How Preclusion of an FDIC Action Under the Insured v. Insured Exclusion Could Change D&O Coverage

The 2008 financial crisis might be behind us, but coverage disputes stemming from the flood of lawsuits brought by the Federal Deposit Insurance Corporation (“FDIC”) against directors and officers of failed banks are far from over. With the FDIC filing lawsuits against more than 1,200 individuals for directors and officers liability between January 2009 and August 2015, coverage continues to be hotly contested across the country, with the most heavily litigated issue being whether a lawsuit commenced by the FDIC as a receiver of a failed bank is precluded by the “insured v. insured” exclusion commonly contained in Directors and Officers liability (“D&O”) policies. See FDIC, http://1.usa.gov/1NdXuA1.

The application of this exclusion, which precludes coverage for claims based on suits brought by one insured against another, has yielded mixed results. Although some courts have held that insured v. insured exclusions preclude coverage because the FDIC “steps into the shoes” of the company when it brings lawsuits against directors and officers in its capacity as a receiver; other courts, representing a growing consensus favoring coverage, have held that the application of the exclusion in the FDIC context is ambiguous and must be construed against the insurer. However, a recent decision by the U.S. Court of Appeals for the Tenth Circuit departs from the coverage trend and raises issues that are likely to change the D&O landscape going forward.

Application of D&O Exclusions to FDIC Lawsuits

When a federally insured bank fails, the FDIC will step in to cover losses and act as a receiver. Emily S. May, Bank Directors Beware: Post-Crisis Bank Director Liability, 19 N.C. Banking Inst. 31, 32 (2015). The FDIC will investigate the bank's failure and is authorized to bring professional liability suits against the failed bank's directors and officers. Id. at 32-33. In determining whether to bring a lawsuit, the FDIC considers not only the likelihood of success on the merits, but also the cost of bringing suit and potential recovery. Id. at 33-34. On the latter point, the availability of D&O insurance is critical to determining whether commencing a lawsuit is cost-effective. Id.

A D&O policy is intended to protect corporate officers and directors from losses incurred in connection with claims made against them for acts or omissions committed in their official capacities. D&O insurance is divided primarily into A, B and C Side coverage. Lawrence J. Trautman & Kara Altenbaumer-Price, D & O Insurance: A Primer, 1 Am U Bus L Rev 337, 346 (2012). Side A “responds when a company cannot indemnify the losses of individual officers and directors, either due to insolvency or when [legally prohibited].” Id. Side B “reimburses a company for its indemnification of the losses of individual officers and directors.” Id. Side C “is designed to pay the losses directly sustained by a company for its own liability.” Id. at 347.

Insured v. Insured Exclusion

The insured v. insured exclusion began appearing in D&O policies in the late 1980s in response to several lawsuits by insured corporations against their own directors to recoup operations losses during the savings and loan crisis. See Biltmore Assocs., LLC v. Twin City Fire Ins. Co., 572 F.3d 663, 668 (9th Cir. 2009). This exclusion, which has become standard in D&O policies, is designed to deter collusive suits brought by companies to recoup ordinary business losses, as well as prevent coverage for boardroom in-fighting, by excluding losses incurred in connection with claims made between individuals and entities that fall within the policy's definition of “insured.” See Level 3 Commc'ns, Inc. v. Fed. Ins. Co., 168 F.3d 956, 957-58 (7th Cir. 1999).

Altough the specific language may vary, a typical insured v. insured exclusion provides:

The insurer shall not be liable for Loss ' on account of any Claim made against any Insured … brought or maintained by or on behalf of any Insured or Company ' in any capacity, except: [a] Claim that is a derivative action brought or maintained on behalf of the Company by one or more persons who are not Directors or Officers and who bring and maintain such Claim without the solicitation, assistance or active participation of any Director or Officer.

St. Paul Mercury Ins. Co. v. Hahn, No. SACV-13-0424, 2014 WL 5369400, at *1-2 (C.D. Cal. Oct. 8, 2014) (emphasis added).

The definition of “insured” regularly includes directors, officers and the company, thereby precluding coverage for direct suits between the insured company and its insured directors and officers and, depending on the policy language, could also extend to suits involving a broad range of individuals. 4 Law and Prac. of Ins. Coverage Litig. ' 47:33 (2015). The policy may also carve out exceptions for suits not typically considered “friendly” or collusive, such as: 1) shareholder derivative claims (as illustrated in the sample language above); and 2) wrongful termination claims by an insured director, officer or employee. Id.

