Why it matters

The United States District Court for the District of Puerto Rico held that a D&O policy’s “insured v. insured” exclusion did not foreclose coverage for a suit against bank executive insureds by the FDIC because the FDIC was not suing them on behalf of an “Insured” or an “Organization” but instead was bringing its claim on behalf of non-insureds, including the bank’s depositors and accountholders. In addition, the court held that when only part of a complaint made by the FDIC against former officers and directors of a failed bank relates back to a prior claim against the insureds, the complaint triggers two policy periods.

Detailed Discussion

Beginning in 2006, lawsuits were filed against the directors and officers of Westernbank in Puerto Rico. The lawsuits alleged that the bank’s directors and officers engaged in a pattern of allegedly reckless and negligent conduct in handling a series of loans, including one loan referred to as the “Inyx loan.” The insurers agreed to defend under a 2006-2007 directors & officers liability policy.

A few years later the bank failed. The FDIC took control as a receiver and filed a lawsuit against the directors and officers including similar allegations that the bank’s officers acted recklessly and negligently in the handling of loans. The FDIC sought recovery for eight separate borrowers – one of which was the Inyx loan.

The primary insurer argued that coverage was barred by the policy’s insured v. insured exclusion. The court noted that some courts had found that the insured v. insured exclusion prevents FDIC suits because the FDIC steps into the shoes of the failed bank and effectively becomes an insured, while other courts hold that the FDIC is statutorily and practically distinct from insured parties because it represents depositors, account holders, and the depositors’ insurance fund. Noting this split in authority, the Court stressed the “obvious intent” behind the exclusion, stating that the FDIC is not suing on behalf of an insured or an organization but on behalf of the depositors’ insurance fund.

Due to the overlapping allegations in the FDIC’s suit and the earlier Inyx lawsuit, the insurers also argued that the FDIC’s lawsuit relates to and thus is considered a single “Claim” with the earlier lawsuits first made in the 2006-2007 policy period. Given that the coverage for that year had already been seriously depleted, the directors and officers and the FDIC objected.

The policy defined “Claim” in relevant part as “a written demand” or “a civil . . . proceeding,” and it provided that where the insureds have given written notice of a Claim, then a subsequent Claim “alleging, arising out of, based upon or attributable to the facts alleged in the Claim or alleging any Wrongful Act which is the same as or related to any Wrongful Act alleged in the Claim shall be considered related to the first Claim of which such notice has been given” and is “subject to the one aggregate limit of liability.”

The directors and officers and the FDIC argued that the FDIC’s lawsuit triggered both policy periods; they contended that only the allegations as to the Inyx loan related back to the 2006-2007 policy period, and the allegations as to the remaining seven borrowers are a “Claim” under the 2009-2010 policy period.

The court sided with the directors and officers and the FDIC, holding that the FDIC’s claim triggered both policy periods.

The court noted that the FDIC’s complaint “substantially overlaps with the complaints in the earlier Inyx lawsuit regarding general allegations of grossly negligent practices,” but nonetheless held that only the allegations as to the single borrower at issue in the prior suits sufficiently overlap for purposes of the policy’s related claims provision. Accordingly, the court held that the FDIC’s claim with respect to the Inyx borrower relates back to and is treated as a single claim with the lawsuits first filed under the 2006-2007 policy period, but the FDIC’s claim as to the remaining seven borrowers is a claim made under the 2009-2010 policy period.

To read the opinion in W Holding Co. v. AIG Insurance Co., click here.