(Article from Insurance Law Alert, May 2019)
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A New York court ruled that an insured v. insured exclusion in an excess D&O policy was ambiguous as to whether it applied to claims brought by a creditor trust and therefore did not bar coverage. Westchester Fire Ins. Co. v. Schorsch, 2019 WL 1901372 (N.Y. Sup. Ct. N.Y. Cnty. Apr. 29, 2019).
Westchester Fire Insurance Company, a seventh-level excess insurer of RCAP Holdings, LLC, sought dismissal of coverage claims based on an insured v. insured exclusion. The exclusion bars coverage for claims brought by one insured against another under the policy. However, an exception to the exclusion applies to claims brought by a bankruptcy trustee or examiner, receiver, conservator, liquidator “or other comparable authority.” The parties disputed whether a creditor trust, established pursuant to a restructuring agreement in connection with RCAP’s bankruptcy proceedings, falls within the scope of “other comparable authority.”
Westchester argued that the exclusion barred claims brought by a creditor trust established to gather and distribute creditor assets under the supervision of a three-member board, because such a trust is not “substantively independent and disinterested in the same way that a bankruptcy trustee or similar entity is and, consequently, is not a comparable authority.” In contrast, RCAP contended that “comparable authority” is ambiguous and that in any event, the creditor trust is the substantive equivalent of a creditor committee because it was established to obtain funds for RCAP’s creditors. The court agreed with RCAP, finding the exclusion to be ambiguous. Construing this ambiguity in favor of coverage, the court held that it did not bar coverage under Westchester’s policies.