The insured vs insured exclusion in D&O insurance prevents one insured party from claiming against another insured party under the same policy. It exists to stop collusive lawsuits, but common carve-backs preserve cover for legitimate disputes.
This article covers how the exclusion works, the six carve-backs that may preserve cover, how it applies under Australian law, and what to check in your policy wording.
TL;DR
- The insured vs insured exclusion limits cover when one insured sues another under the same D&O policy.
- It exists to prevent collusive claims, where insured parties might collude to recover business losses from the policy.
- Six common carve-backs may preserve cover: whistleblower, cross-claims, derivative actions, liquidator claims, former director claims, and employment claims.
- Modern policies are shifting to the narrower "entity vs insured" exclusion; Side A DIC policies can drop down when the exclusion blocks cover.
All information is general in nature. Cover is subject to policy terms, conditions, and exclusions, which vary between insurers and policy wordings.
What is the Insured vs Insured Exclusion?
The insured vs insured exclusion (commonly written "IvI exclusion") is a standard provision in directors and officers (D&O) liability policies. It limits or removes cover when one insured party brings a claim against another insured party under the same policy.
The exclusion exists for one core reason: to prevent collusive lawsuits. Without it, an insured company could sue its own directors to recover business losses from its D&O insurer, turning a third-party liability policy into a first-party recovery tool. The exclusion preserves the policy's intended purpose, which is to defend insureds against external claims.
Most modern Australian D&O policies include the exclusion, but it is rarely an absolute bar. Common carve-backs preserve cover for legitimate disputes such as whistleblower claims, shareholder derivative actions, and claims brought by liquidators or administrators. Always read the specific policy exclusions section and definitions. Exclusion language and carve-back scope vary materially between insurers.
See also: Management Liability vs D&O Insurance in Australia (Complete Guide)
Who Counts as "an Insured" Under a D&O Policy?
D&O policies define "insured" precisely. The definition typically includes:
- The named entity (the company itself, plus listed subsidiaries)
- Directors and officers (current and sometimes former)
- Senior managers and employees acting in a management or supervisory capacity
- Subsidiaries named or specified in the policy schedule
- Estate, heirs, and legal representatives of a deceased insured person
- Outside directorship extensions where a director sits on the board of another entity at the company's request (where endorsed)
The insured vs insured exclusion can apply to claims between any of these parties. A current director suing a former director, or the company itself suing one of its own officers, will both typically trigger the exclusion before any carve-back is considered.
The scope of "insured" is set out in the policy schedule and the policy wording's definitions section. Check both. A claim that looks like a third-party claim may turn out to be between two insureds once you trace the parties through the policy definitions.
Six Carve-Backs That May Preserve Cover
The exclusion has historical pedigree but rarely operates as an absolute bar in modern policies. Six standard carve-backs preserve cover in legitimate disputes.
1. Whistleblower carve-back
Cover is typically preserved where an insured person who has made a protected disclosure under whistleblower laws brings a claim against another insured. Under Australian law, protected disclosures are governed by Part 9.4AAA of the Corporations Act and related whistleblower protection regimes. The carve-back recognises that whistleblower claims are not collusive.
2. Cross-claims in Third-Party Proceedings
When a third party (not an insured) sues the company and its directors, and the defendant insureds then bring cross-claims against each other in the same proceeding, the carve-back may preserve cover for those cross-claims. This recognises that cross-claims responding to external pressure are not the type of collusion of the exclusion targets.
3. Shareholder derivative actions
Shareholders who are not insured may bring derivative actions on behalf of the company against its directors. The carve-back may preserve cover, but only if the action is brought "independently" - without solicitation or active participation by another insured. This "Assistance Exception" requirement has been heavily litigated in international D&O case law and is expected to apply similarly in Australian wordings.
4. Liquidator and administrator carve-back
When a company enters liquidation, a liquidator may bring claims against former directors, including insolvent trading compensation claims under the Corporations Act. Some policies also refer to claims brought by administrators, receivers, or external administrators, but the exact carve-back depends on the policy wording. This is the Australian equivalent of the "bankruptcy carve-back" frequently discussed in US D&O literature. See also our overview of director liability for corporate obligations.
5. Former director carve-back
Claims brought by a director who left the company more than a defined separation period earlier (commonly 1 to 2 years) are often carved back into cover. The rationale is that a former director with no continuing involvement is unlikely to be colluding with current insureds. The exact separation period is set in the policy schedule.
