prIn an interesting March 31, 2014 opinion (here), the Unites States Court of Appeals for the First Circuit, applying Puerto Rico law, affirmed a district court’s ruling that the D&O insurer for the failed Westernbank of Mayaguez, Puerto Rico must advance the bank’s former directors’ and officers’ expenses incurred in defending the FDIC’s suit against them in its capacity as the failed bank’s receiver. Though the case ultimately involves an interpretation of Puerto Rican statutory principles dictating when an insurer must advance defense expenses, it also includes an interesting angle on the recurring issue of whether or not an action against a failed bank’s directors and officer by the FDIC in its capacity as receiver for the bank is precluded from coverage under the “Insured vs. Insured” exclusion found in most D&O insurance policies.




Regulators closed Westernbank on April 30, 2010, which according to the FDIC cost the insurance fund $4.25 billion. In October 2011, certain of the former Westernbank directors and officers sued the bank’s primary D&O insurer in state court in Puerto Rico, seeking a judicial declaration that the insurer must defend that against claims the FDIC had asserted against them  (about which refer here). The FDIC as receiver for Westernbank moved to intervene in the state court action, and on December 30, 2011, removed the state court action to the District of Puerto Rico. On January 20, 2012, the FDIC filed its amended complaint in intervention, in which it named as defendants certain additional directors and officers, and, in reliance on Puerto Rico’s direct action statute, the various D&O insurers in the bank’s D&O insurance program. A copy of the FDIC’s amended complaint can be found here.


In its complaint, the FDIC, as Westernbank’s receiver, seeks recovery of over $176 million in damages from the former bank’s directors and officers as well as their conjugal partners, based on twenty-one alleged grossly negligent commercial real estate, construction and asset-based loans approved and administered from January 28, 2004 through November 19, 2009. In its complaint in intervention in the directors and officers coverage action against the bank’s D&O insurers, the FDIC seeks a judicial declaration that its claims against the directors and officers are covered under the policies. All of the defendants moved to dismiss the respective claims against them.


As discussed here, on October 12, 2012, Judge Gustavo Gelpi, denied all of the motions to dismiss. A copy of the court’s October 23, 2012 decision can be found here. Among other things, Judge Gelpi ruled that the insured vs. insured exclusion did not preclude coverage for the FDIC’s liability action against the former directors and officers, in part because at least in this case the FDIC not only sought to enforce the rights of the failed bank to which it succeeded as the failed bank’s receiver, but also because the FDIC also sought to enforce the rights of “depositors, account holders, and a depleted insurance fund.”


In addition, and of the greatest significance for purposes of the appeal,  Judge Gelpi ruled that the D&O insurer must advance the individuals defendants defense expenses, noting that Puerto Rican statutory law requires liability insurers to advance defense expenses “if there is even a remote possibility that a claim ultimately will be covered.” He also noted that his advancement ruling “is without prejudice” to the insurer’s “eventually being entitled to repayment.”


The insurer sought to appeal the advancement ruling to the First Circuit.


The March 31 Opinion


In a March 31, 2014 opinion written by Judge Ojetta Rogeriee Thompson, a unanimous three-judge panel of the First Circuit affirmed the lower court’s ruling that the D&O insurer must advance the individual directors’ and officers’ defense expenses.  The appellate court emphasized that the Puerto Rican statute requiring advancement if there is even a “remote possibility” of coverage, and that any doubts about an insurer’s advancement obligation “must be resolved in the insured’s favor.”


The insurer had sought to argue that there was not even a remote possibility of coverage, because the FDIC’s action against the individuals depended on the rights to which it succeeded as receiver for the failed bank. Because the FDIC as receiver stepped into the shoes of the failed bank, the insurer argued,  its action is just as precluded under the insured vs. insured exclusion as the action would have been had it been brought by the bank itself. In arguing that there was at least a remote possibility of coverage, the individuals and the FDIC cited to various cases that have held that the insured vs. insured exclusion does not preclude coverage for a D&O lawsuit brought in its capacity as receiver for a failed bank.


The appellate court noted specifically that, while the insurer argued that the FDIC was proceeding only its capacity as receiver, the FDIC for its part alleged more than that it had succeeded to the rights of the failed bank. It also alleges under FIRREA that it has succeeded to the rights of Westernbank’s depositors and account holders, and also that it was suing to recover “money the insurance fund had shelled out” after the bank failed. The Court said that “we think that these allegations make it likely possible – even if only remotely so – that the FDIC is suing on these non-insureds’ behalf. “


Noting that the parties’ arguments make this “a classic battle of dueling caselaw” with “no controlling authority” and with an obligation to resolve any doubts in the insured’s favor, the D&O insurer’s “suggestion that there is zero likelihood of a remote possibility of coverage falls flat.” The court ruled that the district court’s advancement ruling should stand, while emphasizing that “having lost the likelihood-of-success skirmish,” the D&O insurer “may still ‘win’ the coverage war at a succeeding trial on the merits.”




