The New York Supreme Court disposed of a longstanding dispute between J.P. Morgan and the insurers of the now defunct Bear Stearns, rejecting the insurers’ various arguments to avoid indemnity coverage for a $160 million payment made by Bear Stearns in connection to a 2006 settlement with the Securities and Exchange Commission (“SEC”) and New York Stock Exchange. As previously discussed in our August 2016 post about the prior motion for summary judgment order in this case, that settlement resulted from allegations that Bear Stearns, through its brokers, had facilitated late trading and deceptive market timing practices.
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 This decision, while unpublished, is a timely one for policyholders, as regulators including the FDIC litigate these claims arising out of the financial crisis.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.
Professional services companies need to be extra-careful when placing Directors and Officers liability (“D&O”) coverage to ensure that their policies don’t take away with one hand what they appear to give with the other. A new district court ruling suggests that a professional services exclusion found in most D&O policies may erase most of the coverage such companies believe they’re purchasing.
Banks and other financial institutions, like most companies, usually carry D&O insurance to protect themselves and their decision-makers from claims of alleged ”Wrongful Acts,” including alleged negligence or misleading statements. They may also have Errors and Omissions or Professional Liability (“E&O”) coverage to respond to claims arising from the performance of services requiring special training or expertise. To avoid overlapping coverage for claims that may be covered under an E&O policy, D&O policies typically include a so-called “professional services” exclusion that draws a line between these two lines of coverage. When applied to a professional services company, however, this line becomes blurred. As demonstrated by a recent decision from the U.S. District Court for the Southern District of Florida, broadly applying this exclusion to services companies like financial institutions threatens to eviscerate the companies’ D&O coverage.
Policyholders provide information to their insurers all the time. That information can be highly important, sensitive, and confidential—but is the transmission of it protected from disclosure? Maybe so, maybe not. How high should you keep your fences?
The general rule is that there is no insured-insurer privilege that protects the confidentiality of communications between a policyholder and its insurer. For communications to be protected from disclosure, they must fall within the scope of the traditional privileges (the attorney-client privilege or work product protection)—or within the ambit of the “common interest” exception that applies to both. “Common interest” is recognized by courts in many jurisdictions as a limited exception to the rule that disclosure of privileged communications to a third party waives the privilege.