The ‘insured v. insured’ exclusion clause contained in a Directors and Officers Liability Insurance policy generally excludes coverage to officers when a claim is brought against them by the Corporation named in the policy. Despite the clear wording of the clause, the clause will not exclude coverage to an officer when the officer and the Corporation are adverse in interest.

Kohanski v. St. Paul Guarantee Insurance Co., [2005] O.J. No. 5882,  Ontario Superior Court of Justice

Horkins J. determined that even though the exclusion was clear and unambiguous, it should not be applied if its application would defeat the objective of the insurance contract. Therefore it was appropriate to look at the underlying policy reasons behind the exclusion in determining whether the exclusion applied. In addition, Horkins J. noted that the U.S. cases demonstrate that, for purposes of determining the applicability of the exclusion clause, the Court must first consider the status of the officer when the claim is asserted. If the action does not present itself as a collusive suit between the Corporation and the Director, the exclusion clause does not apply. In this situation, Horkins J. determined that it was clear that the parties were truly adverse. Horkins J. determined that to apply the exclusion and declare that no duty to defend exists would be inconsistent with the main purpose of the exclusion as stated by the U.S. Courts. As a result, he found that St. Paul had a duty to defend Kohanski in the action pursuant to the terms of the Policy.

MIA is an organization that represents employees in the insulation industry and labour relations matters. Michael Kohanski (“Kohanski”) operates a business in the insulation industry. On January 19, 1994, Peter Woloszanskyj was hired to be the manager of MIA. His wife, Anna Woloszanskyj, was hired in April 2000 to be an administrative assistant. In February 2002, Peter and Anna Woloszanskyj entered into new employment agreements with MIA. The employment contract was signed by Kohanski on behalf of MIA. On March 2, 2002, Kohanski resigned as President of MIA and from the Board of Directors. On October 3, 2002, Peter and Anna Woloszanskyj allege that MIA terminated them without cause. They issued a Statement of Claim against MIA seeking damages for breach of contract, wrongful dismissal and defamation. MIA delivered a Statement of Defence and Counterclaim in the action. MIA denied the allegations in the Statement of Claim, including the validity and enforceability of the February 2002 employment contract signed by Kohanski. MIA issued a Counterclaim against Peter and Anna Woloszanskyj and Kohanski. In the Counterclaim, MIA sought contribution and indemnity from Kohanski for any amount that may be found owing to Peter and Anna Woloszanskyj. MIA alleged that Kohanski never disclosed to MIA the existence of the new employment contracts. MIA also alleged that the agreements were secured by fraud, dishonesty and constituted a conspiracy between Peter and Anna Woloszanskyj and Kohanski; and that Kohanski did not have authority to enter into the contracts on behalf of MIA.

Kohanski was insured by St. Paul Guarantee Insurance Co. (“St. Paul”) through a Directors and Officers Liability Insurance policy (the “Policy”). Kohanski notified the insurer of the Counterclaim that was brought against him and requested that he be provided with a Defence. His request was denied, and he commenced an action seeking a declaration that St. Paul was required to defend him pursuant to the terms of the Policy.

The Policy contained an exclusion known as the “insured vs. insured” exclusion. This exclusion states:

The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against the Directors and Officers:

…
(7) which is brought by or at the behest of the Corporation, or any affiliate of the Corporation, or by any security holder of the Corporation whether directly or derivatively except where such security holder bringing such Claim is acting totally independently of, and totally without the solicitation of, or assistance of, or participation of, or intervention of, any Director or Officer, or the Corporation or any affiliate of the Corporation.

There was no dispute that the claim made against Kohanski would fall within coverage of the Policy if it was not excluded by this clause. However, St. Paul argued that it is plain and obvious that the exclusion applied and that it owed no duty to defend Kohanski. The Counterclaim was a claim made against a director brought by the Corporation. Kohanski relied upon on a body of case law in the United States that discussed the general policy reasons underlying the exclusion clause. These cases included Re Buckeye Countrymark Inc., 251 B.R. 835 (Bkrtcy. S.D. Ohio 2000), Cigna Insurance Company v. Gulf United States Corp., 1997 WL 1878757 (D.Idaho), Conklin Co v. National Union Fire Ins. Co., 1987 WL 108957 (D.Minn.), and Township of Center v. First Mercury Syndicate, 117 F. (3d) 115 (3rd Circ. 1997). The U.S. cases clearly established that the purpose behind the exclusion clause was to prevent a Corporation and a Director of the corporation from bringing a collusive suit in order to trigger coverage from the policy of insurance. St. Paul argued that given the plain and obvious wording of the clause that Horkins J. should not look behind the exclusion clause and consider its purpose in determining whether the clause applied.

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