insured v. insured

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 This decision, while unpublished, is a timely one for policyholders, as regulators including the FDIC litigate these claims arising out of the financial crisis.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

Indemnification Claim Extinguishes Fire Caused by Insured v. Insured Exclusion

shutterstock_152247341The Fifth Circuit recently delivered good news to policyholders in a July 27, 2015 opinion that supports the argument that an indemnification right among co-insured parties may be covered, notwithstanding the insured-versus-insured exclusion. In Kinsale Insurance Co. v. Georgia-Pacific LLC, the indemnification right prevailed because the claim for which coverage was sought was for an indemnification request, not for the underlying property damage arising from a fire.

Georgia-Pacific hired Advanced Services, Inc. to demolish a plywood plant. Advanced Services, in turn, leased equipment for the work from H&E Equipment Services (“H&E”). When a fire in the plant damaged this equipment, H&E brought sued Advanced Services, which, in turn, brought a third-party demand for indemnification against Georgia-Pacific. Advanced Services held a Commercial General Liability policy issued by Kinsale Insurance Company, under which Georgia Pacific was an additional insured. The policy contained an insured-versus-insured policy exclusion that provided, in relevant part: “This insurance does not apply to claims or ‘suits’ for ‘bodily injury,’ ‘property damage’ or ‘personal and advertising injury’ brought by one insured against any other insured.”

Georgia-Pacific filed a claim under the insurance policy for any indemnification it might owe Advanced Services, but Kinsale Insurance denied the claim, citing the insured-versus-insured exclusion. The insurer then filed an action for a declaratory judgment that it did not owe indemnity to Georgia-Pacific, and the district court—applying Louisiana law—granted summary judgment in Kinsale’s favor. It held that the policy exclusion applied, as the original suit was for property damage, which is explicitly included in the exclusion.

The Fifth Circuit disagreed, finding that, because Advanced Service’s suit against Georgia-Pacific did not seek damages, but rather, indemnification, the exclusion did not apply. It was not persuasive to the court that the original action for which the indemnity was sought was for property damage, and the property damage claim was not brought by one insured against another. The court distinguished a prior Fifth Circuit case, Fidelity & Deposit Co. of Maryland v. Conner, pointing out that the exclusion in that case applied to any claim, without limitation based on the nature of the claim.

In making its decision, the court noted, “We do not deny that it is possible that Advanced’s indemnity claims could become a battle between two insureds over who, if either, was responsible for the fire and even whether there was shared responsibility. One central purpose of the insured versus insured exclusion no doubt is to keep the insurance company free from such litigation.” Nonetheless, the court found that the exclusion did not apply because this was not a claim for property damage, but one for indemnity.

The Fifth Circuit’s decision serves as a reminder for policyholders to look carefully at their insured versus insured exclusion to see if it is broadly worded to apply to all claims, or whether it is limited to certain types of claims, such as bodily injury and property damage in this case.