As I have previously noted on this blog, one of the recurring D&O insurance coverage issues arising during the latest bank failure wave has been the question whether the Insured vs. Insured Exclusion precludes coverage for claims brought by the FDIC in its capacity as receiver for a failed bank against the failed bank’s former directors and officers. In denying coverage for these kinds of claims, the D&O carriers argue that because the only basis on which the FDIC has the right to assert these claims is that it “stands in the shoes” of the failed bank, the Insured vs. Insured (IvI) Exclusion precludes coverage. The FDIC and the individual directors and officers argue that the question whether exclusion precludes coverage for the FDIC claims is ambiguous, and therefore the exclusion cannot be applied as the carriers contend.
As these cases have unfolded in various courts across the country, the rulings have gone both ways – some courts have found that the exclusion applies, while others have found that it is ambiguous and does not apply.
In an October 8, 2014 Opinion (here), in the latest ruling on these issues, Central District of California Judge Andrew Guilford, addressing these issues in the coverage litigation filed in connection with the FDIC’s lawsuit against the former directors and officers of Pacific Coast National Bank, held that the question of whether the IvI Exclusion precludes coverage for claims brought by the FDIC in its capacity as receiver of the failed bank is ambiguous.
Pacifica Coast National Bank of San Clemente, California failed on November 13, 2009. In November 2012, the FDIC, as the failed bank’s receiver filed a civil action against five of the bank’s former directors and officers, alleging negligence, gross negligence and breaches of fiduciary duty in relation to various loans the bank had made ad that allegedly resulted in millions of dollars of losses to the bank. The individual defendants sought coverage for the claims under the bank’s D&O insurance policy. The D&O insurance carrier, in turn, filed an action seeking a judicial declaration that there was no coverage under the policy for the FDIC’s claims. The FDIC moved for summary judgment in the coverage litigation and the individual defendants jointed in the FDIC’s motion. The insurer filed a cross-motion for summary judgment.
In denying coverage, the insurer relied on two policy provisions, the IvI Exclusion and the Unpaid Loan Carve-Out. The IvI Exclusion provided in pertinent part that the policy does not provide coverage for any claim against an Insured “brought by or on behalf of any Insured or Company [including the Bank] in any capacity.” The exclusion had a carve-back that preserved coverage for “a Claim that is a derivative action brought or maintained on behalf of the Company by one or more persons who are not Directors or Officers and who bring and maintain such Claim without the solicitation, assistance or active participation of any Director or Officer.”
The Unpaid Loan Carve-Out provides that the Loss as defined in the policy does not include “any unrepaid, unrecoverable or outstanding loan, lease or extension of any credit to any Affiliated Person or Borrower.”
The October 8 Opinion
In his October 8, 2014 Opinion, Judge Guilford denied the insurer’s motion for summary judgment and granted the motion for summary judgment of the FDIC and of the individual directors and officers. Judge Guilford held that the two policy provisions on which the insurer relied are ambiguous and therefore cannot serve as a basis to deny coverage.
With respect to the IvI Exclusion, Judge Guilford said that the fact that the exclusion is ambiguous when applied to the FDIC in its capacity as receiver of a failed bank “is evidenced by the fact that courts considering this exclusion have reached varying conclusions.” Noting the many decisions that have similarly concluded that the exclusion is ambiguous, Judge Guilford said that “there can be little doubt that repeated disputes over the IvI Exclusion have placed insurers on notice that it is ambiguous.”
Judge Guilford went on to note that “the insurance company has the ability, as a repeat party to these contracts, to ensure that ambiguities are eliminated over time.” The insurer “had the opportunity to make clear in the Policy that the IvI Exclusion applied to the FDIC-R, and it could have done so with a simple statement.” Judge Guilford noted that, in fact, the carrier “provides an optional regulatory exclusion – not included on the policy here – that explicitly names the FDIC.”
Judge Guilford expressly rejected the insurer’s argument that the IvI Exclusion applies because the FDIC “stands in the shoes” of the failed bank for which it is acting as receiver.” Though the U.S. Supreme Court had said in the O’Melveny & Myers v. FDIC decision that the FDIC as receiver “stands in the shoes” of the failed bank, the question to be answered under the IvI exclusion is whether or not the FDIC acting as the receiver of a failed bank is acting “on behalf of” the failed bank; the Supreme Court’s decision “doesn’t tell us whether ‘on behalf of’ means the same thing as ‘stands in the shoes.’”