The majority of litigation surrounding the insured v. insured exclusion centers on whether a third party acting on behalf of the insured company ' i.e., corporate receivers, regulatory agencies, or trustees in bankruptcy ' are considered an “insured” under the policy and therefore subject to the exclusion. The applicability of this exclusion was initially met with mixed results, including in the context of lawsuits brought by the FDIC as receiver of a failed bank.

Regulatory Exclusion

Around the same time, the D&O market developed the “regulatory exclusion,” which is specifically designed to preclude coverage for claims by a government agency against directors and officers. This exclusion can be broad or specific, but typically precludes coverage for losses resulting from claims “based upon or attributable to any action or proceeding brought by or on behalf of” a governmental or regulatory agency. Id. at ' 47:40.

Courts have uniformly rejected attempts by government agencies to challenge this exclusion as against public policy, or as ambiguous. See, e.g., F.D.I.C. v. Am. Cas. Co. of Reading, Pa., 995 F.2d 471, 473-74 (4th Cir. 1993) (upholding parties' freedom to contract in the absence of an express public policy on point); Am. Cas. Co. v. Beranek, 862 F. Supp. 322, 327-28 (D. Kan. 1994) (finding the term “regulatory agency” to be unambiguous); St. Paul Fire & Marine Ins. Co. v. F.D.I.C., 968 F.2d 695, 701 (8th Cir. 1992) (holding that exclusion is not ambiguous as to whether it applies to direct versus secondary actions). Notably, despite the success in upholding this exclusion, market competition has rendered this exclusion relatively rare in D&O policies.

Case Law

The issue presented in virtually all cases analyzing the applicability of the insured v. insured exclusion to actions brought by the FDIC, is whether the FDIC is bringing the lawsuit “by or on behalf of” an insured. Insurers, typically relying on the Supreme Court's opinion in O'Melveny & Myers v. F.D.I.C , argue that the “FDIC as receiver steps into the shoes of the failed [bank], obtaining the rights of the insured depository institution that existed prior to receivership” and since such a claim is not covered if brought by a bank, it is likewise not covered when brought by the FDIC. 512 U.S. 79, 86 (1994) (internal quotations and citation omitted). Conversely, the FDIC and insureds contend that the FDIC has a unique role that requires it to step into a number of different pairs of shoes ' “as it were the wingtips of the Bank, the pumps of any stockholder, the loafers of any accountholder, and the tennis shoes of any Bank depositor” ' and because it is suing to recoup losses of depositors and other creditors, not its own, it is not bringing the type of collusive suit the exclusion was designed to preclude. St. Paul Mercury Ins. Co. v. F.D.I.C., 774 F.3d 702, 707 (11th Cir. 2014). Often, another factor in finding coverage is the inclusion of a shareholder derivative exception, which courts have extended to FDIC actions because the FDIC succeeds to shareholders' claims by operation of law, reasoning that the exception should apply regardless of who brings the claims. Hahn, 2014 WL 5369400, at *5.

Despite some initial willingness to apply the insured v. insured exclusion to suits brought by the FDIC, see, e.g., Gary v. Am. Cas. Co. of Reading, Pa., 753 F. Supp. 1547, 1554-56 (W.D. Okla. 1990), the majority of decisions issued in the wake of the 2008 financial crisis have deemed the exclusion ambiguous and construed the policy in favor of coverage. See, e.g., W Holding Co., Inc. v. Chartis Ins. Co.-Puerto Rico, 904 F. Supp. 2d 169 (D.P.R. 2012); Progressive Cas. Ins. Co. v. F.D.I.C., 926 F. Supp. 2d 1337, 1339'40 (N.D. Ga. 2013). Indeed, even more recent attempts to preclude coverage have been overturned in light of this trend favoring coverage.

For example, in St. Paul Mercury Insurance Company v. F.D.I.C., the district court initially held that the insured v. insured exclusion unambiguously precluded coverage for actions brought “by or on behalf of” the FDIC. In rejecting the “multiple shoes” argument, the district court observed that “it is exceptionally rare for someone other than the FDIC ' to raise a claim on behalf of a federally insured bank,” and since “the only party that could bring an action on a federally insured bank's behalf is the FDIC,” the exclusion unambiguously prescribed FDIC actions. 968 F. Supp. 2d 1236, 1242 (N.D. Ga. 2013). The Eleventh Circuit Court of Appeals reversed, finding the exclusion was ambiguous because it was susceptible to more than one reasonable interpretation, and specifically stated “the most compelling argument [in favor of ambiguity] is that courts who have addressed similarly worded insured v. insured exclusions have reached different results.” 774 F.3d at 709-10. Following this decision, it appeared the coverage trend would certainly continue.

