In an interesting April 7, 2014 opinion (here), Magistrate Judge Stanley A. Boone of the Eastern District of California, applying California law, held that a D&O insurance policy’s insured vs. insured exclusion precludes coverage for claims brought against former officers of the failed County Bank of Merced, California by the FDIC in its capacity as the failed bank’s receiver. Because the magistrate judge’s ruling depended on an unusual wording not generally found in the typical insured vs. insured exclusion, the ruling may be of limited relevance to similar coverage disputes in other cases. However, the magistrate judge’s analysis may still be of interest notwithstanding the unusual wording because of the issues the magistrate judge considered in reaching his conclusion.
County Bank of Merced, California failed on February 6, 2009 and the FDIC was appointed as receiver. The FDIC asserted potential claims against the bank’s officers on February 5, 2009. The FDIC made a formal claim against the officers on November 16, 2009. The claim was submitted to the bank’s insurer, which had issued a policy calling itself an Extended Professional Liability insurance policy (confusingly referred to in the magistrate judge’s opinion as an “EPL policy.” Readers of this blog well know that an EPL Policy is something entirely different, so for clarity’s sake and because the relevant coverage sections of the policy at issue provide D&O insurance, I will refer to the policy in this blog post as a D&O policy.)
The insurer denied coverage for the claim in reliance on the D&O policy’s insured vs. insured exclusion. The relevant exclusion, Exclusion 21 to the Policy, provides in pertinent part that the policy does not cover loss arising from “a claim by, or on behalf of, or at the behest of, and other insured person, the company, or any successor, trustee, assignee or receiver of the company.” (The exclusion also contains several carve backs preserving coverage for certain kinds of claims otherwise precluded from coverage by the exclusion, but none of these carve-backs are relevant here.) The D&O insurance carrier took the position that the FDIC’s claims against the former officers were precluded from coverage under Exclusion 21 because the FDIC brought the claims in its capacity as receiver of County Bank.
On February 27, 2012, the FDIC filed a civil action against five former officers of the failed bank, alleging that the defendants had been negligent and had breached their fiduciary duties. On November 12, 2012, the FDIC and the former officers reached a settlement in the civil action in which the officers assigned their rights under the D&O insurance policy to the FDIC and consented to the entry of a default judgment. A default judgment in the amount of $48.5 million was entered.
In the separate coverage lawsuit, the insurer and the FDIC (proceeding as the individuals’ assignee) cross-moved for summary judgment on the question of whether or not the insured vs. insured exclusion precluded coverage for the FDIC’s lawsuit against the former officers.
The April 7 Opinion
In an April 7, 2014 Opinion, the magistrate judge granted the D&O insurer’s motion for summary judgment and denied the FDIC’s cross-motion. The magistrate judge concluded that Exclusion 21 precluded coverage for the FDIC’s claim because the FDIC brought the claims against the former officers in its capacity as “receiver.” He rejected the FDIC’s argument that the exclusion’s reference to “receiver” referred only to a court-appointed receiver, saying that “while the FDIC attempts to differentiate itself from other types of receivers, it fails to identify any significant distinction that would justify an interpretation of Exclusion 21 that would treat the FDIC differently from any other type of receiver.”
The FDIC also sought to fashion an argument for coverage based on the fact that the insurer offered a separate “Regulatory Exclusion” – not included on County Bank’s policy – that expressly excludes coverage for claims brought by any federal or state regulatory agency. The FDIC argued that the existence of the two different exclusions demonstrates that the regulatory exclusion was intended to exclude FDIC claims and the insured vs. insured exclusion was not intended to exclude FDIC claims.
The magistrate judge rejected this argument in light of the FDIC’s dual capacity as federal insurer of deposits and as liquidating agent for the bank. The FDIC, he noted, stands in the shoes of the bank only in the latter capacity. Thus, “the existence of a regulatory exclusion is not superfluous in light of the insured versus insured exclusion; the regulatory exclusion would bar suits brought by the FDIC in its capacity as federal insurer, also known as its ‘corporate capacity,’ whereas the insured versus insured exclusion would only bar claims by the FDIC in its capacity as receiver.”
