In a decision, the US Court of Appeals for the Ninth Circuit, in finding for a directors & officers (D&O) insurer, denied coverage of the Federal Deposit Insurance Corporation’s (FDIC) claims against a failed bank’s former directors and officers under the “insured v. insured exclusion” in the D&O policy, which excluded coverage of claims brought by a receiver or successor.1 This decision shows the impact that particular language can have in determining what types of claims may be excluded from coverage and emphasizes the importance of understanding the implications of particularly worded provisions in a D&O policy––implications which should considered when selecting and negotiating coverage.

District Court Opinion

In FDIC v. BancInsure, Inc., the FDIC, acting as receiver of a failed bank, threatened an action against the bank’s former directors and officers seeking damages for the losses that resulted from their alleged misconduct.2 Thereafter, the FDIC entered into a settlement agreement with the former directors and officers and BancInsure, Inc. (BancInsure), the bank’s D&O insurer, whereby the directors and officers assigned their rights under the policy to the FDIC, and the parties agreed that the FDIC would file suit against BancInsure to determine whether the policy provided coverage.

On November 19, 2012, the FDIC brought an action against BancInsure in the United States District Court for the Central District of California alleging that BancInsure wrongfully denied coverage for the FDIC’s claims against the bank’s former directors and officers. On motion for summary judgment, BancInsure asserted that coverage for the FDIC’s claims was barred by the “insured v. insured exclusion” of the policy, which precluded coverage for any legal actions brought “by, or on behalf, of at the behest of” the bank, insured persons, or “any successor, trustee, assignee or receiver” of the bank. According to BancInsure, the FDIC was both a “successor” and “receiver” of the bank, and therefore the exclusion applied.

In response, the FDIC pointed to the policy’s “shareholders’ suit exemption” to the insured v. insured exclusion as evidence of BancInsure’s intent to cover claims brought by the FDIC. According to the FDIC, after the bank’s failure, the FDIC succeeded to the rights of the bank’s shareholders and therefore was entitled to coverage under the shareholder suit exception, which provided for losses arising from a shareholder’s derivative action.

The district court rejected BancInsure’s arguments and granted the FDIC’s motion for summary judgment. The court held that the FDIC’s claims were “not excluded from coverage under the Insured v. Insured Exception based upon the shareholders suit exemption and ambiguity as to whether the Exclusion, even with the pertinent ‘receiver’ language, applie[d] to the FDIC.” In support of its holding, the court cited to 12 U.S.C. § 1821(d)(2)(A)(i), which gives the FDIC exclusive authority to bring claims to recover losses by shareholders and others.3 “Because the Insured v. Insured Exclusion plainly exempts claims by shareholders, and the FDIC succeeds to shareholder’s claims by operation of law, the FDIC’s claims are exempted from the Exclusion just as shareholders’ derivative claims would be if they could bring such claims themselves.”

Circuit Court Opinion

On appeal, the Ninth Circuit reversed the decision of the district court and held that the FDIC was not entitled to coverage under the insured v. insured exclusion. In rejecting the FDIC’s argument that it is not a receiver within the meaning of the exclusion, the Ninth Circuit held that “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.” The fact that the FDIC, as receiver, succeeded to the rights of the bank’s shareholders, does not render the insured v. insured exclusion ambiguous. “Interpreting the shareholder-derivative suit exception to provide coverage to the FDIC’s claims may very well read the term ‘receiver’ out of the insured-versus-insured exclusion.” The court concluded that “the term ‘receiver’ is clear and unambiguous and includes the FDIC in its role as receiver of [the bank].”

Key Takeaways

Does this decision prevent the FDIC, when acting as a receiver, from seeking coverage under D&O policies that include an insured v. insured exclusion? Not necessarily. Although the Ninth Circuit denied coverage this time around, its reasoning for doing so was tied to the narrow language of the insured v. insured exclusion. Had the policy not explicitly used the terms “successor” and “receiver,” but rather relied on more broad language, then it is more likely that the court would have, as a number of other courts have done, found the FDIC was entitled to coverage under the policy.4 In fact, in its opinion, the Ninth Circuit made clear that the narrow language of BancInsure’s policy was what differentiated this case from those cases that the FDIC cited in support of its argument. The court noted, that although the FDIC cited to several cases in which the FDIC was not included within the scope of an insurance policy’s insured v. insured exclusion, in none of those cases did the exclusion expressly include the term “successor” or “receiver.”5

This decision provides a clear warning for banks and other policyholders about the implications these terms may have when included in an insured v. insured exclusion of a D&O policy. Prior to selecting coverage, it is important for policyholders to carefully review the language of a policy and to consider the impact such language may have on their coverage. And it is equally important for policyholders to prepare themselves to propose alternative language when negotiating coverage. The coverage, or lack of coverage, of particular claims can lead to serious consequences for policyholders. Therefore, careful thought needs to go into the content of a D&O policy to ensure it is the appropriate fit for a business.