Sphinx International, Inc. v. National Union Fire Insurance Company of Pittsburgh

George Taylor was a director, officer, and 10 percent shareholder in Sphinx International, Inc. (Sphinx) (plaintiff). Sphinx terminated Taylor’s employment and removed him from his director and officer positions. A few years later, Sphinx missed its earnings projections for two consecutive years, and Taylor filed a securities class action against Sphinx. Taylor solicited other Sphinx shareholders to join his lawsuit and amended his complaint to include the new plaintiffs. Sphinx sought coverage for Taylor’s claims from Genesis Indemnity Insurance Company (Genesis) and National Union Fire Insurance Company of Pittsburgh (National) (defendants). Genesis denied Sphinx’s claim based on a directors and officers (D&O) liability policy, which contained an insured-versus-insured exclusion barring coverage for claims against Sphinx by any current or former director or officer unless the claim was instigated and continued totally independently of and without the participation of any director, officer, or affiliate of Sphinx. Sphinx filed suit against Genesis and National. After settling with National, Sphinx continued its litigation against Genesis. Sphinx argued that the D&O policy was inapplicable because insured-versus-insured exclusions were intended to preclude coverage for collusive lawsuits, such as a corporation suing its own officers or directors in order to recapture losses resulting from their business mistakes, and that Taylor’s lawsuit was not collusive. Sphinx also argued that even if the exclusion applied, it should bar coverage only against the percentage of the claim attributable to Taylor, with the portion attributable to the other shareholder-plaintiffs remaining covered. The district court granted summary judgment to Genesis, and Sphinx appealed.