One of the recurring D&O insurance coverage issues that has arisen during the current wave of failed bank litigation has been the question whether coverage for an action by the FDIC in its role as receiver of a failed bank against a failed bank’s directors and officers is precluded by the Insured vs. Insured exclusion found in most D&O insurance policies. The D&O insurers’ argument is that because the FDIC as receiver “stands in the shoes” of the failed bank, the exclusion precludes coverage to the same extent as if the action had been brought by the bank itself.


As discussed most recently here, a number of courts have found the language of the Insured vs. Insured exclusion to be ambiguous on the issue of whether it precludes coverage for an action by the FDIC. However, in a sweeping 18-page August 19, 2013 opinion (here), Northern District of Georgia Richard W. Story held that the Insured vs. Insured exclusion unambiguously precludes coverage for an action brought by the FDIC in it is capacity as receiver of a failed bank against the failed bank’s former directors and officers.


Although this ruling will not put an end to the coverage disputes, it represents a significant ruling on which D&O insurers will seek to rely in disclaiming coverage for FDIC failed bank lawsuits. Significantly, Judge Story rejected a number of the arguments on which the FDIC typically relies in trying to argue that the Insured vs. Insured exclusion does not preclude claims brought by the FDIC as receiver.


A special hat tip to Joe Monteleone and his blog The D&O E&O Monitor for the link to Judge Story’s opinion



Community Bank & Trust failed on January 29, 2010. As noted here (second item), on February 24, 2012, the FDIC filed an action against two former officers of the bank. The complaint alleges that Charles Miller, the bank’s senior head of retail lending, violated his legal duties in approving loans in violation of the bank’s loan policies. Trent Fricks, the bank’s CEO, is alleged to have breached his duties in failing to supervise the loan officer and in failing to take corrective measures.


The bank’s D&O insurer agreed to defend the individual defendants under a reservation of rights and initiated a separate lawsuit seeking a judicial declaration that it had no duty to defend or indemnify the individuals. The insurer filed a motion for summary judgment in the coverage lawsuit, seeking a ruling as a matter of law that coverage for the FDIC lawsuit was precluded. The FDIC argued that the policy provisions on which the insurer sought to rely were ambiguous and that it was entitled to further discover of the insurer’s internal communications about insurer’s own interpretation of the policy provisions.


In moving for summary judgment, the insurer relied on its policy’s Insured vs. Insured exclusion, which, in pertinent part precludes coverage for loss “on account of any Claim made against any Insured … brought or maintained by or on behalf of any Insured or Company in any Capacity.”


The August 19 Opinion

In his August 19, 2013 opinion, Judge Story held that the FDIC was not entitled to further discovery because the policy’s insured vs. insured exclusion unambiguously precluded coverage. Judge Story noted that under FIRREA, the FDIC as receiver succeeds to “all rights, titles, powers and privileges of the insured depositary institution,” which means, in the language of the U.S. Supreme Court in its 1994 decision in O’Melveny & Myers v. FDIC, that the FDIC, as a failed bank’s receiver, “steps into the shoes” of the failed bank.


Judge Story noted further that in the O’Melveny case, the Supreme Court held that because the FDIC steps in the shoes of the failed bank, any defenses that could have been raised against the bank can be raised against the FDIC. Judge Story said that:


In this case, this Court finds that the FDIC has stepped into the shoes of CB&T, and under O’Melveny, whatever claims would have been good against CB&T are also good against the FDIC. The Insured vs. Insured exclusion expressly excludes from coverage suits brought by an insured against another insured. If CB&T had sued Miller and Fricks, the exclusion would have applied to absolve Plaintiff from a duty to provide coverage for Miller and Fricks. As such, the exclusion applies equally to the FDIC.


Judge Story went on to note that other than in the context of a derivative suit (for which the Insured vs. Insured exclusion as an express coverage carve back), “it is exceptionally rare for someone other than the FDIC … to raise a claim on behalf of a federally insured bank.” The fact that “the only party that could bring an action on a federally insured bank’s behalf is the FDIC” demonstrates that “the exclusion speaks specifically to this circumstance.”


The FDIC sought to rely on a number of court decisions that had held that the Insured vs. Insured exclusion does not apply to the FDIC. Judge Story observed that none of those decisions were binding on him, while the Supreme Court’s O’Melveny decision “strongly indicates that the exclusion should be given effect.” He also noted that it is hard to discern the supposed “majority of opinions” on which the FDIC sought to rely since “the language of the exclusions among the cases is different.”


In a particularly noteworthy aspect of his ruling, Judge Story declined to follow a line of insurance coverage decisions from the S&L Crisis era which had held that the Insured vs. Insured exclusion did not preclude coverage for the FDIC’s lawsuits. Among other things Judge Story noted that “in none of those cases did the insured vs. insured exclusion state that it applied to claims brought ‘on behalf of’ an insured as is the case here.” He noted further that the outcomes of other cases interpreting the exclusion’s applicability to FDIC lawsuits “usually turns more on the language of the exclusion rath than the adoption of the courts of a supposed majority or minority rule.” 


