Informational only. Not legal advice. No attorney-client relationship is created by reading this post. Consult a licensed attorney in your jurisdiction.
The insured-versus-insured exclusion ("IvI exclusion") is the provision in directors-and-officers liability policies that most reliably surprises sophisticated insureds at the worst possible moment — when the company is already in financial distress and the directors facing suit need their coverage most. Understanding the exclusion's origins, its standard scope, and its principal carve-outs is prerequisite to structuring D&O programs that actually deliver protection when litigation is brought by or on behalf of another insured.
Origins and Rationale
The IvI exclusion emerged as a market response to the savings-and-loan crisis of the 1980s. Insurer exposure grew dramatically as failed institutions — through their successor regulators and receivers — brought suits against former directors and officers for the same conduct that had produced the institution's losses. Carriers recognized that the classic moral-hazard concern was acute: an insured entity controlling both sides of litigation (or effectively controlling one side) could arrange a collusive claim to convert a business loss into an insured loss. The IvI exclusion was designed to prevent the insurer from funding intra-insured settlement of business disputes dressed up as D&O claims.
The exclusion's application quickly extended beyond financial institutions, becoming standard in commercial D&O policies. Its phrasing has evolved from transaction to transaction, but the core structure has remained stable: claims "brought by, on behalf of, or at the behest of" any insured against another insured are excluded from coverage.
Standard Formulation and Scope
A typical IvI exclusion bars coverage for:
Any claim by, on behalf of, or at the direction or behest of any Insured Person or the Company against any Insured Person.
"Insured Person" typically encompasses all natural-person directors and officers. "Company" typically encompasses the corporate entity itself. The exclusion's effect is broad: suits by current directors against former directors, suits by the company itself against a departing officer, and suits brought nominally in the name of the company by a board faction against former leadership all fall within the exclusion's literal terms.
The "on behalf of" extension. The phrase "on behalf of" creates the most litigation, because it reaches suits ostensibly brought by independent parties. Where a creditors' committee, a liquidating trustee, or a receiver brings claims against former officers, the question is whether those plaintiffs are acting "on behalf of" the corporate insured — which would trigger the exclusion — or as independent parties with independent claims — which would not.
The Circuit Split: Bankruptcy Trustees and Debtors-in-Possession
The interaction between the IvI exclusion and bankruptcy proceedings has produced the most contested litigation over the exclusion's scope.
Trustee claims. When a bankruptcy trustee brings an action against former directors on behalf of the bankruptcy estate, carriers argue the trustee "stands in the shoes" of the debtor-company and is therefore bringing a claim "on behalf of" an insured. Policyholders argue the trustee is a distinct legal entity acting for the benefit of creditors — parties who are decidedly not insureds — and that treating the trustee as the alter ego of the pre-bankruptcy company thwarts the very purpose of bankruptcy reorganization.
The Sixth Circuit addressed this issue in Indian Harbor Insurance Co. v. Zucker, where the court, in a split decision, held that the IvI exclusion applied to claims brought by a liquidating trustee, reasoning that the trustee succeeded to the debtor's claims and stood in the debtor's position for purposes of the exclusion. The majority's reasoning drew a sharp dissent, and the case illustrates the limits of the "successor" theory: not all circuits have followed the Sixth Circuit's approach, and the outcome turns heavily on the specific language of the IvI exclusion and the trustee-carve-back in the applicable policy.
Debtor-in-possession claims. A debtor-in-possession under Chapter 11 presents a distinct question. Unlike a trustee, the DIP is literally the same entity as the pre-petition debtor — the same legal person, now operating under the supervision of the bankruptcy court. Under 11 U.S.C. § 1107(a), the DIP has the rights and powers of a trustee and owes the same fiduciary duties to creditors that a trustee would owe.
A bankruptcy court in the Southern District of Texas addressed this configuration recently. In In re Walker County Hospital Corporation, Judge Isgur held that a DIP's claims against a former CEO fell within the bankruptcy-trustee carve-back to the IvI exclusion, because the DIP was functioning as a "similar official" to a bankruptcy trustee for purposes of the carve-back language. That holding is significant: it suggests that the presence of a trustee-carve-back in the policy can protect DIP actions even where the literal "on behalf of the company" language might otherwise trigger the exclusion.
