Ninth Circuit Confirms the FDIC Cannot Avoid the Insured-Versus-Insured Exclusion

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In recent years, courts frequently have held that a D&O policy’s “insured-versus-insured” exclusion bars coverage for claims by the FDIC, as receiver of a failed bank, against the bank’s former directors and officers because the FDIC stands in the shoes of the insured bank. Therefore, the FDIC has tried to circumvent this exclusion by arguing that a policy’s shareholder derivative suit exception to the insured-versus-insured exclusion brought the FDIC’s claim back within coverage. A recent decision by the Ninth Circuit Court of Appeals rejected this argument and confirmed that the insured-versus-insured exclusion applies to FDIC claims.

In FDIC v. Bancinsure, Inc., 2017 U.S. App. LEXIS 452 (9th Cir. Jan. 10, 2017), the court reversed the district court’s determination that an insurer was obligated to defend and indemnify officers and directors of the insured bank against the FDIC’s claims. The bank’s D&O insurer had denied coverage based on an insured-versus-insured exclusion that excludes coverage for losses arising out of actions against an insured officer or director by the insured bank or “any successor, trustee, assignee or receiver” of the insured bank. The FDIC countered that the shareholder derivative suit exception to the insured-versus-insured exclusion brought the claim back within coverage. The shareholder derivative suit exception provides coverage when shareholders, who are not insureds under the policy, bring a derivative suit against the insured corporation. The FDIC argued that its claim was brought on behalf of both the bank and its shareholders, and therefore its claims were similar to a derivative suit and should trigger coverage under the shareholder derivative suit exception.

The court disagreed with the FDIC. The court stated that the insured-versus-insured exclusion clearly applied to a claim by a receiver of the insured bank, which the FDIC clearly was. The court then rejected the FDIC’s attempt to shed its designation as a receiver by asserting that it brought claims on behalf of the bank’s shareholders so that it could take advantage of the shareholder derivative suit exception. The court explained that the right to bring causes of action for malfeasance by a corporation’s executives belongs to the corporation. A shareholder derivative suit is a secondary means of enforcing a corporation’s rights against directors and officers of the corporation, but only when the corporation fails or refuses to do so. The FDIC’s claim as the receiver of the corporation was brought on the corporation’s behalf, thus rendering a shareholder derivative suit unnecessary. Therefore, the FDIC’s claim could not be considered a shareholder derivative suit. In addition, the court stated that the shareholder derivative suit exception did not render the insured-versus-insured exclusion ambiguous merely because the FDIC was the successor for both the rights of the bank and the rights of the shareholders.

A secondary issue in the court’s decision was the interplay between the insured-versus-insured exclusion and the policy’s regulatory exclusion, which in the policy at issue was deleted by endorsement and replaced with a coverage sub-limit for regulatory claims. The regulatory exclusion would have provided a second basis for denying the FDIC’s claim. The FDIC argued that providing a coverage sub-limit for previously excluded regulatory claims demonstrates that the insurer intended that the policy would cover the FDIC’s regulatory claim. The court rejected this argument as well, stating that the elimination of the regulatory exclusion did not negate the effect of the insured-versus-insured exclusion. However, a dissenting opinion disagreed on this point.

This case is an example of the ways the FDIC has attempted to create coverage under D&O policies for its claims against failed banks by undermining insured-versus-insured exclusions that expressly apply to claims by an insured’s receiver against other insureds. Here, the Ninth Circuit reinforced the rule that an insured-versus-insured exclusion bars coverage for claims by a receiver. However, the FDIC has much at stake as a frequent litigant seeking coverage under failed banks’ D&O policies. Notwithstanding the Court of Appeals’ decision, D&O insurers will likely face these issues again in the future.