Failed Bank Coverage Litigation – Insured v. Insured Exclusion – 1st Circuit Finds Duty To Pay Defense Costs

By Joseph Monteleone, Esq. of Rivkin Radler LLP


In a somewhat folksy Opinion by Judge O. Rogeriee Thompson, the First Circuit affirmed an Order of the District Court for the District of Puerto Rico holding that an insurer had an obligation to advance defense costs in underlying litigation brought by the Federal Deposit Insurance Corporation (FDIC) against directors and officers of a failed bank.  W. Holding Company, Inc. v. AIG Insurance Company – Puerto Rico, No. 12-2008, (1st Cir.  March 31, 2014).  [See here for a link to the decision]
The exclusion at issue provided that the insurer
Shall not be liable to make any payment for Loss in connection with any Claim made against an Insured . . . which is brought by, on behalf of or in the right of, an Organization or any Insured Person other than an Employee of an Organization, in any respect and whether or not collusive.


The Court noted that “the policy neither mentions the FDIC nor bars coverage for suits by FDIC-type regulators like some policies do.”  In fact, the Court observed that the District Court took judicial notice of the fact that other policies issued by the insurer expressly excluded coverage for claims brought by or on behalf of any State or Federal regulatory or administrative agency in its capacity as a receiver.
The District Court had found the insured vs. insured exclusion inapplicable because the FDIC was not only suing on behalf of insureds, but it was also suing on behalf of bank account holders, depositors and the FDIC’s insurance fund.
Key to the Court’s ruling that the insurer had to advance defense costs was Puerto Rico law holding that an insurer must pay such defense costs if a complaint alleges claims that create even a “remote possibility” of coverage.  The Court further stated that the there only had to be a “likelihood” of a remote possibility of coverage.
Judge Thompson took great pains to emphasize that the Court’s decision applied only to defense costs and was based on the very easy burden on the insureds under Puerto Rico law to secure advancement.   As she stated to conclude the Opinion,
But we add – lest anyone be confused – that having lost the likelihood-of-success skirmish, [the insurer] may still ‘win’ the coverage ‘war at a succeeding trial on the merits.’
(citations omitted)
Thus, the “coverage war” continues between insurers and ultimately the FDIC over application of the insured vs. insured exclusionary language in the current aftermath of the bank failures of a few years ago.

[1] Contrast this language with that at issue in the very recent decision in Bancinsure, Inc. v. McCaffree, No. 12-2110, 2014 U.S. Dist. LEXIS 24941 (D. Kan. Feb. 27, 2014), where the court upheld an insured vs. insured exclusion that provided as follows.
[t]he Insurer shall not be liable . . . for Loss in connection with any Claim made against the Insured Persons based upon, arising out of, relating to, in consequence of, or in any way involving . . . a Claim by, or on behalf, or at the behest of any other Insured Person, the Company, or any successor, trustee, assignee or receiver of the Company.
For additional information, contact Joe at or 201.287.2497. 
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