Insurer Not Liable for ‘Insured v. Insured’ Case, Says Court

When three board members are accused of misdeeds by a company exec, the court must decide if an 'insured-vs-insured' exclusion applies.
By: | September 4, 2019

World Water Works Inc. (WWW Inc.) was in the business of wastewater treatment. Founded in 1998, WWW Inc. was owned and operated by Mark Fosshage.

In 2011, World Water was formed as a separate legal entity and became the holding company for WWW Inc.

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Around this same time, three individuals were brought on as directors on the World Water board — Prashant Mitta, Ravi Reddy and Ravishankar Tumuluri. In 2016 these three removed Fosshage from his duties as president and CEO.

About a year later, Anthony Besthoff, a shareholder of World Water, filed a suit against the three. He alleged Mitta, Reddy and Tumuluri had other big goals in mind: During their time at World Water, they had been simultaneously creating and investing in various corporate entities in India. These India operations were then later spun off as independent companies.

Further in Besthoff’s complaint, he claimed Mitta, Reddy and Tumuluri’s actions were a detriment to World Water. Their main M.O., he said, was benefiting the India operations.

Word Water held a liability insurance policy through Continental Casualty Co. When the Besthoff complaint came through, World Water notified the insurer, but Continental denied the claim.

The policy had an “insured versus insured” exclusion, or IVI Exclusion. Because both Besthoff and the three named in the allegation were all World Water employees, Continental argued the policy did not kick in.

Later, after communicating with the insured, Continental agreed to defend the Besthoff suit with a full reservation of rights. In defense, World Water filed a complaint against the insurer, claiming Continental was liable for breach of contract and for bad faith in addition to owing the amount needed to reimburse World Water for the underlying suit.

In court, Continental conceded that, without the IVI Exclusion, the Besthoff action would fall under the insurance policy. However, because the exclusion did exist, Continental “shall not be liable to pay any Loss under this Coverage Part in connection with any Claim made against any Insured” that is made “by or on behalf of any Insured in any capacity.”

World Water, however, pointed to another clause in the policy. One in which exceptions to the IVI Exclusion were listed.

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In total, there were seven potential exceptions. World Water pointed to the main one: 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 IVI Exclusion would not apply.

In World Water’s eyes, Besthoff’s complaint was brought derivatively on behalf of the company. Therefore, the exclusion did not apply.

But the court said no dice.

Scorecard: The IVI Exclusion stands, says the court. Continental has no duty to defend or indemnify World Water or its three board members.

Takeaway: While appointing executives to high-level positions should be done with due diligence, insurance is still needed in those instances when executives do not act in accordance to company policy. Sometimes general liability will not cut it. &

Autumn Heisler is the digital producer at Risk & Insurance®. She can be reached at [email protected]

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