A D&O policy’s insured v. insured exclusion applies to a derivative action where the shareholder plaintiff was briefly a director of the insured company, according to the United States District Court for the Northern District of California’s ruling in Gross v. Scottsdale Insurance Company, No. 5:24-cv-02069-EJD, 2026 U.S. Dist. LEXIS 185618 (N.D. Cal. Aug. 18, 2026).
The subject exclusion bars coverage for Loss on account of any Claim “brought or maintained by, on behalf of, in the right of, or at the direction of any Insured in any capacity.” The policy defines “Insured” to include “any person who was, now is, or shall become” a duly elected or appointed director of the insured company. The exclusion has an exception for any Claim “brought derivatively by a securities holder” that “is instigated and continued totally independent of, and totally without the solicitation, assistance, active participation of, or intervention of, any Insured.”
The underlying derivative action was brought after the shareholder demanded the company sue three of its directors for alleged mismanagement and breach of fiduciary duties. After making the demand, the shareholder served as a company director for approximately three weeks before resigning. Months later, he filed the derivative action.
The court held the insured v. insured exclusion applied based on its plain text, even though the plaintiff was not yet a director when he first made his demand, and resigned as a director before he filed suit. The court pointed out that neither the exclusion nor the definition of Insured contains any temporal limitation. As such, once the plaintiff became a director, he became an Insured, and the exclusion applied to any claim he had made or would make.
The court rejected the plaintiff’s argument that the derivative action exception applied, finding that once the plaintiff became a director, and therefore an Insured, any Claim he made could not be “totally independent of” any Insured. The court also found it irrelevant that the Claim was not collusive, observing that the exclusion expressly applied to any Claim “whether or not collusive.”
Finally, the court found the plaintiff’s reliance on alleged oral statements by the insurer’s representative that his appointment as a director would not impair coverage could not support an argument of waiver or estoppel, concluding that oral representations could not override express contractual terms.