However, in the most recent battle over the application of the insured v. insured exclusion, the Tenth Circuit, in BancInsure, Inc. v. F.D.I.C., departed from the coverage trend and affirmed a district court's ruling that the FDIC's claims against the former directors of Columbian Bank & Trust (“Columbian”) were unambiguously barred by the insured v. insured exclusion. 796 F.3d 1226 (10th Cir. 2015).

BancInsure sought a declaratory judgment that it owned no duty of coverage under the policy it issued to Columbian for claims the FDIC asserted against its former directors. That policy contained both an insured v. insured exclusion and a regulatory exclusion. The insured v. insured exclusion included a carve-out for shareholder derivative suits, and provided:

Insurer shall not be liable to make any payment for Loss in connection with any Claim made against the Insured Persons based upon, arising out of, relating to, in consequence of, or in any way involving ' a Claim by, or on behalf of, or at the behest of, any other Insured Person, the Company, or any successor, trustee, assignee or receiver of the Company. '

Id.' at 1231.

The regulatory exclusion excluded coverage for any action “brought by or on behalf of any ' deposit insurance organization” including a legal action brought by a “receiver.” Id. However, Columbian purchased a “regulatory exclusion endorsement,” which amended the policy by deleting the regulatory exclusion and setting a maximum aggregate liability cap of $5 million for claims brought by “any federal or state regulatory ' agency or deposit insurance organization.” Id. The endorsement proclaimed: “Nothing herein contained shall be held to vary, waive or extend any of the terms, conditions, provisions, agreements or limitations of the above mentioned policy other than as above stated.” Id. According to BancInsure's marketing materials, the endorsement was a “broadening feature” and its internal documents deemed FDIC receiver claims “regulatory” in nature. Id.

In reaching its decision, the court relied exclusively on the language of the insured v. insured exclusion, which expressly encompassed claims brought by a “receiver of the Company.” Id. at 1234. The court rejected the defendant directors' argument that other provisions in the policy superseded or created an ambiguity as to the application of the exclusion, including: 1) the carve-out for shareholder derivative suits, which is frequently relied on by courts to find ambiguity; and 2) the endorsement removing the regulatory exclusion from the policy in order to specifically extend coverage to actions brought by a “deposit insurance organization.” Id. at 1238. The court likewise did not entertain any evidence of the parties' intent to provide coverage for FDIC suits, and refused to judicially estop BancInsure from claiming actions by the FDIC were not covered under the policy, based on its answers to interrogatories in prior litigation. Id. at 1239. Ultimately, the word “receiver” in the insured v. insured exclusion was dispositive of the issue, despite overwhelming evidence that the parties' intended for the policy to cover losses stemming from actions brought by the FDIC.

Changing the Landscape

The import of the BancInsure decision is less about its holding, and more about the doubts it casts on the industry's understanding and expectations of whether FDIC suits will be precluded under a D&O policy. Despite the mixed savings-and-loan era case law, the industry has acknowledged the post-2008 trend of finding coverage for FDIC suits where they are neither expressly precluded nor of the type that should be. Arguably, the parties' in BancInsure anticipated the same result ' the insured not only paid to remove the regulatory exclusion, which was the only universally accepted bar to FDIC suits, but also paid for $5 million in coverage for claims brought by “deposit insurance organization.” The policy likewise contained other indicia of broad coverage, such as a carve-out for shareholder derivative suits, and there was evidence the insured shared this understanding. However, the inclusion of just one word in the insured v. insured exclusion derailed the parties' expectations of coverage.

Conclusion

This decision presents an array of opportunities to change D&O coverage. For insurers seeking to avoid the onslaught of FDIC suits, it is a guidepost for how to limit coverage under D&O policies going forward, without the need to resort to a regulatory exclusion that lacks market appeal. For insureds, this cautionary tale could open the doors for them to negotiate the specific terms of what was traditionally considered a “standard” exclusion. For the FDIC, it presents an enforcement challenge; the more likely future coverage decisions and policy language are shaped by this holding to preclude coverage the less cost effective such suits will become, which will factor heavily into the FDIC's decision to bring suit. With the FDIC taking over 485 failed banks since 2008, coverage stakes are high and we will have to see who makes the first move.

Allyson McKinstry is an associate in the Insurance/Reinsurance group at Crowell & Moring LLP's New York office.

