Why it matters

In the continuing split among courts considering insured v. insured exclusions, the Eleventh U.S. Circuit Court of Appeals recently found such an exclusion ambiguous and reversed summary judgment in favor of the insurer. The underlying dispute involved a failed bank and a lawsuit brought by the Federal Deposit Insurance Corporation (FDIC) as receiver against former officers of the institution. The district court ruled that the insurer had no obligation to defend the officers under the insured v. insured exclusion. The Eleventh Circuit reversed on the ground that it was ambiguous whether the exclusion applies when the FDIC, as the bank’s receiver, brings claims against insureds. This case is significant not only because it further continues the split of judicial opinions on the question, but also because it found that the most compelling evidence of the ambiguity was “that courts who have addressed similarly worded insured vs. insured exclusions have reached different results.”

Detailed Discussion

In 2010, Georgia-based Community Bank & Trust failed and the FDIC was appointed as receiver. In its capacity as receiver, the FDIC filed suit against two former bank officers, Miller and Fricks, asserting that they had approved loans in violation of the bank’s loan policy and prudent lending practices, causing damages of $15 million.

Miller and Fricks tendered the suit to St. Paul Mercury Insurance Company, the bank’s D&O insurer. In response, St. Paul filed a declaratory judgment action in Georgia federal court seeking a declaration that coverage was barred due to the policy’s insured v. insured exclusion.

The exclusion provided: “The Insurer shall not be liable for Loss [including Defense Costs] on account of any Claim made against any Insured: … 4. Brought or maintained by or on behalf of any Insured or Company in any capacity.”

The district court judge ruled that the exclusion was unambiguous and that St. Paul had no duty under the policy to defend or indemnify the officer defendants. The FDIC appealed.

The exclusion itself makes no references to the FDIC, regulators, or any liquidating entity. The FDIC argued that, as receiver, it “steps into a number of pairs of different shoes” – it acts on behalf of the bank, but also on behalf of stockholders, account holders, depositors and other creditors. As such, it is not a mere successor to an “Insured” for purposes of the exclusion.

St. Paul countered that the exclusion was unambiguous and that by bringing a claim in the bank’s behalf, the FDIC was stepping into the bank’s shoes and is subject to all defenses that could have been asserted against the bank.

Although the FDIC made a number of arguments as to why the exclusion is ambiguous, the Eleventh Circuit found that “the most compelling argument is that courts who have addressed similarly worded insured v. insured exclusions have reached different results.” The fact that multiple courts themselves have adopted multiple, inconsistent interpretations of the same exclusionary language demonstrates that the insured v. insured exclusion is ambiguous as it applies to the FDIC in its role as receiver.

Remanding the case to the district court, the panel noted that it might be necessary to consider extrinsic evidence to determine the intent of the parties.

To read the opinion in St. Paul Mercury Ins. Co. v. FDIC, click here.