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An inevitable part of the current wave of bank failures
has been the FDIC's filing of lawsuits against former directors and officers of
the failed institutions. And though the FDIC's initiation of this litigation
has been gradual, the lawsuits have now started to
accumulate in significant numbers. And just as this FDIC litigation was
perhaps inevitable once the banks started to faile, so too it was also perhaps
inevitable that the FDIC lawsuits would be accompanied by D&O insurance
As discussed below, the failed bank insurance coverage
lawsuits are now starting to arrive. If the initial cases are any indication,
one of the main coverage battlegrounds will be the typical D&O insurance
policy's Insured vs. Insured exclusion. Specifically, the question will be
whether the FDIC as receiver pursuing the failed bank's claim against the
bank's former directors and officers is acting as an "insured" under the
D&O policy so as to preclude coverage under the policy.
First up in this analysis is Michigan Heritage Bank of
Farmington Hills, Michigan, which failed on August 29, 2009 (about which refer here).
As discussed in greater detail here,
on August 8, 2011, the FDIC, as the bank's receiver, filed a lawsuits in the
Eastern District of Michigan against a single former officer of the bank.
What followed next is that on November 1, 2011, Michigan
Heritage's D&O insurer filed an action in the Eastern District of Michigan
seeking a judicial declaration that there is no coverage for the underlying
lawsuit or for the bank officer's defense expenses under the bank's D&O
policy. A copy of the insurer's declaratory judgment complaint can be found here.
Among other things, the carrier seeks a judicial
declaration that the policy's Insured vs. Insured exclusion precludes coverage
for the underlying lawsuit. The insurer's argument is that as the bank's
receiver, the FDIC is asserting the bank's own claims and is seeking to recover
the bank's losses. Therefore, the carrier contends, the FDIC's lawsuit is a
claim "by, on behalf of, or at the behest of" the bank, and as the bank and the
defendant loan officer are both insureds under the policy, the policy's Insured
vs. Insured exclusion precludes coverage.
A very similar sequence has also followed with respect to
Westernbank, of Mayaguez, Puerto Rico, which failed
on April 30, 2010. As reflected here, on
December 17, 2010, the FDIC, through its outside counsel, sent a letter to
Westernbank's D&O insurer asserting claims against the bank's former
directors and officers.
Westernbank's carrier, in turn, on October 6, 2011, filed
an action in local Puerto Rico court seeking judicial declaration that the
FDIC's claim is not covered under the bank's D&O policy. The complaint,
which is in Spanish, can be found here.
According to an October
14, 2011 press release from the carrier's outside counsel, the complaint
seeks a judicial declaration with respect to "the controversial and critical
question whether the FDIC-R can be deemed an insured under the Policy so as to
excuse [the carrier] from providing coverage."
Though these declaratory judgment actions have only just
been filed, they are in many ways a vestige of an earlier time. As I discussed
blog post way back in August 2008, when the current bank wave was only just
starting to unfold, the question whether the Insured vs. Insured exclusion
precluded coverage for claims by the FDIC as receiver against former directors
and officers of failed banks was hotly contested during the S&L crisis. As
I said in my earlier post, and as appears likely now, the Insured vs. Insured
exclusion could be a critical part of the failed bank insurance coverage
litigation during the current round of bank failures as well.
During the S&L crisis, where the FDIC had its
greatest success in overcoming the Insured vs. Insured exclusion was where it
was able to argue successfully that the Insured vs. Insured exclusion precluded
coverage only with respect to collusive lawsuits. Because it was able to show
that its claims and lawsuits were fully adversarial, it was able to establish
that the exclusion did not apply.
The FDIC was not uniformly successful in arguing that the
exclusion only precluded collusive claims, and there has in fact been some
intervening case law to the effect that the Insured vs. Insured exclusion
applies even when the underlying claim is not collusive.
It will in any event be interesting to see how these
coverage cases develop. The one thing that seems certain is that as the FDIC
failed bank litigation continues to accumulate, so too will the related
coverage litigations. Many of the related coverage suits likely will also
involve these same Insured vs. Insured issues.
Another issue that is likely to be litigated in coverage
cases arising out of FDIC failed bank litigation is the enforceabilty of the
so-called Regulatory Exclusion, which when present in the D&O policy
precludes coverage for claims brought by the FDIC and other regulators. Not all
policies implicated in the bank failures have these exclusions, but where they
are present they are likely to be relied upon by the carriers to contest
coverage. It is probably worth noting that these issues were fully litigated
during the S&L crisis and the courts generally found that the
regulatory exclusion precluded coverge for FDIC claims. My prior blog post
about the regulatory exclusion can be found here.
A good summary of the D&O insurance coverage
issues involved in FDIC failed bank litigation can be found here.
Special thanks to the several loyal readers who sent me
links to ths source documents referenced above.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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