The 2008 financial crisis might be behind us, but coverage disputes stemming from the flood of lawsuits brought by the Federal Deposit Insurance Corporation (“FDIC”) against directors and officers of failed banks are far from over. With the FDIC filing lawsuits against more than 1,200 individuals for directors and officers liability between January 2009 and August 2015, coverage continues to be hotly contested across the country, with the most heavily litigated issue being whether a lawsuit commenced by the FDIC as a receiver of a failed bank is precluded by the “insured v. insured” exclusion commonly contained in Directors and Officers liability (“D&O”) policies. See FDIC, http://1.usa.gov/1NdXuA1.

The application of this exclusion, which precludes coverage for claims based on suits brought by one insured against another, has yielded mixed results. Although some courts have held that insured v. insured exclusions preclude coverage because the FDIC “steps into the shoes” of the company when it brings lawsuits against directors and officers in its capacity as a receiver; other courts, representing a growing consensus favoring coverage, have held that the application of the exclusion in the FDIC context is ambiguous and must be construed against the insurer. However, a recent decision by the U.S. Court of Appeals for the Tenth Circuit departs from the coverage trend and raises issues that are likely to change the D&O landscape going forward.

Application of D&O Exclusions to FDIC Lawsuits

When a federally insured bank fails, the FDIC will step in to cover losses and act as a receiver. Emily S. May, Bank Directors Beware: Post-Crisis Bank Director Liability, 19 N.C. Banking Inst. 31, 32 (2015). The FDIC will investigate the bank's failure and is authorized to bring professional liability suits against the failed bank's directors and officers. Id. at 32-33. In determining whether to bring a lawsuit, the FDIC considers not only the likelihood of success on the merits, but also the cost of bringing suit and potential recovery. Id. at 33-34. On the latter point, the availability of D&O insurance is critical to determining whether commencing a lawsuit is cost-effective. Id.

A D&O policy is intended to protect corporate officers and directors from losses incurred in connection with claims made against them for acts or omissions committed in their official capacities. D&O insurance is divided primarily into A, B and C Side coverage. Lawrence J. Trautman & Kara Altenbaumer-Price, D & O Insurance: A Primer, 1 Am U Bus L Rev 337, 346 (2012). Side A “responds when a company cannot indemnify the losses of individual officers and directors, either due to insolvency or when [legally prohibited].” Id. Side B “reimburses a company for its indemnification of the losses of individual officers and directors.” Id. Side C “is designed to pay the losses directly sustained by a company for its own liability.” Id. at 347.

Insured v. Insured Exclusion

The insured v. insured exclusion began appearing in D&O policies in the late 1980s in response to several lawsuits by insured corporations against their own directors to recoup operations losses during the savings and loan crisis. See Biltmore Assocs., LLC v. Twin City Fire Ins. Co. , 572 F.3d 663, 668 (9th Cir. 2009). This exclusion, which has become standard in D&O policies, is designed to deter collusive suits brought by companies to recoup ordinary business losses, as well as prevent coverage for boardroom in-fighting, by excluding losses incurred in connection with claims made between individuals and entities that fall within the policy's definition of “insured.” See Level 3 Commc'ns, Inc. v. Fed. Ins. Co. , 168 F.3d 956, 957-58 (7th Cir. 1999).

Altough the specific language may vary, a typical insured v. insured exclusion provides:

The insurer shall not be liable for Loss ' on account of any Claim made against any Insured … brought or maintained by or on behalf of any Insured or Company ' in any capacity, except: [a] Claim that is a derivative action brought or maintained on behalf of the Company by one or more persons who are not Directors or Officers and who bring and maintain such Claim without the solicitation, assistance or active participation of any Director or Officer.

St. Paul Mercury Ins. Co. v. Hahn, No. SACV-13-0424, 2014 WL 5369400, at *1-2 (C.D. Cal. Oct. 8, 2014) (emphasis added).

The definition of “insured” regularly includes directors, officers and the company, thereby precluding coverage for direct suits between the insured company and its insured directors and officers and, depending on the policy language, could also extend to suits involving a broad range of individuals. 4 Law and Prac. of Ins. Coverage Litig. ' 47:33 (2015). The policy may also carve out exceptions for suits not typically considered “friendly” or collusive, such as: 1) shareholder derivative claims (as illustrated in the sample language above); and 2) wrongful termination claims by an insured director, officer or employee. Id.