The FDIC also tried to argue that the “reasonable expectation” regarding the insured vs. insured exclusion is that it was in the policy to prevent collusive lawsuits, and therefore should not preclude coverage for claims by the FDIC as receiver because they are not collusive. The magistrate judge rejected this argument on two grounds: first, he found that the argument was flawed because it would apply to any type of receiver in any context, yet the FDIC did not explain why the exclusion would not apply to the FDIC and not to other type of receivers.
The second ground on which the magistrate judge rejected the FDIC’s “reasonable expectation” argument is interesting. He said that a suit by the FDIC against a failed bank’s directors and officers “has the potential for collusion just as a suit by a corporation against its own directors and officers.” While he was “not accusing the FDIC of collusion,” he noted that the interests of the FDIC as receiver “could be aligned with the interests of the directors and officers of a failed bank when an insurer is involved.” Accordingly, he said, “it is not too difficult to imagine a scenario of collusion between the FDIC and the directors and officers.” For that reason, he rejected the FDIC’s argument that excluding the FDIC’s claims would be inconsistent with the parties’ reasonable expectations.
It is important to note that that Exclusion 21’s express reference to a company’s “receivers” is unusual. Indeed, the magistrate judge expressly rejected the relevance of various cases on which the FDIC sought to rely in which courts had concluded that the insured vs. insured exclusion does not preclude coverage for the FDIC’s claims as receiver. Exclusion 21, he noted, “is materially different from the insured versus insured exclusion interpreted in the cases cited by the FDIC,” because Exclusion 21 specifically excludes claims brought be “receivers,” while the cases the FDIC cited did not include language expressly excluding claims brought by “receivers.”
Because of this policy wording difference, the holding in this case will be of limited value in the many other coverage disputes arising in connection with FDIC failed bank litigation and involving the question of whether more conventional insured vs. insured exclusions preclude coverage for the FDIC’s claims as receiver. Just the same, though the insurance question here involved unusual policy wording, the magistrate judge’s analysis is nevertheless interesting and potentially even relevant to other cases.
His analysis of why the existence of the regulatory exclusion does not negate the argument that the insured vs. insured exclusion applies to the FDIC is interesting. The FDIC will often seek to argue that the absence of a regulatory exclusion means that a D&O insurance policy should cover claims brought by the FDIC notwithstanding the existence of the insured vs. insured exclusion. By reasoning that two exclusions apply to the FDIC in different ways – with the regulatory exclusion precluding coverage for FDIC claims in either of its dual capacities, and the insured vs. insured exclusion precluding coverage only for FDIC claims in its capacity a receiver of a failed bank – the magistrate judge showed how the absence of a regulatory exclusion does not mean that FDIC as receiver claims are covered or that the insured vs. insured exclusion was not intended to exclude FDIC claims.
The magistrate judge’s “reasonable expectations” analysis is also interesting, for its recognition that an FDIC’s claims as receiver presents at least the theoretical possibility of “collusion” and so represents the kind of dispute the exclusion was designed to address.
I will say that the FDIC’s dual capacity represents a confusing strain in many of these cases, both in the underlying liability lawsuits and in the coverage actions. In many of the FDIC’s failed lawsuits, the defendant directors and officers attempt to assert affirmative defenses against the FDIC for actions it took in its capacity as the bank’s regulator prior to its collapse. Whether or not these kinds of defenses can be asserted in an action the FDIC is bringing in its capacity as receiver is a hotly contested issue. As this case shows (and other cases have also shown) the question of the capacity in which the FDIC is acting can become a factor in coverage litigation as well.
As interesting as this case is, the question of the applicability of the insured vs. insured exclusion to claims asserted in its capacity as the receiver of a failed bank will continue to be litigated. 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.
Special thanks to Joe Montelone, now of the Rivkin Radler law firm, for sending me a copy of the magistrate judge’s opinion.