Meaning
D&O liability insurance policies contain a standard provision that denies coverage for claims brought by one insured entity against another insured party. This limitation, often called the entity vs entity exclusion, prevents the policy from paying out for internal disputes and collusion between corporate entities and their directors. It typically applies to actions initiated by the corporation itself or its subsidiaries against its own officers.
The primary purpose is to ensure that the insurance company does not fund internal corporate infighting or manufactured losses. The exclusion does not apply to claims brought by independent third parties such as shareholders or regulatory bodies.
Trigger Condition
Insurers apply the restriction when the plaintiff and the defendant are both covered under the same insurance contract. For example, if a parent company sues a subsidiary director for negligence, the entity vs entity exclusion will deactivate the defense and indemnity coverage. This exclusion protects insurers from having to pay for losses where the insureds have a high degree of mutual control or financial interest.
In bankruptcy situations, the exclusion may become a point of contention if a receiver or liquidator files a claim against the directors, though court rulings often distinguish these court appointed representatives from the original entity.
Corporate Protection
Risk managers often negotiate carve outs to restore coverage for specific internal scenarios. These exceptions frequently include shareholder derivative actions that are brought without the assistance or involvement of the company itself. Other common exceptions cover employment practice claims brought by former directors or actions launched after the director has been out of office for a specified number of years.
These carve outs ensure that genuine adversarial disputes are still funded by the policy.
Coverage Assessment
Reviewing the precise wording of the exception clauses is critical during policy renewal. The absence of robust carve outs leaves directors exposed to personal liability for strategic internal reorganisations. If a dispute arises, the insurer will immediately issue a reservation of rights letter citing this exclusion.
