The 'I' Of The Storm: Insured vs. Insured Exclusion Found To Be Ambiguous

When banks fail, the FDIC generally steps in as receiver. Seemingly inevitably, these bank failures result in claims by the FDIC, acting as receiver for the failed bank, its creditors, its shareholders, etc.

In recent years, many D&O insurers have asserted that the Insured vs. Insured ("IvI") Exclusion bars coverage for claims asserted by the FDIC against former officers and directors. Those efforts have been met with mixed success, with courts increasingly ruling in recent decisions that the IvI Exclusion does not exclude claims asserted by the FDIC against individual insureds (i.e., former officers and directors of the bank). See, e.g., St. Paul Mercury Ins. Co. v. Hahn, No. SACV 13-0424 AG RNBX, 2014 WL 5369400, at *3 (C.D. Cal. Oct. 8, 2014) (holding that IvI exclusion is ambiguous as applied to FDIC claims); W. Holding Co. v. Chartis Ins. Co. Puerto Rico, 904 F. Supp. 2d 169, 182-84 (D.P.R. 2012) (same). In a very recent decision, the Court of Appeals for the Eleventh Circuit joined this trend, finding the exclusion ambiguous as it applies to claims asserted by the FDIC. See St. Paul Mercury Ins. Co. v. Federal Deposit Ins. Co., No. 13-14228 (11th Cir. Dec. 17, 2014) ("St. Paul v. FDIC"). http://media.ca11.uscourts.gov/opinions/pub/files/201314228.pdf

While the language of IvI exclusions varies somewhat, they commonly preclude coverage for claims "brought or maintained by or on behalf of" the insured company against individual insureds. Insurance carriers argue that the exclusion bars coverage because the FDIC "stands in the shoes of" the bank, and therefore, in the insurers' view, must be asserting claims "on its behalf." The insurers' argument to this effect is described in detail in the Eleventh Circuit's opinion in St. Paul v. FDIC at pp. 10-11. As practitioners in this area know, a few courts have agreed with the insurers' argument (including the trial court in FDIC v. St. Paul), holding that because the FDIC, acting as receiver, asserts (at least in part) claims that would have belonged to the corporation (e.g., claims against former directors and officers for malfeasance), the IvI exclusion bars coverage. See, e.g., St. Paul Mercury Ins. Co. v. Miller, 968 F. Supp. 2d 1236,1243-44 (N.D. Ga. 2013) (holding exclusion applies); and Fid. & Deposit Co. of Md. v. Conner, 973 F.2d 1236, 1244-45 (5th Cir. 1992) (same).

This approach is wrong for at least two reasons. First, this overly simplistic analysis goes against the plain language...