According to a November 13, 2012 press release from their defense counsel (here), the five bank officer defendants in an action the FDIC filed against them as the failed bank’s receiver have settled the case for an assignment to the agency of their rights under the bank’s D&O insurance policy.


The case involves the former County Bank of Merced, California, which failed on February 6, 2009, when the FDIC was appointed as its receiver. As discussed here, in January 2012, the FDIC filed an action in the Eastern District of California against five former officers of the bank, each of whom served on the bank’s Executive Loan Committee. The complaint alleges claims against them for negligence and breach of fiduciary duty, in connection with 12 loans the bank made between December 2005 and June 2008 that the FDIC says caused the bank losses in excess of $42 million.


In August 2012, the five individuals filed their own separate lawsuit in the Eastern District of California against the bank’s D&O insurer. A copy of their complaint can be found here. The individuals contend that the carrier has wrongfully denied coverage under the policy and wrongfully refused to defend them. The individuals seek a judicial declaration that the claim against them is covered under the policy and also asserts claims for breach of contract and for bad faith.


From the individuals’ complaint, it appears that the carrier is denying coverage based on the insured vs. insured exclusion (about which refer here). The individuals contend that the policy’s base form had a regulatory exclusion, which had it remained in the policy would have precluded coverage for the FDIC’s action against them. The individuals allege further that the bank had purchased an endorsement to the policy that removed the regulatory exclusion from the policy. The individuals essentially contend that the point of the endorsement to remove the regulatory exclusion was to ensure that the policy provided coverage for claims brought by the FDIC, and the carrier therefore should not be able to rely on a different exclusion to try to deny coverage for an FDIC claim.


According to defense counsel’s press release, in their settlement with the FDIC, the five individuals assigned their claim for bad faith and breach of contract to the FDIC, while retaining their right to try recover from the D&O insurer their defense fees incurred prior to the settlement The parties also exchanged covenants not to bring any further actions against each other, and the settlement also included a covenant by the FDIC not to assert any claims against the five individuals’ property or assets. The FDIC will control and prosecute the assigned claims against the insurer at the agency’s own cost and expense. The officers maintained their right to continue their own retained claims.


As I have previously noted (here), questions of D&O insurance coverage may represent the real battle ground in the current wave of FDIC failed bank litigation, and as I also noted in that same post, one of the critical coverage issues of contention may be whether or not the insured vs. insured policy precludes coverage for the FDIC’s claims against the former officers and directors of the failed bank.


Perhaps of greater interest in this context, in the case that I discussed in the prior post to which I linked in the preceding paragraph, the former bank officials involved in the case were also able to settle the FDIC’s claim against them for their agreement to the entry of a judgment against them together with an assignment of their rights under their D&O insurance and a covenant by the FDIC not to execute the judgment against them.


It remains to be seen whether or not the FDIC’s willingness to resolve these cases against the former bank officers and directors on this basis will work for the agency. They will still have to succeed in establishing that the D&O insurers’ policies provide coverage for the claims (as well as fight off the carriers’ likely procedural objections to the validity of the agreed judgment and assignment). But it is in any event interesting to see that the FDIC is willing to resolve cases on this basis, at least in certain circumstances (perhaps only when particular coverage issues are involved as well).


There may well be legitimate arguments about the merits or demerits of these types of deals. Of course, it certainly could be argued that the D&O insurer, having denied coverage, should not be heard to object to the fact that the individuals have taken steps to protect themselves. However, the problem with these type of consent judgment/covenant not to execute type deals is that this approach can run the risk of slipping into a collusive arrangement, with the insured individual willingly agreeing to a settlement amount that has no relation to the his or her true liability exposure. Without meaning to suggest anything one way or another about this particular deal, I will say that in my prior life as an insurer-side coverage attorney, I did see deals that were questionable.


All of that said, however, these types of deals have undeniable attractions for the individual defendants involved, and I would expect that other defendants in other failed bank cases will undoubtedly be looking to see if they can reach settlements with the FDIC on a similar basis. Whatever the merits or demerits of these types of deals, we undoubtedly will see many more of them before the current round of failed bank litigation finally plays itself out.


Special thanks to a loyal reader for seding me a copy of the defense counsel’s press release.


Management Liability Insurance and the Potential Liabilities of Law Firm Managers: Attorneys are well aware of their need to procure and maintain errors and omissions insurance – or what they typically think of as malpractice insurance. But while they understand their need to have insurance in the event of claims against them asserting that they erred in the delivery of client services, attorneys, or at least some of them, can be reluctant to accept their need to also maintain insurance protecting their firm’s managers against claims for wrongful acts committed in the management of their firm.


Attorneys resistant to the need for this type of insurance (or advisors who have to try to persuade them of the need) will want to take a look at the November 14, 2012 Wall Street Journal article entitled “Creditors Seek to Sue Dewey’s Ex-Leader” (here). The article describes a motion that the unsecured creditors of the failed Dewey & LeBouef firm have filed in the firm’s bankruptcy proceedings. The unsecured creditors seek the leave of the bankruptcy court to file an action against the firm’s former Chairman, its former executive director, and its former chief financial officer, seeking to hold the three individuals liable for alleged misconduct the unsecured creditors contend led to the firm’s demise.


The unsecured creditors bid to pursue claims against the former law firm managers illustrates a point I have often made when discussing management liability insurance for law firms, which is that law firm managers face the possibility of potential claims for an wide variety of potential claimants. Indeed, as I think this situation illustrates, the law firm managers at least potentially face potential claims from the same general range of claimants as does any privately held business and therefore the need for management liability insurance is the same.


Lawyers are of course nothing if not argumentative and I can anticipate the likely lawyer reaction (being a recovering attorney myself) to the attempt to draw these kinds of conclusion from this situation. First, some lawyers might argue that the lawsuit the unsecured creditors want to file is solely about the insurance that the law firm maintained, and in the absence of the insurance, the unsecured creditors would not be pursuing the claim. I would object to this argument on two grounds; first, it is speculative (as it requires us to make assumptions about the claimants’ motivations) and also it assumes facts not in evidence (that is, that the claimants would not be pursuing the claims in absence of the insurance).


But the real problem with this argument is that is presumes that prospective defendants would be better off without the insurance. That strikes me as a dicey proposition and not one that personally I would not want to have to test. Most self-interested persons faced with the prospects of angry creditors asserting millions of dollars of claims would be very grateful to have a D&O insurance policy to defend and indemnify them.


Special thanks to a loyal reader for drawing my attention to the Journal article.