The majority of litigation surrounding the insured v. insured exclusion centers on whether a third party acting on behalf of the insured company ' i.e., corporate receivers, regulatory agencies, or trustees in bankruptcy ' are considered an “insured” under the policy and therefore subject to the exclusion. The applicability of this exclusion was initially met with mixed results, including in the context of lawsuits brought by the FDIC as receiver of a failed bank.

Regulatory Exclusion

Around the same time, the D&O market developed the “regulatory exclusion,” which is specifically designed to preclude coverage for claims by a government agency against directors and officers. This exclusion can be broad or specific, but typically precludes coverage for losses resulting from claims “based upon or attributable to any action or proceeding brought by or on behalf of” a governmental or regulatory agency. Id. at ' 47:40.

Courts have uniformly rejected attempts by government agencies to challenge this exclusion as against public policy, or as ambiguous. See, e.g., F.D.I.C. v. Am. Cas. Co. of Reading, Pa. , 995 F.2d 471, 473-74 (4th Cir. 1993) (upholding parties' freedom to contract in the absence of an express public policy on point); Am. Cas. Co. v. Beranek , 862 F. Supp. 322, 327-28 (D. Kan. 1994) (finding the term “regulatory agency” to be unambiguous); St. Paul Fire & Marine Ins. Co. v. F.D.I.C. , 968 F.2d 695, 701 (8th Cir. 1992) (holding that exclusion is not ambiguous as to whether it applies to direct versus secondary actions). Notably, despite the success in upholding this exclusion, market competition has rendered this exclusion relatively rare in D&O policies.

Case Law

The issue presented in virtually all cases analyzing the applicability of the insured v. insured exclusion to actions brought by the FDIC, is whether the FDIC is bringing the lawsuit “by or on behalf of” an insured. Insurers, typically relying on the Supreme Court's opinion in O'Melveny & Myers v. F.D.I.C , argue that the “FDIC as receiver steps into the shoes of the failed [bank], obtaining the rights of the insured depository institution that existed prior to receivership” and since such a claim is not covered if brought by a bank, it is likewise not covered when brought by the FDIC. 512 U.S. 79, 86 (1994) (internal quotations and citation omitted). Conversely, the FDIC and insureds contend that the FDIC has a unique role that requires it to step into a number of different pairs of shoes ' “as it were the wingtips of the Bank, the pumps of any stockholder, the loafers of any accountholder, and the tennis shoes of any Bank depositor” ' and because it is suing to recoup losses of depositors and other creditors, not its own, it is not bringing the type of collusive suit the exclusion was designed to preclude. St. Paul Mercury Ins. Co. v. F.D.I.C. , 774 F.3d 702, 707 (11th Cir. 2014). Often, another factor in finding coverage is the inclusion of a shareholder derivative exception, which courts have extended to FDIC actions because the FDIC succeeds to shareholders' claims by operation of law, reasoning that the exception should apply regardless of who brings the claims. Hahn, 2014 WL 5369400, at *5.

Despite some initial willingness to apply the insured v. insured exclusion to suits brought by the FDIC, see, e.g., Gary v. Am. Cas. Co. of Reading, Pa. , 753 F. Supp. 1547, 1554-56 (W.D. Okla. 1990), the majority of decisions issued in the wake of the 2008 financial crisis have deemed the exclusion ambiguous and construed the policy in favor of coverage. See, e.g., W Holding Co., Inc. v. Chartis Ins. Co.-Puerto Rico , 904 F. Supp. 2d 169 (D.P.R. 2012); Progressive Cas. Ins. Co. v. F.D.I.C. , 926 F. Supp. 2d 1337, 1339'40 (N.D. Ga. 2013). Indeed, even more recent attempts to preclude coverage have been overturned in light of this trend favoring coverage.

For example, in St. Paul Mercury Insurance Company v. F.D.I.C., the district court initially held that the insured v. insured exclusion unambiguously precluded coverage for actions brought “by or on behalf of” the FDIC. In rejecting the “multiple shoes” argument, the district court observed that “it is exceptionally rare for someone other than the FDIC ' to raise a claim on behalf of a federally insured bank,” and since “the only party that could bring an action on a federally insured bank's behalf is the FDIC,” the exclusion unambiguously prescribed FDIC actions. 968 F. Supp. 2d 1236, 1242 (N.D. Ga. 2013). The Eleventh Circuit Court of Appeals reversed, finding the exclusion was ambiguous because it was susceptible to more than one reasonable interpretation, and specifically stated “the most compelling argument [in favor of ambiguity] is that courts who have addressed similarly worded insured v. insured exclusions have reached different results.” 774 F.3d at 709-10. Following this decision, it appeared the coverage trend would certainly continue.

