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Another Victory for Insurers in the Application of the Insured v. Insured Exclusion to Failed Bank Litigation
Another Victory for Insurers in the Application of the Insured v. Insured Exclusion to Failed Bank Litigation
By Thomas K. Hanekamp, Esq. and Kathryn A. Formeller, Esq. of Tressler LLP
Coverage was unambiguously precluded by an Insured v. Insured exclusion for claims brought by the FDIC against former bank directors despite the insured’s arguments concerning industry purpose and ambiguity. BancInsure, Inc. v. McCaffree, No. 12-2110, 2014 U.S. Dist. LEXIS 24941 (D. Kan. Feb. 27, 2014).
In August 2008, the state of Kansas closed Columbian Bank and Trust Company (Columbian) and appointed the FDIC as receiver. Three years later, the FDIC filed suit against Columbian’s former directors and officers alleging breach of fiduciary duty and negligence in originating and/or approving risky commercial real estate loans and failing to properly supervise bank lending functions. The FDIC claimed damages of $52 million. Before the FDIC filed suit but after it had asserted claims against the officers and directors, the officers and directors sought coverage from their D&O insurer. The insurer agreed to advance defense costs pursuant to a reservation of rights and then filed suit seeking a declaration that it owed no coverage under the D&O policy for any claims brought by the FDIC.
The insurer, the former officers and directors and the FDIC thereafter entered into a settlement to resolve the underlying lawsuit. The former officers and directors agreed to confess judgment in favor of the FDIC for $5 million, the amount of the D&O policy limits. The parties agreed that the amount of the settlement was reasonable and the insurer paid $250,000 in partial satisfaction of the judgment.
Meanwhile, the insurer continued to contest coverage and sought summary judgment in its favor in the coverage action. The insurer contended that coverage was barred by the Insured v. Insured exclusion and advanced several arguments in support of its position. The exclusion barred coverage for claims
based upon, arising out of, relating to, in consequence of, or in any way involving … a Claim by, or on behalf of, or at the behest of, any other Insured Person, the Company, or any successor, trustee, assignee or receiver of the Company.
First, the FDIC argued that pursuant to industry custom, practice and purpose, the exclusion was meant to preclude collusive lawsuits by one insured against another. Because the FDIC’s claims were not collusive, the exclusion did not apply. While acknowledging that the FDIC’s suit was not collusive, the court held that the exclusion’s historical purpose was not a basis for rejecting the exclusion as written. The court noted that in St. Paul Mercury Ins. Co. v. Miller, No. 2:12-CV-0225-RWS, 2013 U.S. Dist. LEXIS 116877 (N. D. Ga. Aug. 19, 2013), the U.S. District Court for the Northern District of Georgia summarily rejected a similar argument, concluding that the court should not refuse to give effect to unambiguous policy language based on assumptions as to why the language is included.
The court also rejected the FDIC’s argument that the regulatory exclusion endorsement, which deleted the regulatory exclusion, would be rendered meaningless if the court were to find that the Insured v. Insured exclusion applied. The court observed that its decision was consistent with Davis v. BancInsure, Inc., No. 3:12-cv-113-TCB, 2013 U.S. Dist. LEXIS 46249 (N.D. Ga. March 20, 2013). In Davis, the defendant directors and officers similarly contended that application of the same Insured v. Insured exclusion to claims brought by the FDIC would render the regulatory exclusion endorsement meaningless. The District Court rejected this argument and held that the existence of both the Insured v. Insured exclusion and the regulatory exclusion endorsement did not mean that the latter negated or superseded the former. The Davis court therefore found that the Insured v. Insured exclusion expressly barred coverage for the FDIC’s claims.
Finally, the FDIC argued that the presence of both the Insured v. Insured exclusion and the regulatory exclusion endorsement created ambiguity as to whether claims by FDIC were excluded. The court once again turned to the Davis decision wherein the U.S. District Court for the Northern District of Georgia observed that although the majority view holds that coverage exists for FDIC claims even though it "steps into the shoes" of the failed bank, those cases did not involve policy language – like the language at issue – expressly providing that the exclusion applied to receivers. The court also observed that the U.S. District Court for the Northern District of Georgia’s decision in St. Paul Mercury Ins. Co. v. Miller, was in accord. In Miller, the District Court held that the Insured v. Insured exclusion barred coverage for a suit brought by the FDIC against former bank employees. In that case, the exclusion barred coverage for claims "brought or maintained by or on behalf of any Insured or Company in any capacity." Because the FDIC steps into the shoes of a failed bank, the District Court held that if the policy barred coverage for a suit by the bank, it would also bar coverage for a suit by the FDIC. Based on the foregoing, the court concluded as a matter of law that the policy was not ambiguous, and must therefore be enforced as written.
Because the court concluded that the Insured v. Insured exclusion barred coverage for the FDIC’s claims, the court did not consider the insurer’s alternative argument that the policy was void because the former officers and directors made misrepresentations giving the insurer the right to rescind the policy. The court also rejected the FDIC’s independent argument that the insurer was estopped from denying coverage in the instant action because the insurer admitted that the policy applied to the claims in the underlying action in a 2008 declaratory judgment action initiated by the bank against the insurer.