Judge Story also rejected the FDIC’s argument that the exclusion did not apply because its purpose was to preclude coverage for collusive suits and its lawsuit was not collusive. Judge Story said “this Court cannot refuse to give effect to an unambiguous term of the policy based on an assumption of why the language was put in the policy.”


Finally, Judge Story declined to follow cases that had held that public policy considerations argued against applying the exclusion to preclude coverage for claims brought by the FDIC. He said that he “disagrees with the notion that it is appropriate to rewrite a contract between private parties in the name of saving the taxpaying public money. Again, there is no rule that the federal insurance fund should always win.”



Judge Story’s ruling stands in interesting contrast to the January 4, 2013 ruling of Northern District of Georgia Judge Robert L. Vining, in insurance coverage litigation arising out of the FDIC’s failed bank lawsuit against former directors and officers of Omni National Bank of Atlanta, that because of the “multiple roles” in which the FDIC acts in pursuing claims against the former directors and officers of a failed bank, there is “ambiguity” on the question whether the FDIC’s lawsuit triggers the insured vs. insured exclusion. (For further background on Judge Vining’s decision, refer here).


Similarly to Judge Vining, in October 2012, District of Puerto Rico Judge Gustavo Gelpi declined to dismiss a direct action the FDIC had brought under the Puerto Rico direct action statute against the D&O insurer of the failed Westernbank, noting that the FDIC has authority under FIRREA to act on behalf of a number of different constituencies and therefore that “the FDIC”s role as a regulator sufficiently distinguishes it from those whom the parties intended to prevent from bringing claims under [the Insured vs. Insured] Exclusion.” (For more about Judge Gelpi’s decision, refer here.)


Notwithstanding these prior rulings, Judge Story found that the Insured vs. Insured exclusion unambiguously precluded coverage for the FDIC’s action as receiver of the failed bank against the bank’s former directors and officers. The fact that the various courts have reached such divergent conclusions suggests that this D&O insurance coverage question remains an unsettled and disputed issue. Indeed the fact that two judges in the same federal district could reach such diverging opinions shows just how unsettled this issue is.


Though the issue has been and remains an unsettled question, Judge Story’s opinion in the Community Bank & Trust coverage litigation nevertheless remains an important decision. Among other things, he firmly rejected a number of arguments on which the FDIC typically relies in trying to argue that the exclusion does not apply to the agency’s failed bank lawsuits. His refusal to follow the S&L Crisis era decisions on the issue could prove useful for the agency in other coverage disputes. The D&O insurers undoubtedly will also rely on Judge Story’s rejection of the FDIC’s argument that the exclusion only applies to collusive suits, as well as his rejection of the public policy arguments, in contending in other cases that the Insured vs. Insured exclusion precludes coverage for the FDIC”s failed bank lawsuits.


As Joe Monteleone observed in his blog post about Judge Story’s ruling, “this is a very significant win for insurers in the current round of coverage litigation with the FDIC involving bank failures since 2007.”


As important as the ruling is, Judge Story’s opinion will be no means put an end to the coverage disputes on the question whether the exclusion applies to the FDIC’s failed bank lawsuit. It is not just that a judge in the same judicial district reached a contrary conclusion on the same issue. It is also that Judge Story himself emphasized that the various cases on the issue are best understood as a reflection of the specific policy language at issue. Because even Judge Story himself found that the outcome of the question depends on the specific policy language involved, the parties to similar coverage disputes will continue to argue whether or not the specific language in their case does or does not operate to preclude coverage. But though the parties will continue to argue, the insurers do now have one more case on which to rely in arguing that the Insured vs. Insured exclusion precludes coverage for an FDIC failed bank lawsuit.


Further background regarding the coverage disputes involving the Insured vs. Insured exclusion can be found here and here.


Living in the 21st Century: This past Friday night, Mrs. D&O Diary and I were out to dinner with some friends. During our dinnertime conversation, we discussed the question of why these days so many people take pictures of their food and then post the pictures on the Internet. I don’t think we came to a table consensus on the issue, but during the discussion I did take of few pictures with my phone of my wife’s grilled green beans appetizer (pictured). Still not sure why people take picture of their food and post the pictures on the Internet.


The picture by the way was taken at Felice’s Urban Cafe, a modest sort of hipster healthful foods-type restaurant installed in a retrofitted house on Larchmere Boulevard in Cleveland. For my main dish, I had the Lake Erie Walleye. It was awesome. Readers who find themselves in the Cleveland area and who want to give Felice’s a try are welcome to give me a call. If you like, we can take pictures of our food with our cell phones and post the pictures on the Internet – and then we can try and figure out why?