Standard Carve-Outs
Market practice has evolved to include several standard carve-backs to the IvI exclusion, each reflecting a different recognized problem with the exclusion's overbreadth:
1. Shareholder Derivative Suits
Most D&O policies carve back from the IvI exclusion shareholder derivative suits that are brought without the "active assistance, participation, or solicitation" of any insured director or officer. The rationale is that a genuine derivative suit — one initiated and controlled by independent shareholders — does not present the collusion risk the exclusion is designed to address. The carve-back is typically conditioned on the absence of insured involvement in prosecution of the derivative suit, which can create coverage disputes when directors cooperate with derivative plaintiff's counsel during early stages of litigation.
2. Employment Practices Claims
Employment practices liability claims — brought by employees or former employees against directors and officers — are typically carved out of the IvI exclusion when the employees are "insureds" only by virtue of their employment status, not by virtue of holding directorial or officer positions. The policy logic is that EPL claims do not present the moral hazard that motivated the exclusion.
3. Bankruptcy Trustee / Receiver Carve-Back
Many modern D&O forms include an express carve-back for claims brought by a bankruptcy trustee, examiner, creditors' committee, or similar official, provided that such action is brought and controlled independently of any insured person. This is the carve-back that was at issue in Walker County Hospital and that most directly addresses the financial-distress context.
The Entity Coverage Problem
A distinct dimension of IvI exclusion litigation concerns entity coverage under Side C of the D&O policy. Where the company itself is a named defendant in a securities class action — the paradigm Side C exposure — the IvI exclusion is generally inapplicable, because the plaintiff class is composed of shareholders, not insureds. The exclusion becomes relevant when the company counterclaims or brings cross-claims against individual directors who are separately insured. Carriers sometimes argue that the IvI exclusion bars coverage for any portion of the indemnification obligation that arises from the company's own crossclaims.
Practitioners structuring D&O programs for companies with complex capital structures or distressed debt situations should pay particular attention to whether the D&O policy's entity coverage trigger aligns with the IvI exclusion's scope — the interaction between the two provisions can leave significant gaps.
Side A as a Partial Workaround
The practical response to IvI exclusion litigation risk is the Side A DIC (difference-in-conditions) policy, addressed in a companion post. Side A DIC policies typically carry narrower IvI exclusions — in some cases limited only to claims by the company as an entity, without extension to claims by or on behalf of other insured individuals. Where the bankruptcy trustee or DIP argument fails under the primary D&O policy, a well-structured Side A DIC may still respond.
Practice Notes
Tender early, tender to all layers. In a distress scenario where litigation is imminent, tender the claim to all D&O layers simultaneously, including the Side A DIC. Insurers in a tower have incentives to argue that a lower-layer coverage determination resolves the IvI question for their layer as well. Early, independent tender prevents that argument.
Scrutinize "at the behest of" language. Policies that extend the IvI exclusion to claims "at the direction or behest of" any insured, rather than simply "by or on behalf of," introduce a factual inquiry into whether shareholder plaintiffs or creditor-class plaintiffs were motivated or directed by insured officers. This broader phrasing can imperil the shareholder-derivative carve-back itself if any insured officer had informal communications with plaintiff's counsel before the suit was filed.
Document the independence of the trustee's decision. When representing a bankruptcy trustee asserting D&O claims, build a contemporaneous record establishing that the decision to sue former directors was made by the trustee independently, after counsel's analysis, and without instruction from or participation by any insured. That record is the evidentiary predicate for the trustee-carve-back argument.
Open Questions
Whether courts will uniformly extend the Walker County DIP analysis to circumstances where the DIP is controlled by prepetition management — as opposed to a new management team — remains unsettled. The moral-hazard concern is most acute when former management, now operating as the DIP, brings suit against a departing colleague. Courts may decline to apply the trustee carve-back in that configuration, reverting to the literal "on behalf of the company" analysis.
Closing
The IvI exclusion rewards careful policy drafting and careful claim handling in equal measure. Its origins in anti-collusion policy make it seem reasonable in the abstract; its application in contested bankruptcy proceedings, post-merger litigation, and director-versus-director disputes reveals an exclusion whose sweep routinely exceeds its purpose. For practitioners advising clients in distressed situations, the IvI carve-outs — particularly the trustee carve-back — are not boilerplate. They are the operative coverage provision.
Talk to Yates Anderson
If you are litigating a matter in this area — or weighing whether to — the working analysis above only goes so far. Request a case evaluation and a Yates Anderson attorney will respond within one business day.
Informational only. Not legal advice. No attorney-client relationship is created by reading this post. Consult a licensed attorney in your jurisdiction.