6. Employment-related carve-back
Claims by an insured person alleging Employment Practices Wrongful Acts - including wrongful termination, workplace harassment, discrimination, and retaliation - are typically carved back. This applies whether the claim is brought under management liability cover or standalone D&O.
Related: employer liability for company directors in Australia.
How the Exclusion Applies in Australia
Australian D&O policies operate within the Corporations Act 2001 framework. The insured vs insured exclusion appears in standard Australian D&O wordings, but its application is shaped by Australian insolvency and corporate law.
Key Australian legal references that drive carve-back analysis:
- Sections 180-184: director duty framework - care and diligence, good faith, proper use of position, proper use of information
- Section 588G: insolvent trading liability for directors
- Section 588M: liquidator's power to recover from directors
- Part 5.3A: voluntary administration framework
- ASIC: brings civil penalty actions against directors that often interact with D&O cover
When an Australian company enters administration or liquidation, the question of whether the liquidator's claim against former directors triggers the insured vs insured exclusion turns on the policy's specific wording. Most modern Australian D&O policies preserve cover for these claims through the liquidator/administrator carve-back.
Exclusion wording and carve-back breadth vary between Australian insurers. APRA-authorised insurers, Lloyd's syndicates, and other markets each use slightly different language. Always check the schedule and policy wording for the specific terms applicable to your cover.
Modern Variants: Entity vs Insured and Side A DIC
The traditional insured vs insured exclusion is broad. Two modern developments in the D&O market either narrow its scope or fill the gap when it blocks cover.
The "Entity vs Insured" variant
Many newer D&O policies have replaced the traditional insured vs insured exclusion with a narrower "entity vs insured" exclusion. This narrower form only excludes claims brought by the named entity (the company itself) against insured persons (directors and officers). Claims between two directors, or between former and current officers, fall outside the exclusion under this wording. This shift is more favourable to insureds and is becoming common in the Australian and global D&O markets.
Side A DIC drop-down policies
A Side A DIC (Difference in Conditions) policy sits above a standard Side A/B/C D&O programme. It provides additional policy limits dedicated solely to non-indemnifiable claims against directors and officers. The critical feature for insured vs insured analysis: a Side A DIC may "drop down" to provide cover when the primary policy denies cover under the insured vs insured exclusion. Side A DIC policies often contain fewer and narrower exclusions than primary D&O cover, making them a recognised solution for directors concerned about exclusion-related coverage gaps. They are typically held by listed companies and larger private companies.
Real-World Scenarios
Three scenarios show how the exclusion and its carve-backs operate in practice. All scenarios are illustrative and subject to specific policy wording.
Scenario 1: Director vs former director
A current director of a private company alleges that a former co-director made misleading representations during a capital raise two years ago. The current director brings proceedings personally for damages. Both parties are insured under the same D&O policy.
How the exclusion may respond: The insured vs insured exclusion would typically apply, removing cover. If the policy includes a former director carve-back with a separation period that the former director has met, the carve-back may preserve cover. Cover is subject to specific policy terms.
Subject to policy terms. Illustrative scenario only.
Scenario 2: Shareholder derivative action
A minority shareholder (who is not an insured) brings a derivative action against the company's directors, alleging breach of duty under sections 180-184 of the Corporations Act. The shareholder is not collaborating with any director, officer, or the company itself.
How the exclusion may respond: The shareholder derivative carve-back may preserve cover, provided the action is brought independently without solicitation or active participation by any insured. Legal defence costs may be advanced. Cover is subject to specific policy terms.
Subject to policy terms. Illustrative scenario only.
Scenario 3: Liquidator action against former directors
A company enters liquidation. The liquidator brings proceedings against former directors alleging insolvent trading compensation claims under the Corporations Act.
How the exclusion may respond: The liquidator/administrator carve-back typically preserves cover for the directors' defence costs and any covered settlement, even though both the company (in liquidation) and the directors are insured. This is one of the most important practical applications of the carve-back in Australian D&O claims. Cover is subject to specific policy terms.
Subject to policy terms. Illustrative scenario only.
