FDIC

Ninth Circuit Correctly Recognizes that Insured-Versus-Insured Exclusion Does Not Bar FDIC From Pursuing Coverage Under Failed Bank’s D&O Policy

The Ninth Circuit recently held in St. Paul Mercury Insurance Co. v. Federal Deposit Insurance Corp. that a D&O policy’s insured-versus-insured exclusion does not prevent the Federal Deposit Insurance Corporation (“FDIC”), as receiver of an insured failed bank, from obtaining coverage under such policy. In so doing, the Court of Appeals follows the Eleventh Circuit and other courts that have addressed this issue and sided with the policyholder. This decision, while unpublished, is a timely one for policyholders, as regulators including the FDIC litigate these claims arising out of the financial crisis. Just this week, a Georgia jury returned a verdict in favor of the FDIC that awarded almost $5 million in damages for claims relating to a bank’s negligent management by its former officers and directors.

The FDIC brought claims against the former directors and officers of Pacific Coast National Bank for negligence, gross negligence, and breaches of fiduciary duty. The FDIC alleged that the former directors’ pursued an aggressive lending strategy, failed to ensure that loan practices complied with the bank’s policies, and inadequately supervised subordinate officers, which led the bank to suffer millions of dollars in losses. The insurer, The Travelers Companies, Inc., which comprises appellant Saint Paul Mercury Insurance Company, filed a declaratory judgment action to establish that the policy does not cover the FDIC’s claims. Considering the parties’ cross-motions for summary judgment on the action, the district court rejected Travelers’ contention that the exclusion barred coverage, holding that the exclusion did not expressly bar claims by the FDIC.

On appeal, the key issue was whether the language of the exclusion, which barred coverage for claims brought “by or on behalf of any Insured or Company,” was ambiguous. The FDIC argued that the phrase “on behalf of,” as applied to its action against the directors, was ambiguous, relying on the facts that it initiated the underlying case almost three years after the bank’s failure and that no person from the bank had any involvement in bringing its claims.

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Tenth Circuit Employs “Animal Farm” Rule of Insurance Policy Interpretation, Finding Some Words are More Equal Than Others

In George Orwell’s Animal Farm, the governing principle that “All animals are equal” was revised by the pigs, who had ascended into power, to “All animals are equal, but some animals are more equal than others.” A recent decision by the Tenth Circuit (applying Kansas law), BancInsure v. FDIC, appears to apply a similar principle of insurance policy interpretation, finding that the plain meaning of one policy provision may trump the equally plain meaning of another conflicting provision. This is a departure from well settled rules governing how courts interpret insurance policies. Among those rules are that where there is no ambiguity, courts are to apply a provision’s plain and ordinary meaning. However, courts are to read the policy as a whole and cannot interpret one policy provision (even if it is clear) in a way that would render another provision meaningless (because all words in a policy are equal). Where the plain meaning of two or more policy provisions conflict, the policy is ambiguous and the court must adopt a reasonable reading that favors coverage. Instead of employing these rules to resolve an ambiguity in the D&O policy at issue, the court in BancInsure gave effect to one provision that excluded coverage, even though doing so required it to disregard another clear provision that would have allowed coverage—effectively deciding that “all words are equal, but some words are more equal than others.” READ MORE