Judge Guilford also found an ambiguity on the question of whether or not coverage for this claim was in any event preserved by the derivative claim coverage carve-back to the IvI Exclusion. Judge Guilford noted that the FDIC as receiver also succeeds to the rights of the failed bank’s shareholders. Even if, as the insurer argued, the FDIC’s lawsuit technically is not a derivative action, the question remains of on whose behalf the FDIC brings the claims. Judge Guilford said that “even if the procedure by which the FDIC-R asserts the claims differs from the derivative action available to shareholders,” the policy should cover the claims “if the FDIC-pursues them under its authority to recover losses on behalf of shareholders.”
Finally, Judge Guilford rejected the insurer’s argument that the Unpaid Loan Carve-Out precluded coverage for these claims because the damages the FDIC sought in the underlying action were in the amount of unpaid loans. Judge Guilford said that Carve-Out does not unambiguously apply to cases where tortious conduct results in damages that might happen to be in the amount of unpaid loans.
Judge Guilford’s opinion in this case stands in interesting contrast with the August 19, 2013 decision of Northern District of Georgia Judge Richard W. Story in the Community Bank & Trust coverage action, in which Judge Story held that the Insured vs. Insured exclusion in the D&O insurance policy at issue in that case unambiguously precluded coverage for the FDIC’s lawsuit against the bank’s former directors and officers. Judge Story’s decision is discussed in greater detail here.
On the other hand, Judge Guilford’s opinion is consistent with an earlier ruling from a different judge in the same judicial district. On January 4, 2014, Northern District of Georgia Robert L. Vining, Jr. held in the Omni National Bank coverage action 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 as the failed bank’s receiver 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.)
Judge Guilford not only acknowledged the existence of this split in the case authority but he expressly relied on it in concluding that the exclusion’s application to claims asserted by the FDIC-R is ambiguous, observing that the fact that the exclusion is ambiguous “is evidenced by the fact that courts considering this exclusion have reached varying conclusions.” This argument, taken together with the increasing weight of the cases that have concluded that the exclusion’s applicability to the FDIC-R is ambiguous, may increasingly make it more difficult for insurers to argue that the exclusion is not ambiguous.
Judge Guilford’s observation that the carrier could have easily precluded coverage for claims asserted by the FDIC by the inclusion of a regulatory exclusion is interesting. It is true that in the process of policy placement, the question of whether or not there is “regulatory coverage” tends to focus on whether or not the policy has some form of regulatory exclusion. Policies that do not have regulatory exclusions are preferred over policies that do. This marketplace distinction between policies that have the regulatory exclusion and that do not would be meaningless if coverage for FDIC claims is nevertheless precluded by the IvI Exclusion, whether or not the policy has a regulatory exclusion. Given this practical dynamic in the day-to-day insurance marketplace, there is some merit to the argument that the carrier ought not to be able to preclude coverage indirectly for a claim it could have but did not exclude expressly.
I will say I am less persuaded by Judge Guilford’s conclusion that even if the IvI Exclusion operates to preclude coverage for the FDIC’s claims coverage is nevertheless preserved by the application of the exclusion’s carve-back for derivative claims. The carve-back clearly was meant to apply to derivative claims. The FDIC’s lawsuit is not asserted as a derivative claim; it is a direct action. Judge Guilford’s analysis of this issue seems forced to me and unnecessarily fuzzies up the issue.
As long as the D&O insurance carriers hold out the hope that they might be able to persuade a court to reach the same conclusion that Northern District of Georgia Judge Richard Story reached in his August 2013 decision in the Community Bank & Trust case – that is, that the IvI exclusion unambiguously precludes coverage for the FDIC’s claims as receiver of a failed bank against the bank’s former directors and officers – they will continue to try to contest coverage in reliance of the exclusion. However, with each decision that the exclusion’s applicability to the FDIC’s claims is ambiguous, the argument will get harder and harder for the carriers to sustain. At some point, the cumulative weight of the case decisions could reach the point where the argument simply becomes unsustainable – that is, of course, unless the insurers can notch up some victories for the contrary position.