Insured Versus Insured Exclusion Defeats Coverage For Class Action Filed By Former Director

In a win for Wiley's client, the United States District Court for the District of Wyoming, applying Wyoming law, held that an insured versus insured ("IvI") exclusion barred coverage for an entire class action proceeding brought by an insured's former director against the insured and various other former directors and officers. Tri County Tel. Ass'n, Inc. v. Twin City Fire Ins. Co., No. 24-CV-274-KHR (D. Wyo. Jan. 12, 2026).

One of the insured's former directors and his wife (with whom he shared his membership interest) sued the insured telephone cooperative and various other former directors and officers in both his individual capacity and as a representative of a class of over 800 members. The suit alleged that a merger transaction undervalued the cooperative and sold it for less than it was worth. After more than four years of litigation, the insured prevailed on summary judgment. The insured sought a defense under its directors and officers liability policy, but the insurer denied coverage based on the policy's IvI exclusion, which barred coverage for "any Claim brought or maintained by or on behalf of any Insureds (in any capacity) or any security holder of an Insured Entity." The insured argued that two exceptions to the IvI exclusion restored coverage: the Security Holder Exception and the Former Manager Exception.

Applying Wyoming law, the court first held that the IvI exclusion barred coverage for the entire class action because "Claim" was defined as a civil proceeding. Even though the class action included both the insured entity and various insured persons as defendants, and the complaint underwent multiple amendments, including new theories and a late-added defendant, the former director's involvement in the class action as the principal plaintiff served to exclude the entire proceeding, including all defendants and iterations of the complaint. The court rejected the insured's attempt to invoke the allocation clause to permit coverage for certain claims encompassed within the class action because the allocation clause only applied where there is a covered claim. Because the entire class action was a single Claim barred by the IvI exclusion, there was no covered claim that required allocation. The court also held that even if the underlying claims were separate, they were still based on the same Wrongful Act or Interrelated Wrongful Acts centered around the merger transaction, which formed a single Claim.

The court enforced the exclusion as written, noting that a suit brought by a former director deeply involved in the underlying dispute fit squarely within one of the recognized purposes of IvI exclusions—to preclude coverage for disputes arising from corporate infighting—though the court emphasized that it is the plain meaning of the policy language, not the exclusion's purpose, that controls.

The court then held that no exception applied to restore coverage. Under the Security Holder Exception, the IvI exclusion did not apply to "a civil proceeding by a security holder of an Insured Entity ...that is brought and maintained without solicitation, assistance, or active participation of any Insured Entity or Manager." The court held that it was sufficient that the former director was a Manager under the policy and had participated in the litigation, rejecting the insured's argument that the language required a second actor. The Former Manager Exception also did not apply because it required the suit to proceed entirely without the involvement of "a former Manager who has not served in such capacity for at least one year prior to such Claim being made." The court agreed that a director "serves" while holding office, regardless of when they last took official action as a director. Because the board of directors officially resigned less than one year before the suit was filed, the exception could not apply.

Finally, the court held that the insured had not demonstrated bad faith as a matter of law because the insurer correctly denied a defense, and the evidence demonstrated that the insurer conducted at least a cursory coverage investigation.

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