D&O Coverage for FDIC Lawsuits against a Failed Bank’s Killers

November 1, 2013

Insurance LawSince January 1, 2008, the FDIC has taken over 485 failed banks. As receiver for a failed bank, the FDIC may sue those responsible for the bank’s demise, including its officers and directors, attorneys, accountants, appraisers, brokers, or others. Although the rate of subprime mortgage-related bank failures reached its peak several years ago, the FDIC is accelerating its efforts to recover from the banks’ directors and officers. According to the FDIC’s latest report on October 8, 2013, the agency has authorized suits in connection with 127 failed institutions against 1,029 individuals for D&O liability.

When the officers and directors of these failed institutions seek coverage for the FDIC’s actions from their D&O insurers, their insurers are likely to argue that the “insured v. insured” and “regulatory” exclusions preclude coverage for any suit brought by the FDIC as the bank’s receiver. My next few posts will examine whether these exclusions preclude coverage for FDIC lawsuits against a failed bank’s killers.

Insured v. Insured Exclusion

Now universally included in D&O policies, the insured v. insured exclusion precludes coverage when the insured institution sues its officers and directors or anyone else insured under the policy. The purpose of the exclusion is to prevent insured institutions from filing collusive lawsuits against their officers and directors in an attempt to recover normal operating losses resulting from poor business decisions from their D&O carriers. The insurers maintain that when acting as the bank’s receiver, the FDIC “stands in the shoes” of the failed bank and thus the exclusion precludes coverage as if the action had been brought by the bank itself. Insureds respond that the exclusion does not unambiguously apply to FDIC actions and applying it to such actions would not promote its purpose of avoiding coverage for collusive lawsuits.

Read the Policy

The applicability of the insured v. insured exclusion to claims by bank regulators was first tested in cases arising out of the savings and loan crisis in the late 1980s and early 1990s. In those cases, the exclusion usually applied to actions “by” an insured against another insured, and most courts refused to equate the bank’s governmental receiver or liquidator with an insured. Noting the receiver sues on behalf of the bank’s depositors and creditors, as well as the bank itself, these courts determined that the exclusion was at best ambiguous with respect to whether the regulators’ lawsuits qualified as a suit “by” the bank.

Savings and loan crisis era cases that ruled in favor of the insurer involved policy language that unambiguously made the exclusion applicable to non-collusive lawsuits by the insured bank’s successors. The insured v. insured exclusion at issue in Mt. Hawley Ins. Co. v. Federal Sav. & Loan Ins. Corp., 695 F.Supp. 469 (C.D.Cal.1987), for example, applied to claims by the “legal representatives” or “assigns” of the insured corporation.  The court concluded that the broader language in the exclusion encompassed suits brought by FSLIC against an insolvent savings & loan’s directors and officers.

Subprime Mortgage Crisis Era Cases

Although the “successor” and “assignee” language found in Mt. Hawley has not been widely adopted, most D&O insurers have broadened their insured v. insured exclusions to encompass claims brought by and “on half of” another insured. To date, only a few cases have addressed the applicability of this broader language to claims arising out of the 2008 subprime mortgage crisis, although the number is likely to increase as the FDIC ramps up its litigation efforts. In late 2012 and early 2013, federal district courts in Georgia and Puerto Rico rejected the insurance industry’s argument that the FDIC sues “on behalf of” of the insured bank. More recently, another federal district court in Georgia treated the “on behalf of” language as a game changer and ruled in favor of the insurer. My next post will examine all three decisions.