eleventh cuircuit sealGoing all the way back to the S&L crisis, a recurring insurance coverage issue that has arisen in the failed bank context has been the question of whether or not coverage for a claim brought by the FDIC in its capacity as receiver of a failed bank against the failed bank’s former directors and officers is precluded under the Insured v. Insured exclusion typically found in most D&O insurance policies. This issue has arisen yet again in connection with the failed bank litigation the FDIC has filed during the current bank failure wave.  


A number of district courts have found the question of the Insured v. Insured exclusion applicability to lawsuits brought by the FDIC in its capacity as receiver for a failed bank to be ambiguous, as reflected for example here. However, as discussed here, in September 2013, Northern District of Georgia Judge Richard W. Story, ruling in insurance coverage litigation relating to the failed Community Bank & Trust of Cornelia, Georgia, held that the exclusion’s applicability to claims brought by the FDIC in its capacity as receiver for the failed bank was not ambiguous and precluded coverage under the policy for the FDIC’s claims. 


Since it was entered in the Community Bank & Trust case, Judge Story’s ruling has represented arguably the strongest authority supporting  the D&O insurer’s arguments in other  cases that the Insured v. Insured exclusion unambiguously precludes coverage for claims brought by the FDIC in it s capacity as receiver for a failed bank. 


However, in a December 17, 2014 decision (here), the Eleventh Circuit, applying Georgia law and relying on the fact of the split authority on this issue, found the exclusion’s applicability to claims brought by the FDIC as receiver to be ambiguous and remanded the case for further evidentiary proceedings to determine the parties’ intent with respect to the exclusion. The Eleventh Circuit’s ruling will have a significant impact not only because it is the first appellate decision on this issue but also because it applies to district courts in Georgia and Florida (among several other states) where so many of the bank closures during the current bank failure wave took place. 



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 FDIC alleges that the defendants’ misconduct cost the bank $15 million in damages.  


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 moved for summary judgment in the coverage lawsuit seeking a ruling that as a matter of law coverage for the FDIC lawsuit was precluded under the Insured v. Insured exclusion.  The FDIC argued that the policy provisions on which the insurer sought to rely were ambiguous and that it was entitled to further discovery 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.”


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 and any defenses that could have been raised against the bank can be raised against the FDIC. The FDIC and the individuals appealed Judge Story’s ruling to the Eleventh Circuit. 
The December 17, 2014 Opinion           

On December 17, 2014, in an opinion written by Judge Harvey Schlesinger (a federal district court judge sitting by designation) for a three-judge panel, the Eleventh Circuit reversed Judge Story’s ruling, holding that the question of the applicability of the Insured v. Insured exclusion to claims brought by the FDIC as receiver for a failed bank is ambiguous and therefore that it may be necessary to consider extrinsic evidence to determine the parties’ intent. Accordingly the Eleventh Circuit remanded the case to the district court for further proceedings. 


In connection with the question of whether or not the exclusion was ambiguous, the parties had raised a number of legal arguments based on the specifics of the FDIC’s role when it acts as receiver of a failed bank. However, rather than rely on these various legal arguments or on the nature of the FDIC”s role as receiver, the Eleventh Circuit said that “it seems to us that the most compelling argument is that courts who have addressed similarly worded insured vs. insured exclusions have reached different results.” In a footnote, the appellate court added that “the fact remains that there are two schools of thought on how to interpret insured v. insured exclusions, and that seems to make FDIC-R’s point.” 


The appellate court referenced, by way of illustration, a separate decision out of the Northern District of Georgia, also applying Georgia law to a nearly identical exclusion, in which the court held, contrary to Judge Story’s ruling in this case, that the exclusion is ambiguous. The Eleventh Circuit said that the fact that Judge Story in this case and that another judge in the same court “reached opposite conclusions about the effect of a nearly identically worded insured v. insured exclusion appears to us to plainly support a finding of ambiguity under Georgia law.”


In conclusion, the Court said, “since we conclude that the insured v. insured exclusion is ambiguous, it may be necessary to consider extrinsic evidence to determine the parties’ intent.” The Court remanded the case to the district court “for further consideration in accordance with this opinion.” 



The Eleventh Circuit’s ruling in this case is not the first instance in which a court has found the existence of the conflicting case law to be determinative of the question with the insured vs. insured exclusion is ambiguous. For example, in October 2014, a judge in the Central District of California found the exclusion to be ambiguous based on a similar reason (among other considerations). 


The various court decisions have indeed gone both ways on this exclusion. As long as there were strong decisions –like Judge Story’s in this case – finding the exclusion to unambiguously preclude coverage for claims asserted by the FDIC in its capacity as receiver, the D&O insurers have been emboldened to continue to try to contest coverage on this basis. However, now that the courts are finding ambiguity based on nothing more than the split in the case law (rather than on whether one side or the other was correctly decided), the game may be up for the D&O insurers. The insurers may still think they can argue on the merits that the exclusion is unambiguous, but if the existence of the case law split alone and without any reference to the merits is enough to establish ambiguity, then there really is not much left on which the insurers can base their argument. They can’t deny that there is a split in the authority on this issue. 


The fact that it was a federal appellate court that reached this decision will make this a very difficult decision for the insurers to avoid. To be sure, the court was applying Georgia law, so the carriers can try to argue that the ruling does not apply where the laws of other jurisdictions govern. The carriers can also try to argue against the ruling outside of the Eleventh Circuit. 


The carriers will face a number of obstacles in making these arguments. The first is that more banks failed in Georgia than any other state, so the Eleventh’s Circuit’s ruling will be determinative in connection with the largest state grouping of cases. Because Florida is also in the Eleventh Circuit, the ruling in this case will like be determinative, and whether or not determinative, nonetheless followed in cases to which Florida law applies.  Since there were almost as many failed banks in Florida as in Georgia, this case will likely foreclose matters in another of the largest state groupings of cases. And even outside of the Eleventh Circuit, other district courts will be that much less likely to reached a ruling contrary to this appellate court. 


It will be interesting to see what happens to this case when it goes back to the district court. I strongly suspect that the evidentiary inquiry to determine the parties’ intent with respect to this exclusion will not be an edifying spectacle. I have in my life lived through the kinds of discovery proceedings that are now going to take place in this case, with various underwriters and brokers having their depositions taken and their emails scrutinized. It is not the sort of thing that anyone who wasn’t getting paid for the exercise would actually want to sit through. I will say this, if the carriers know that they have to go through this sort of discovery exercise in order to try to assert the exclusion against an FDIC claim, they are very quickly going to try to find a different basis on which to try to contest coverage. 


In an earlier post, I had said that as long as the carriers think they can persuade a court to reach the same conclusion as Judge Story reached in the district court in this case, they will continue to argue that the insured vs. insured exclusion precludes coverage for claims brought by the FDIC in its capacity as receiver for a failed bank. Now the carriers can no longer rely on Judge Story’s opinion and they have an appellate court decision going against them. We may be approaching the point where the carriers’ position on this coverage question is unsustainable. 


Special thanks to a loyal reader for providing me with a copy of the Eleventh Circuit’s opinion.