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In recent years, the Federal Deposit Insurance Corporation (“FDIC”), acting as a receiver, has filed numerous lawsuits against the former directors and officers of banks which failed during the course of the global financial crisis.  These suits generally contend that the alleged malfeasance of the directors and officers at the time led to the banks’ downfall.  A key and frequent issue emanating from these cases is whether the banks’ Directors & Officers (“D&O”) liability insurance policies provide coverage for such losses.  The United States Court of Appeals for the Ninth Circuit recently considered this issue, finding that a so-called “insured-versus-insured” exclusion contained in a D&O policy unambiguously barred coverage for the FDIC’s claims.

In Federal Deposit Insurance Corp. v. BancInsure, Inc., 2017 U.S. App. LEXIS 452 (9th Cir. Jan. 10, 2017), the FDIC, acting in its capacity as receiver of the failed Security Pacific Bank (“Security Pacific”), filed a declaratory judgment action against its D&O carrier, BancInsure, seeking coverage for losses arising from the former directors’ and officers’ alleged negligence, gross negligence and breach of fiduciary duty.   BancInsure argued that coverage was barred by the D&O policy’s “insured-versus-insured” exclusion, which precluded coverage for claims brought “by, or on behalf of, or at the behest of” Security Pacific, a person insured under the policy, or any “successor, trustee, assignee or receiver”.  The FDIC countered that an exception for shareholder derivative suits set forth in the exclusion applied since its claims were similar to those asserted in such suits, and because the FDIC was also acting on behalf of the bank’s shareholders.  The federal district court granted summary judgment in favor of the FDIC, concluding that the D&O policy provided coverage for such claims.

On appeal, the Ninth Circuit, in an unpublished opinion, reversed and remanded the district court’s determination. The court rejected the FDIC’s argument that it is not a receiver within the meaning of the insured-versus-insured exclusion because it had assumed a “unique role” representing “multiple interests”, including those of a shareholder.  The court noted that malfeasance claims against directors and officers belonged to the corporation, not to the shareholders.  Because the FDIC’s claims were akin to a direct action which could have been instituted by Security Pacific’s board, the insured-versus-insured exclusion would still preclude coverage.

The court also distinguished the FDIC’s claims from a derivative suit, which the court explained is secondary to the FDIC’s rights as a receiver to bring the same claims, and can only be brought when the FDIC fails to exercise its primary rights to assert such claims directly.  The court stated that “[r]eading the D&O policy as a whole and in context, the shareholder-derivative-suit exception extends the D&O policy’s coverage to losses from shareholder derivative suits, but not to suits brought by a successor or receiver.”  According to the court, the existence of the derivative suit exception did not change that result or render the insured-versus-insured exclusion ambiguous merely because the FDIC also succeeded to the rights of shareholders.  The court reasoned that accepting the FDIC’s contentions would essentially read the term “receiver” out of the exclusion.  The court concluded that “[w]e think the term ‘receiver’ is clear and unambiguous and includes the FDIC in its role as receiver of Security Pacific.” 

The court also rejected the FDIC’s contention that the removal of the policy’s “regulatory exclusion” by endorsement should be construed in favor of coverage because the FDIC’s claims would “most naturally” be precluded by said exclusion.  The court ruled that the deletion of the regulatory exclusion did not “vary, waive or extend” any of the policy’s other terms, and therefore did not alter the scope of the insured-versus-insured exclusion.

BancInsure underscores the necessity of undertaking a careful review of the terms, conditions and exclusions contained in a D&O policy.  Differences of opinion exist among courts regarding the interpretation and applicability of the insured vs. insured exclusion in the context of FDIC failed bank claims.  One word, in this case, the term “receiver”, could mean the difference between a determination of coverage or no coverage.