Bears Burden of Establishing that Exception to Insured Versus Insured Exclusion Applies

The United States District Court for the Northern District of Illinois, applying Oklahoma law, has held that the insured bears the burden of demonstrating that an exception to an otherwise applicable exclusion applies to restore coverage.  World Water Works Holdings, Inc. v. Continental Cas. Co., 2019 WL 2576560 (N.D. Ill. June 24, 2019).

The insured, a wastewater treatment company, was named as a nominal defendant in a shareholder derivative lawsuit brought against several of its directors, purportedly on behalf of the company.  The insureds sought coverage for their defense and indemnity under a liability insurance policy.  The insurer maintained that the policy’s Insured versus Insured (IvI) exclusion applied to bar coverage.  The IvI exclusion precluded coverage for claims “by or on behalf of any Insured in any capacity.”  The IvI exclusion was subject to several exceptions, including for “any Claim brought derivatively on behalf of the Insured Entity provided that such Claim is brought and maintained solely by persons acting independent of and without the solicitation, assistance, active participation or intervention of the Insured Entity or any Executive.”  The insured company sought a declaratory judgment that the insurer had a duty to defend the insureds in the lawsuit.  The company argued on summary judgment that the exception to the IvI exclusion applied because the lawsuit was brought derivatively on behalf of the company and “there are no allegations in the [complaint] that indicate that [it] is not maintained solely by persons acting independent of and without the solicitation, assistance, active participation or intervention of the Insured Entity or any Executive.”  The insured also argued that the insurer could not consider extrinsic evidence in determining its duty to defend.

The court granted summary judgment to the insurer on the bases that: (1) the IvI exclusion applied to bar coverage based on the four corners of the complaint (which asserted claims “on behalf of” the insured company), and (2) the insured had failed to satisfy its burden to establish that the exception to the exclusion (applicable to derivative lawsuits brought without the assistance of an Insured) applied.  The court reasoned that, because an exception to an exclusion operates to restore coverage, placing the burden of proof on the insured is consistent with the insured’s initial burden of proving coverage.  The court also determined that, not only was the insurer not prohibited from considering extrinsic evidence, but it was required to do so where the exclusion otherwise barred coverage.  Accordingly, the court granted the insurer’s motion for judicial notice (including of an affidavit that an Insured had submitted in support of the underlying plaintiff’s motion for preliminary injunctive relief), which confirmed that the lawsuit was not brought without the active assistance of an Insured.