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The insured vs insured exclusion in D&O policies

The insured vs insured exclusion bars D&O cover for suits between insureds. The carve-backs that matter in bankruptcy, derivative and whistleblower claims.

4BusinessInsurance · Published October 10, 2026

The insured vs insured exclusion (IvI) removes coverage under a D&O policy for claims brought by one insured against another, or by the company against its own directors and officers. It was added to keep the policy from paying for collusive or internal disputes. Every carve-back, such as derivative suits, bankruptcy trustees and former directors, is a negotiated exception, and the exact wording of those carve-backs decides most coverage fights.

Why the exclusion exists

IRMI's expert commentary traces the exclusion to the mid-1980s, when companies that had suffered large losses sued their own executives. Insurers did not want D&O to become first-party protection for the company's ordinary business failures, and they feared friendly suits designed to reach policy money. IRMI's view is that the core purpose is the first one, and collusion is only part of it.

The result is a clause, in some form, in nearly every D&O policy. Many public company forms use a narrower "entity vs insured" version that bars only claims brought by the company itself, as the D&O Diary notes. Private company and nonprofit forms often use the broader version, where the claimant can be any insured person.

What the clause says

Wording varies by carrier, but most versions have the same parts. This paraphrase is illustrative, not any insurer's form:

  1. The trigger. The policy does not cover a claim "brought or maintained by, at the behest of, or on behalf of" the organization or any insured person. The courts have seen that phrase in cases like In re Ford City Condominium Association (Bankr. N.D. Ill., Aug. 31, 2023).
  2. The capacity language. Some forms add "in any capacity." That wording stopped a former bank CEO's coverage claim in Travelers v. Bernhardt (N.D. Ill., Sept. 30, 2014). A person who sues as a shareholder, employee or lender is still an insured suing.
  3. The definition of "insured." The pivotal term. If "insured" includes a trustee or debtor in possession, the carve-back for bankruptcy trustees may never be reached.
  4. The carve-backs. A list of exceptions that return coverage for specified kinds of claims.

The carve-backs worth reading

Carve-back What it restores What to check
Derivative suits A shareholder sues on the company's behalf against directors Requires no "solicitation, assistance or participation" by an insured, or sometimes only "active" participation
Bankruptcy or receivership Claims by a trustee, examiner, receiver, creditors' committee or liquidator Does it cover the company acting as debtor in possession, and assignees?
Employment claims An employee's discrimination or wrongful termination suit Whether it applies to all employees or only non-officers, and whether EPL sits elsewhere (Employment practices liability insurance (EPLI): what it covers)
Former directors and officers Claims by someone who left the role The look-back period, often one year but sometimes three or four, and any capacity or timing limits
Whistleblowers Claims by an insured who reports to a regulator Does it include directors and officers, Dodd-Frank as well as Sarbanes-Oxley, and non-U.S. equivalents?
Contribution and indemnity A co-defendant seeking contribution Whether the claimant is an insured

Not every form includes every carve-back, and the list is a negotiating checklist rather than a standard.

Where the exclusion bites

Derivative and shareholder suits. The carve-back restores coverage for a derivative case only if the shareholders act on their own. In a decision reported by the D&O Diary on January 23, 2023, a Southern District of New York court applying Kentucky law held coverage was precluded where a claim was brought by both insured and non-insured plaintiffs and was not independent of the insured's participation. A disgruntled director who feeds documents to a friendly shareholder can lose the carve-back for everyone.

Bankruptcy. Whether the exclusion reaches a trustee has been contested for decades. IRMI's commentary describes courts leaning toward not applying it where the policy language is plain, reasoning that a bankruptcy estate is a separate entity created by federal law. Outcomes still depend on the form. In Ford City, the trustee's claims against former condo board members were barred because the policy defined the organization to include trustees and debtors in possession. The Sixth Circuit, applying Michigan law, held in 2017 (as reported by the D&O Diary in June of that year) that the exclusion barred a liquidation trustee's claim assigned by the company as debtor in possession. A New York appellate court held in 2020 in Westchester Fire v. Schorsch that the bankruptcy carve-back preserved coverage for a creditor trust's claim. Read together: a bankruptcy carve-back has to name the debtor in possession and successors to work every time.

