The "insured versus insured" exclusion in a Directors and Officers Liability policy was at issue in Biltmore Assoc., LLC v. Twin City Fire Ins. Co., No. 06-16417, 2009 U.S. LEXIS 15322 (9th Cir. July 11, 2009). 

    The policy named Visitalk.com, Inc. and its directors and officers as insureds, and promised to pay losses that the insureds became liable to pay as a result of covered claims.  Under the "insured versus insured" exclusion, there was no liability coverage if Visitalk sued its directors or officers.  Specifically, there was no coverage for loss "in connection with any Claim made against the Directors and Officers . . . brought or maintained by or on behalf of an Insured in any capacity." 

    Visitalk filed a chapter 11 bankruptcy petition.  As a "debtor and debtor in possession," Visitalk sued its discharged officers and directors for breach of their fiduciary duties, including looting of the company.  Twin City, the insurer, refused to cover the claims.

    In its reorganization plan, Visitalk assigned its claims against the directors and officers to a trust established for its creditors, with Biltmore named as trustee.  Biltmore settled with four directors and officers for $175 million.  The four directors and officers then assigned to the trust their rights against the liability insurers.  Biltmore sued Twin City, but the suit was dismissed by the district court.

    The Ninth Circuit affirmed.  Biltmore argued the claim against directors and officers was on behalf of the creditors and brought by the creditors' trustee.  Therefore, it was not brought or maintained on behalf of "an Insured."  The Ninth Circuit disagreed.  The insured versus insured exclusion barred coverage for Biltmore's claims because a post-bankruptcy debtor in possession acts in the same capacity as the pre-bankruptcy debtor for the purpose of directors and officers liability insurance.  Biltmore also argued that Visitalk, the chapter 11 debtor in possession that brought the underlying suit, was not the same entity as Visitalk, the insured corporation.  Again disagreeing, the Ninth Circuit determined the prefiling company and the company as debtor in possession in chapter 11 were the same entity.