A common issue in directors and officers insurance coverage disputes is the allocation of loss between covered and uncovered insureds and/or claims. This issue can arise when some of the defendants in a lawsuit are not “insureds” under the policy—for example, the policy provides coverage for only directors and officers, and the corporation is also named as a defendant in the lawsuit for which coverage is sought—or when some of the claims in a lawsuit are arguably not covered—for example, when the plaintiff alleges that some of the director’s or officer’s actions were taken in a non-insured capacity. When these issues arise, insurers often claim that loss (including defense costs and settlement amounts) must be allocated between covered and uncovered insureds or claims.

Applying the Larger Settlement Rule

In the absence of an allocation clause specifying how a court should allocate loss between covered and uncovered loss, multiple courts have applied the Larger Settlement Rule, a rule developed by the Ninth Circuit in Nordstrom, Inc. v. Chubb & Son, Inc., 54 F.3d 1424 (9th Cir. 1995). In Nordstrom, a securities lawsuit was filed against the corporation and its directors and officers. The directors and officers were insured under the policies; the corporation was not. The policy did not specifically provide for allocation of a settlement when the lawsuit involved both covered and uncovered parties. The defendants settled the case and the insurer refused to pay more than half the settlement, claiming that the other half should be allocated to uncovered claims.