During the bank failure wave that followed the global financial crisis, one of the recurring questions was whether or not the failed banks’ D&O insurance policies’ insured vs. insured exclusion precluded coverage for the FDIC’s liability claims as receiver for the failed bank against the banks’ former directors and officers . As I noted in a post late last year, the general consensus among the federal appellate courts is that the exclusion’s applicability to FDIC-R claims is ambiguous and therefore that the exclusion does not preclude coverage. As I also noted, however, there was an exception to this consensus, reflecting important wording differences sometimes found in the exclusion.
Consistent with this exception to the consensus, on January 10, 2017, the Ninth Circuit, applying California law, held in an unpublished opinion that the applicable D&O policy’s insured vs. insured exclusion was not ambiguous and precluded coverage for the FDIC’s claims against the former directors and officers of the failed Security Pacific bank. Unlike the exclusion found in many D&O insurance policies, the policy at issue in the Ninth Circuit’s case specifically precluded coverage for claims brought by any “successor” or “receiver.” The Ninth Circuit’s opinion can be found here.
Security Pacific Bank of Los Angeles, California, failed on November 7, 2008. The FDIC was appointed as the failed bank’s receiver. The FDIC-R brought a liability action against the failed bank’s former directors and officers asserting claims against them for alleged losses arising from the individuals’ alleged negligence, gross negligence, and breach of fiduciary duty. The FDIC subsequently brought an insurance coverage action against the failed bank’s D&O insurer, alleging that the insurer’s policy covered the losses.
The insurer contended that coverage for the FDIC-R’s claims against the former directors and officers was precluded by the policy’s Insured vs. Insured exclusion, which excludes coverage for claims brought “by, on behalf of, or at the behest of” Security Pacific, a person insured under the D&O Policy, or “any successor, trustee, assignee or receiver.”
The FDIC contended that if the insurer had intended to preclude coverage for FDIC-R claims, the policy would have included a so-called Regulatory Exclusion; the FDIC noted that the insurer’s base policy form in fact contained a Regulatory Exclusion, but that the Regulatory Exclusion had been deleted by endorsement. The FDIC-R contended that the Regulatory Exclusion’s deletion showed that the parties intended for the policy to apply to claims by the FDIC-R, and at a minimum made the Insured vs. Insured exclusion’s applicability to FDIC-R claims ambiguous.
The district court agreed with the FDIC concluded that the Insured vs. Insured’s applicability to the FDIC-R’s claims to be ambiguous and therefore that the exclusion did not preclude coverage, meaning that the policy provides coverage for the FDIC-R’s claims. The insurer appealed.
The January 10, 2017 Opinion
In its unpublished January 10, 2017 opinion per curiam opinion, a three-judge panel of the Ninth Circuit reversed the district court and remanded the case for further proceedings, holding that the Insured vs. Insured exclusion as worded unambiguously precluded coverage for the FDIC-R’s claims.
In seeking to argue that the exclusion’s specific preclusion of coverage for claims brought by a “receiver” of the insured entity did not apply here, the FDIC argued that because of the numerous roles in which it acted, it was not a “receiver” within the meaning of the exclusion. The FDIC also argued that the exclusion’s coverage carve-back for derivative claims also rendered the exclusion’s applicability to the FDIC-R to be ambiguous, because the FDIC as successor-in-interest was asserting claims against the former directors and officers that the bank itself could have enforced.
The Ninth Circuit said that the exclusion “unambiguously” precludes coverage for claims brought by a “receiver,” and rejected the notion that the FDIC’s allegedly “unique role” changed the analysis. The appellate court said “the FDIC does not clarify what powers it has that other receivers do not normally or cannot have, or vice versa.” While the FDIC cited several cases in which courts had held the insured vs. insured exclusion’s applicability to FDIC-R claims to be ambiguous, the Ninth Circuit noted (in a footnote) that none of the cited cases included Insured vs. Insured exclusions with policy wording of the type found in the exclusion here, which expressly included the terms “successor” and “receiver.”
The Ninth Circuit also noted that the Tenth Circuit, interpreting a policy exclusion with the identical language at issue here, had found that the exclusion specifically precluding coverage for claims brought by a “receiver” precluded coverage for the FDIC-R’s claims. (Refer here for a discussion of the Tenth Circuit’s opinion.)
The Ninth Circuit also rejected the FDIC’s arguments based on the theory that it was in effect asserting a shareholder derivative claim, and therefore that it claim came within the exclusion’s derivative claim coverage carve-back. The Ninth Circuit said the right to bring a derivative action is in any event secondary to the FDIC’s rights as receiver to bring the same claims and may only be exercised if the FDIC-R does not exercise its primary rights to bring the claim directly. The appellate court said that interpreting the shareholder-derivative exception to provide coverage for the FDIC-R’s claims would read the term “receiver” out of the exclusion; the appellate court said that “we think the term ‘receiver’ is clear and unambiguous and includes the FDIC in its role as receiver of Security Pacific,” and therefore that the FDIC’s claims “fall within the scope of the D&O Policy’s insured-versus-insured exclusion.”
Finally, the Ninth Circuit rejected the FDIC’s argument that the removal of the Regulatory Exclusion by endorsement created an ambiguity in whether the Insured vs. Insured endorsement created coverage for the FDIC-R’s claims. The endorsement removing the Regulatory Endorsement expressly did not “vary, waive, or extend” any of the policy’s other terms and therefore did not alter the scope of the insured –vs-insured exclusion.
The key to understanding this case is that the exclusion at issue here, unlike many of the other insured vs. insured exclusions that have been interpreted and applied in the context of FDIC-R failed bank actions, contained language specifically precluding coverage for claims brought by a “receiver.” The presence of this express language clearly makes an analytic difference, and the language in fact helps explain the outcome of this case, and in general helps explain the outcomes of case that vary from what otherwise was a general judicial consensus that the Insured vs. Insured’s exclusion’s applicability to FDIC-R claims is ambiguous. The exclusion at issue in this case, like the exclusion at issue in the Tenth Circuit case to which I linked above, expressly precludes coverage for claims brought by a “receiver,” while the typical policy does not.
As I discussed in a November 2016 post discussion the applicability of the insured vs. insured exclusion, the Ninth Circuit (as discussed in that earlier post) and the Eleventh Circuit (refer here) held the exclusion’s applicability to FDIC-R claims to be ambiguous. The exclusions at issue in those cases, by contrast to the exclusion at issue here and in the earlier Tenth Circuit case, did not have the express language precluding coverage for claims by a “receiver.” The presence or absence of this language clearly is a distinguishing factor and is the consideration that helps explain the federal appellate court decisions that have held the exclusion to be ambiguous and those that have not.
It is worth noting that the inclusion of the express language in the Insured vs. Insured exclusion precluding coverage for claims brought by a “receiver” is the exception. The typical exclusion does not contain this language. In the absence of this language, the consensus seems to be that the exclusion’s applicability to FDIC-R claims is ambiguous. In those circumstances, the likelihood is that if the policy does not contain a Regulatory Exclusion, an insurer’s attempt to try to deny coverage for an FDIC-R exclusion will be challenged and likely will be unsuccessful – unless the policy at issue’s insured vs. insured exclusion contains the express language precluding coverage for claims brought by a “receiver.”