Drafting History or Purpose Does Not Undermine Plain Language: Illinois Federal Court Enforces Insured-Versus-Insured Exclusion

In Travelers Casualty & Surety Co. of America v. Bernhardt, 2014 U.S. Dist. LEXIS 152416 (N.D. Ill. Oct. 28, 2014), the Northern District of Illinois granted summary judgment in favor of Travelers Casualty and Surety Company of America (Travelers), finding it had no duty to defend or indemnify Andrew Bernhardt in a breach of fiduciary duty and negligence lawsuit brought by Town Center Bank (TCB).  The underlying complaint involved several claims by TCB against Bernhardt originating from Bernhardt’s issuance of 26 questionable, high risk, commercial loans while an employee and officer of TCB.  TCB alleged the loans were made without adherence to TCB’s policies and good banking practices. Bernhardt, who was an Insured as defined by the Policy, submitted a claim to Travelers for coverage under the D&O policy, but Travelers denied coverage based in part on the insured-versus-insured exception.

Travelers brought this declaratory judgment action.  Bernhardt’s sole argument was that in order for the insured-versus-insured exclusion to apply, Travelers must establish that the underlying complaint is a collusive suit. The district court disagreed, finding that the exclusion has a broader scope. The district court specifically found that the historical context of the insured “does not impose on Travelers a duty to prove collusiveness when the policy does not require such a showing.” Because the language of the exclusion was unambiguous in not requiring a showing of collusiveness, and because Bernhardt and TCB were insureds, the exclusion barred coverage for the underlying complaint.

This opinion reinforces the fundamental maxim of policy construction that extrinsic evidence should not be used to disturb policy language that the parties bargained for and which is unambiguous on its face.