Illinois Court Holds That Bankruptcy Trustee Is Not An “Insured” For Purposes of “Insured Versus Insured” Exclusion
In Yessenow v. Executive Risk Indemnity, Inc., 2011 IL App 102920, 953 N.E.2d. 433 (1st Dist. 2011), the Illinois Appellate Court held that a bankruptcy trustee asserting claims on behalf of a bankrupt entity is not an “insured” for purposes of the “insured versus insured” exclusion. In the underlying case, the bankruptcy trustee of an insolvent health care company filed an adversary complaint against the company’s former officers and directors asserting claims for self-dealing and mismanagement. The defendant officers and directors sought coverage under the company’s D&O policy, but the insurer denied coverage, arguing that the “insured versus insured” exclusion applied to the bankruptcy trustee’s action. The directors and officers commenced a declaratory judgment action against the insurer challenging its denial of coverage. The trial court granted summary judgment to the directors and officers, holding that the issue of whether a bankruptcy trustee is an “insured” is unsettled law and any ambiguities in insurance policies must be resolved in the insured’s favor.
On appeal, the Illinois Appellate Court affirmed, but on different grounds. The court held that the bankruptcy trustee in the underlying litigation was not an “insured” for purposes of the “insured versus insured” exclusion because the bankruptcy trustee stands in the shoes of the bankruptcy estate, not the bankrupt entity. The court reasoned that “because a bankruptcy trustee is not asserting claims by or on behalf of the bankrupt entity but, rather, on behalf of the estate and for the benefit of the creditors, the trustee is not a trustee of the entity, but rather, is a trustee of the bankruptcy estate.” Accordingly, the court concluded that coverage under the D&O policy was not foreclosed by the “insured versus insured” exclusion. Justice Quinn authored the opinion for the Court.