What to Check in Your D&O Policy Wording
Use this checklist when reviewing your D&O or management liability policy:
- Find the exclusion: Search for "Insured vs Insured" or "Entity vs Insured" in the exclusions section of your policy wording
- Read the definition of "Insured": Find it in the policy schedule and definitions section
- Identify each carve-back: Look for explicit references to whistleblowers, derivative actions, liquidators/administrators, former directors, and employment claims
- Note the separation period: For the former director carve-back, confirm the required separation timeframe (commonly 1-2 years)
- Check the Assistance Exception: Look for language requiring derivative claims to be brought independently of any insured
- Consider Side A DIC: For larger companies, review whether Side A DIC drop-down cover is in place
- Compare to your business risk: Identify the most likely sources of claims in your business (employment, insolvency, derivative actions) and confirm the relevant carve-backs apply
A broker can review your wording and identify gaps. If you are renewing your D&O or management liability cover, this is the right moment to ask specifically about the insured vs insured exclusion and carve-back scope. The period of insurance determines when claims must be made for the policy to respond.
About upcover
upcover is a digital-first insurance broker arranging insurance for Australian businesses. upcover arranges D&O, management liability, professional indemnity, public liability, cyber, and a range of business insurance products.
Each policy includes its own schedule, period of insurance, and policy wording, which contain the exclusions and carve-backs discussed above. When upcover arranges cover, the policy schedule sets out your specific terms.
upcover Pty Ltd ABN 17 628 197 437 is a Corporate Authorised Representative (CAR 1299211) of Experience Insurance Services Pty Ltd ABN 41 657 596 506, AFSL 539078.
Talk to a licensed broker before relying on any general description of policy terms. The exact exclusion wording in your policy may differ from market norms.
Frequently Asked Questions
What is the insured vs insured exclusion in D&O insurance?
The insured vs insured exclusion is a standard provision in D&O policies that limits cover when one insured party (such as a director, officer, or the company itself) brings a claim against another insured party under the same policy. It exists to prevent collusive claims that would turn the policy into a recovery tool.
Why do D&O insurers include the insured vs insured exclusion?
The exclusion exists to prevent collusive lawsuits where insured parties might cooperate to recover business losses from the D&O insurer. Without the exclusion, a company could sue its own directors to recover from its insurance policy, turning a third-party liability policy into a first-party recovery vehicle. The exclusion preserves the policy's intended purpose.
Who counts as "an insured" under a D&O policy?
A D&O policy typically defines "insured" to include the named entity (the company), its directors and officers (current and sometimes former), senior managers and employees acting in a management capacity, named subsidiaries, and the estate or legal representatives of a deceased insured person. The exact scope is set out in the policy schedule and definitions section.
Are whistleblower claims covered despite the insured vs insured exclusion?
Most modern D&O policies preserve cover for whistleblower claims through a specific carve-back. Where an insured person has made a protected disclosure under Australian whistleblower protection laws and brings a related claim against another insured, the carve-back typically preserves cover. Always check your specific policy wording. Subject to policy terms and conditions.
Are shareholder derivative actions excluded?
Shareholder derivative actions are often carved back into cover, provided the action is brought "independently" by a non-insured shareholder without solicitation or active participation by another insured. This independence requirement (sometimes called the Assistance Exception) is critical to the carve-back operation. Always check your policy's specific carve-back language.
Can a liquidator's claim against directors be covered?
When a company enters liquidation, a liquidator may bring claims against former directors, including insolvent trading compensation claims under the Corporations Act. Some policies also refer to claims brought by administrators, receivers, or external administrators, but the exact carve-back depends on the policy wording. Subject to policy terms.
What should I check in my D&O policy about this exclusion?
Find the insured vs insured exclusion in your policy wording. Identify each carve-back (whistleblower, derivative, liquidator, former director, employment). Check the separation period for the former director carve-back, typically 1-2 years. For larger companies, consider whether Side A DIC drop-down cover is appropriate. For the broader comparison see our management liability vs D&O guide.
The information in this article is general in nature and drawn from publicly available data. It does not constitute personalised insurance, tax, or financial advice and has been prepared without taking into account your individual needs, objectives, or financial situation. Insurance availability, premiums, regulatory frameworks, and policy terms change over time. Always confirm current details with a licensed insurance broker. All insurance products arranged through upcover are subject to the terms, conditions, limits, and exclusions contained in the relevant policy wording and Product Disclosure Statement (PDS). Before deciding whether a particular insurance product is right for you, please read the relevant PDS, Target Market Determination, and Financial Services Guide, and consider your personal circumstances. upcover Pty Ltd ABN 17 628 197 437 is a Corporate Authorised Representative (CAR 1299211) of Experience Insurance Services Pty Ltd ABN 41 657 596 506, AFSL 539078. upcover arranges insurance products with selected insurers and does not compare all general insurers or insurance products in the market.
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