Former directors. In Calligeros (C.D. Cal., Dec. 13, 2017), a former director's dispute fell outside a carve-back that required the claim to be brought solely as a securities holder and to rest solely on wrongful acts after he left. The claims rested on events before his departure, so the court found no duty to defend.

Collusion is usually not required. Bernhardt rejected the argument that the exclusion applies only to collusive suits. Courts generally read the text as written, so a bona fide dispute is excluded just like a staged one.

Whistleblowers. A Hunton Andrews Kurth article warns that a whistleblower's help to a government investigation can negate coverage if the whistleblower is an insured person, and that standard carve-backs may cover only employees, only Sarbanes-Oxley claims, or only U.S. positions.

A hypothetical for a private company

Say three founders own a software company. One is removed as CEO and sues the other two for breach of fiduciary duty, in his capacity as a shareholder, and asks the court to appoint a custodian. Under a broad private-company IvI exclusion with "in any capacity" language and no carve-back for former officers, the defense costs for the two remaining founders could be uninsured, even though the claim is exactly what they bought D&O for. If the policy instead carves back claims by a former officer after a stated period and keeps coverage for derivative claims made without the plaintiff's help, the outcome could differ. The illustration shows why the clause matters most at companies with a small ownership group. See D&O insurance for private companies and startups.

Nonprofits and associations

A nonprofit board member who sues the organization, or a terminated executive director who claims discrimination, can run into the exclusion. Many nonprofit forms carve back employment claims or include a separate EPL part. Read both the exclusion and the carve-backs in D&O insurance for nonprofit boards.

Negotiating checklist

  1. Ask for the specimen exclusion and every carve-back, not a summary on the quote.
  2. Check the definition of "insured" for trustees, receivers, debtors in possession and assignees.
  3. Ask whether the derivative carve-back requires "assistance" or "active participation," and who counts.
  4. Confirm the whistleblower carve-back reaches executives and covers Dodd-Frank claims as well as Sarbanes-Oxley.
  5. Look at the former-director look-back, and whether it limits capacity or timing.
  6. Match with the rest of the program. A Side A difference in conditions excess layer (Sides A, B and C explained) is often written with a narrower exclusion, so ask whether it fills gaps in the primary.
  7. Look at the management package. If D&O, employment, fiduciary and crime sit on one form (Management liability packages: D&O, EPLI, fiduciary and crime), the IvI language must work for all of them.

A broker with D&O experience will usually have a market-comparison of these carve-backs. The decision to accept a narrower clause for a lower premium is a business decision, but it is better made deliberately.

Key takeaways

  • The IvI exclusion bars claims by an insured or the company against directors and officers; its purpose is to prevent collusion and keep D&O from covering internal business disputes.
  • The carve-backs decide the outcome: derivative suits, bankruptcy trustees, former directors, employment and whistleblower claims.
  • Courts apply the exact wording, and they usually do not require proof of collusion.
  • The definition of "insured" and phrases like "in any capacity" can quietly defeat a carve-back.
  • Private companies and nonprofits, with small insider groups, should negotiate this clause before a dispute, not after.

Terms used in this guide

Insured vs insured exclusion A D&O exclusion removing coverage for claims brought by one insured against another, such as a company suing its own directors. Directors and officers (D&O) insurance Liability insurance protecting a company's directors and officers, and often the company itself, against claims alleging wrongful acts in managing the business. Exclusion A policy provision that removes coverage for specified perils, property, people or types of loss that the insuring agreement would otherwise include. Employment practices liability (EPLI) Claims-made coverage for employee lawsuits alleging discrimination, harassment, wrongful termination, retaliation and similar wrongful employment acts. Difference in conditions (DIC) A stand-alone property policy that fills gaps in a primary policy, usually adding flood, earthquake and broader terms, often from surplus lines insurers. Defense costs The attorney fees, expert fees and other expenses of fighting a claim, which some policies pay on top of the limit and others deduct from it.

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