However, in the most recent battle over the application of the insured v. insured exclusion, the Tenth Circuit, in BancInsure, Inc. v. F.D.I.C., departed from the coverage trend and affirmed a district court's ruling that the FDIC's claims against the former directors of Columbian Bank & Trust (“Columbian”) were unambiguously barred by the insured v. insured exclusion. 796 F.3d 1226 (10th Cir. 2015).

BancInsure sought a declaratory judgment that it owned no duty of coverage under the policy it issued to Columbian for claims the FDIC asserted against its former directors. That policy contained both an insured v. insured exclusion and a regulatory exclusion. The insured v. insured exclusion included a carve-out for shareholder derivative suits, and provided:

Insurer shall not be liable to make any payment for Loss in connection with any Claim made against the Insured Persons based upon, arising out of, relating to, in consequence of, or in any way involving ' a Claim by, or on behalf of, or at the behest of, any other Insured Person, the Company, or any successor, trustee, assignee or receiver of the Company. '

Id.' at 1231.

The regulatory exclusion excluded coverage for any action “brought by or on behalf of any ' deposit insurance organization” including a legal action brought by a “receiver.” Id. However, Columbian purchased a “regulatory exclusion endorsement,” which amended the policy by deleting the regulatory exclusion and setting a maximum aggregate liability cap of $5 million for claims brought by “any federal or state regulatory ' agency or deposit insurance organization.” Id. The endorsement proclaimed: “Nothing herein contained shall be held to vary, waive or extend any of the terms, conditions, provisions, agreements or limitations of the above mentioned policy other than as above stated.” Id. According to BancInsure's marketing materials, the endorsement was a “broadening feature” and its internal documents deemed FDIC receiver claims “regulatory” in nature. Id.

In reaching its decision, the court relied exclusively on the language of the insured v. insured exclusion, which expressly encompassed claims brought by a “receiver of the Company.” Id. at 1234. The court rejected the defendant directors' argument that other provisions in the policy superseded or created an ambiguity as to the application of the exclusion, including: 1) the carve-out for shareholder derivative suits, which is frequently relied on by courts to find ambiguity; and 2) the endorsement removing the regulatory exclusion from the policy in order to specifically extend coverage to actions brought by a “deposit insurance organization.” Id. at 1238. The court likewise did not entertain any evidence of the parties' intent to provide coverage for FDIC suits, and refused to judicially estop BancInsure from claiming actions by the FDIC were not covered under the policy, based on its answers to interrogatories in prior litigation. Id. at 1239. Ultimately, the word “receiver” in the insured v. insured exclusion was dispositive of the issue, despite overwhelming evidence that the parties' intended for the policy to cover losses stemming from actions brought by the FDIC.

Changing the Landscape

The import of the BancInsure decision is less about its holding, and more about the doubts it casts on the industry's understanding and expectations of whether FDIC suits will be precluded under a D&O policy. Despite the mixed savings-and-loan era case law, the industry has acknowledged the post-2008 trend of finding coverage for FDIC suits where they are neither expressly precluded nor of the type that should be. Arguably, the parties' in BancInsure anticipated the same result ' the insured not only paid to remove the regulatory exclusion, which was the only universally accepted bar to FDIC suits, but also paid for $5 million in coverage for claims brought by “deposit insurance organization.” The policy likewise contained other indicia of broad coverage, such as a carve-out for shareholder derivative suits, and there was evidence the insured shared this understanding. However, the inclusion of just one word in the insured v. insured exclusion derailed the parties' expectations of coverage.

Conclusion

This decision presents an array of opportunities to change D&O coverage. For insurers seeking to avoid the onslaught of FDIC suits, it is a guidepost for how to limit coverage under D&O policies going forward, without the need to resort to a regulatory exclusion that lacks market appeal. For insureds, this cautionary tale could open the doors for them to negotiate the specific terms of what was traditionally considered a “standard” exclusion. For the FDIC, it presents an enforcement challenge; the more likely future coverage decisions and policy language are shaped by this holding to preclude coverage the less cost effective such suits will become, which will factor heavily into the FDIC's decision to bring suit. With the FDIC taking over 485 failed banks since 2008, coverage stakes are high and we will have to see who makes the first move.

Allyson McKinstry is an associate in the Insurance/Reinsurance group at Crowell & Moring LLP's New York office.