Intelligent Digital Systems, LLC v. Beazley Insurance
906 F. Supp. 2d 80
E.D.N.Y2012Background
- plaintiffs seek coverage under a D&O policy issued to Visual Management Systems (VMS) for claims in the Underlying Action; insurer disclaimed coverage based on the insured-versus-insured exclusion.
- Russ was alleged to have been appointed to VMS's Board after a reverse merger, but there is a factual dispute whether he was duly elected/appointed; board structure and bylaws/guidelines are contentious.
- IDS entered into a 2008 Sale Transaction with VMS involving assets, consulting arrangement with Russ, and a promissory note; Russ was not an employee but had a consulting agreement.
- following the Sale, VMS restated financials, and the Plan and IDS asserted unpaid obligations; Russ resigned from the Board on December 12, 2008 and the litigation timeline followed.
- the Underlying Action (EDNY) resulted in judgments against VMS and the Insureds, later stayed or settled; the Plaintiffs assigned rights to IDS and the Plan to pursue insurance coverage.
- the district court converted Beazley’s Rule 12(b)(6) motion to a summary judgment proceeding, applying New York law, and denied dismissal based on issues of fact related to the insured-versus-insured exclusion and equitable estoppel.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Russ was duly appointed or elected to VMS’s Board | IDS/Plan contend Russ was not duly appointed | Beazley argues Russ was a director via board actions | Genuine issues of material fact exist; summary judgment inappropriate on this point |
| Whether the employment-related exception negates the insured-versus-insured exclusion for Russ’s consulting claim | Consulting claim is employment-related | Consulting agreement shows Russ as independent contractor, not employee | No triable issue; consulting contract not employment-related; exclusion potentially applies |
| Whether IDS or Plan claims are barred if exclusion applies to Russ | IDS/Plan are separate legal entities and not necessarily barred | IDS/Plan are controlled by Russ and act at his direction | If Russ is duly appointed, exclusion could extend to IDS/Plan; triable issues remain about appointment and direction |
| Whether equitable estoppel bars Beazley from denying coverage | Beazley relied on VMS/Russ representations; estoppel should not apply | Beazley could rely on representations and investigate; estoppel should apply if warranted | Triable issues exist; summary judgment denied on estoppel ground |
| Whether the court should grant summary judgment on the insured-versus-insured exclusion as a matter of law | Exclusion lacks collusion requirement; may not apply if Russ is not an insured | Exclusion plain language applies if Russ is an insured | Scene remains factual; not appropriate to grant summary judgment on this basis |
Key Cases Cited
- Fed. Ins. Co. v. Am. Home Assur. Co., 639 F.3d 557 (2d Cir. 2011) (no choice of law; interpret contract language; ambiguity rules for insurance policies)
- Haber v. St. Paul Guardian Ins. Co., 137 F.3d 691 (2d Cir. 1998) (ambiguity in insurance contracts; contra proferentem favors insured)
- Sphinx Int’l, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 412 F.3d 1224 (11th Cir. 2005) (insured-versus-insured exclusion not limited to collusive suits in some contexts)
- Andy Warhol Found, for the Visual Arts, Inc. v. Fed. Ins. Co., 189 F.3d 208 (2d Cir. 1999) (plain meaning of policy terms; no collusion requirement stated in exclusion)
- Connolly v. Peerless Ins. Co., 873 F. Supp. 2d 493 (E.D.N.Y. 2012) (creditability of factual disputes; credibility for jury; summary judgment not appropriate on certain issues)