Why it matters: In a recent decision, the Tenth Circuit Court of Appeals held that claims by the Federal Deposit Insurance Corporation (FDIC) in its capacity as receiver of a failed bank against the bank's former directors and officers were excluded by the "insured v. insured" exclusion in the bank's directors and officers (D&O) policy. The court relied on the plain language of the exclusion that unambiguously barred coverage by the FDIC receiver against director-defendants. The court also rejected the FDIC's contention that the presence of a shareholder's derivative suit exception to the insured v. insured exclusion rendered the exclusion ambiguous. Other courts have held insured v. insured exclusions to be ambiguous with regard to claims brought by the FDIC and thus not valid. However, in this case, the insurance company clarified any purported ambiguity by carefully drafting the insured v. insured exclusion to apply to "any Claim made against the Insured Persons by another Insured Person, the Company, or any successor, trustee, assignee or receiver of the Company."

Detailed discussion: Columbian Bank and Trust and its parent company Columbian Financial Corp. (CBT) purchased a D&O policy with BancInsure that covered them from 2007 to 2010.

In 2008, the Kansas bank commissioner declared CBT insolvent and the FDIC became the bank's receiver.

In 2011, the FDIC as receiver brought claims of negligence and breach of fiduciary duty against several former CBT directors and officers. Around the same time, BancInsure filed suit in Kansas state court seeking a declaratory judgment that it did not have to cover the directors for the FDIC claims. The FDIC removed the action to federal court.

Two exclusions were relevant—an "insured v. insured" exclusion and a "regulatory" exclusion. The insured v. insured exclusion excluded coverage for any Claim made against the Insured Persons by another Insured Person, the Company, or any successor, trustee, assignee or receiver of the Company.

The regulatory exclusion excluded coverage for actions brought by federal or state agencies. The regulatory exclusion didn't apply because of a regulatory exclusion endorsement which effectively deleted the exclusion.

The directors and the FDIC argued that because the policy allows for shareholder derivative actions, and the FDIC action is similar to one of those, the insured v. insured provision is at least ambiguous.

The court noted a split of authority on the issue of whether "insured v. insured" exclusions in D&O policies can apply to claims by the FDIC. The majority view holds that coverage exists for FDIC claims, even though the FDIC steps into the shoes of a failed bank (in other words, the FDIC is considered to be an "insured" under certain D&O policies).

The problem for the insureds in this case, though, was that here (unlike in the cases making up the majority view), the policy specifically excluded coverage for claims made against an Insured Person by "a receiver" of the bank. This is the very language that other courts have noted insurers could have included in their policies to clear up the ambiguity but did not.

To read the decision in BancInsure Inc. v. FDIC, click here.