Meaning
An exclusion in directors and officers liability policies denies coverage for claims brought by one insured party against another covered individual or entity. When a corporation sues its own directors or officers, the entity vs insured carveout ensures that the insurance company does not have to fund disputes occurring within the same organization. This exclusion prevents companies from using their insurance policies to cover internal disputes or to collude to collect insurance payouts.
It maintains the policy as a protection against external lawsuits.
Exception Trigger
The limitations of this exclusion are often modified by specific exceptions that restore coverage for particular scenarios. For example, the entity vs insured carveout usually does not apply to claims brought by bankruptcy trustees or independent court-appointed receivers who are acting on behalf of creditors. This distinction is critical because these third parties represent interests outside the corporate management team.
It ensures that the policy still provides value during insolvency proceedings.
Litigation Defense
Active disputes that fall under this exclusion can leave the accused executives without insurance-funded legal defense. The affected individuals must pay their own legal costs unless they can establish that a specific exception applies. This financial risk makes the precise wording of the exception clauses a major point of negotiation during policy renewals.
It forces firms to carefully review their governance risk profiles.
Strategic Negotiation
Brokers often negotiate to narrow the exclusion’s scope by adding exceptions for whistleblower claims or shareholder derivative actions that are filed without the assistance of the insured entity. These modifications protect individual board members from being left exposed during complex corporate disputes.
