Third Circuit Holds Ownership Percentage Exclusion Does Not Render Security Holder Derivative Coverage Illusory

The United States Court of Appeals for the Third Circuit, applying Virgin Islands law, has held that a D&O policy’s Ownership Percentage Exclusion barred coverage for a derivative suit brought by security holders who each owned more than five percent of the insured. Sunshine Shopping Ctr., Inc. v. Travelers Excess & Surplus Lines Co., 2026 WL 2824523 (3d Cir. Sept. 21, 2026). The court also held that applying the exclusion did not render the policy’s coverage for security holder derivative claims illusory.

The insured shopping center owner’s D&O policy provided specified coverage for “Security Holder Derivative Claims,” defined as “any Claim brought on behalf of, or in the name or right of [the company] by one or more security holders of [the company] in their capacity(ies) as such,” if “brought and maintained without the assistance, participation or solicitation of any member of the board of directors, officer, member of the board of managers, or ... equivalent thereof.” The policy also included an Ownership Percentage Exclusion that barred coverage for “Loss for any Claim brought or maintained by or on behalf of, or with the assistance, participation, or solicitation of any person or entity that owns or did own more than 5% of the Named Insured.” When three security holders of the company filed a derivative suit against the company’s directors and officers, the insurer denied coverage on the grounds that the security holders each held more than five percent of the shopping center’s shares and the Ownership Percentage Exclusion thus barred coverage.

The Third Circuit affirmed a grant of summary judgment in favor of the insurer. The court held that the Ownership Percentage Exclusion applied to the derivative lawsuit. The court rejected the insured’s argument that the Ownership Percentage Exclusion applied only to direct actions and not to derivative actions, finding the exclusion drew no such distinction. The court also held that applying the Ownership Percentage Exclusion did not render the policy’s Security Holder Derivative Claims coverage illusory because the policy still provided coverage for claims brought by security holders who owned less than five percent of the company.

Sophia Brodnax, a Law Clerk at Wiley Rein LLP, contributed to this post.