It bears emphasizing that the First Circuit’s ruling does not represent an appellate affirmation of the district court’s coverage ruling on the insured vs. insured exclusion, but rather represents only an appellate ruling on the question of whether or not the lower court correctly applied the Puerto Rican statute requiring liability insurer’s to advance defense costs when coverage is disputed.


Nevertheless, the appellate court’s determination of the advancement issue does provide some interesting perspective on the ultimate merits of the disputed coverage issue. First, the appellate court did note (in footnote 2) that the D&O insurance policy at issue, by contrast to other policies that the same insurer has issued, does not contain a so-called “regulatory exclusion” expressly excluding coverage for claims brought by regulatory authorities.


Second, the appellate court considered it relevant and significant that in asserting its claims, the FDIC expressly sought to assert rights beyond those to which it succeeded as receiver of the failed bank, asserting in addition its rights under FIRREA to assert the claims of depositors and account holders, as well as on behalf of the deposit insurance fund.  These are the claims with respect to which the district court had concluded that the FDIC was also proceeding in a non-insured capacity and therefore that its claims were not precluded from coverage by the insured vs. insured exclusion.


Because the appellate court’s ruling involved the merits only of the advancement issue and did not involve an appellate consideration of the merits of the coverage dispute under the insured vs. insured exclusion, it will have no preclusive effect even in the First Circuit of the continuing dispute as to whether or not the FDIC’s assertion of claims in its capacity as receiver of a failed bank against the bank’s former directors and officers are precluded under the insured vs. insured exclusion.


Accordingly, this ongoing coverage dispute, which has also arisen in numerous other coverage actions associate with failed bank D&O lawsuits, will continue. The carriers, for their part, will try to rely on the rulings, such as the Northern District of Georgia Judge Richard W. Story’s August 2013 opinion (discussed here) that the insured vs. insured exclusion does preclude coverage for an FDIC lawsuit against a failed bank’s directors and officers, while the directors and officers will try to rely on rulings such as Northern District of Georgia Judge Robert Vining’s January 2013 ruling, discussed here, that the insured vs. insured exclusion doesn’t preclude coverage.  


I do note the following with respect to the question of the relevance to the coverage determination of the question as to whether or not the FDIC is proceeding against the directors and officers in a capacity other than as the receiver for the failed bank. The insurers will likely contend that even if the FDIC is acting on behalf of other constituencies in bringing the suit, it is first and foremost bringing the suit in its capacity as receiver for the failed bank, as that is the basis upon which it has any right to bring the claims in the first place. The insurers will further argue that the sole basis on which the FDIC has any right to assert the claims is because, by operation of the receivership, it is acting “in the right of” the failed bank, and therefore the preclusive language of the exclusion applies, notwithstanding the fact that the FDIC may have other purposes and motivations in bringing the action. The policy’s exclusion does not require, in order for the exclusion to apply, that the action be brought “solely” or “only” “in the right of” the Organization. The insurers will argue that because the action was brought “in the right of” the Organization, the exclusion applies notwithstanding the fact that in bringing the claim the FDIC was also action on behalf of other constituencies.


One final aspect of the First Circuit’s opinion here is worthy of comment. In her opinion for the court, Judge Thompson adopted a rather light-hearted tone, using phrases such as saying that the directors and officers “find themselves in the cross-hairs” or in its intervention the FDIC was “jumping in with gusto” or that “without missing a beat” the directors and officers sought coverage under the D&O policy. There is much more of the same in the opinion. Some may find this approach to judicial writing amusing; I do not. I am not sure what Judge Thompson sought to achieve by this approach, but personally I find this jaunty tone to be grating. I don’t think she intended to communicate that the parties’ dispute was unimportant, but I know for sure I were a party to this dispute I would have found her “isn’t this all so very amusing” tone to be extremely annoying.


Very special thanks to Evan Shapiro of the Boundas Skarzynski Walsh & Black law firm for sending me a copy of the First Circuit’s opinion.


Joe Monteleone’s take on the First Circuit’s opinion in an April 3, 2014 post on his D&O E&O Monitor blog can be found here