By Kevin M. LaCroix, Esq., Executive Vice President, OakBridge Insurance Services
On February 5, 2013, in a detailed opinion exploring the nuances of a D&O policy's extended reporting period provisions, Western District of North Carolina Judge Henry Herlong Jr. determined that the directors of the failed Bank of Ashville of Asheville, North Carolina timely provided their D&O insurer notice of the FDIC's lawsuit against them as the failed bank's receiver. Practitioners in the D&O arena will want to read this opinion, a copy of which can be found here, for its examination of the interactions between the policy's "basic" 60-day extended reporting period and its 12-month "supplemental" extended reporting period. (Click here for Lexis enhanced version of the decision).
The Bank of Asheville failed on January 21, 2011. As discussed here, on December 29, 2011, the FDIC as the failed bank's receiver filed a lawsuit in the Western District of North Carolina against seven former directors of the bank. On December 29, 2011, the directors provided the bank's holding company's D&O insurer with notice of the FDIC's lawsuit.
The D&O policy provided coverage for the period November 3, 2007 through November 3, 2010. However, the policy contains a 60-day "basic" extended reporting period, allowing for the notice of claims 60 days beyond the policy's expiration. The policy also provided for a 12-month "supplemental" extended reporting period that, by endorsement and upon payment of an extra premium charge, allows an additional 12 month reporting period. The "supplemental" extended reporting provision in the policy provided that "the supplemental Period starts when the Basic Extended Reporting Period ...ends."
Through a process that the court's opinion reviewed in detail, the bank purchased the 12-month supplemental extended reporting period prior to the expiration of the policy period. The endorsement the D&O insurer issued specified that the supplemental extended reporting period is "11-01-2010 - 11-01-2011."
After the directors submitted notice of the FDIC lawsuit to the insurer, the insurer took the position that the notice was untimely. The directors filed an action seeking a declaratory judgment that the insurer is required to pay defense costs and any settlements or judgments in the FDIC's lawsuit. The directors also alleged a claim for reformation of the policy. The parties filed cross-motions for summary judgment.
The February 5 Opinion
In his February 5 opinion, Judge Herlong granted the directors' motion for summary judgment, holding that the directors had timely provided notice of the FDIC lawsuit to the insurer prior to the expiration of the extended reporting period.
The dispute that the court considered came down to the question whether the 12-month supplemental extended reporting period ran from the end of the policy period of the policy or from the end of the policy's 60-day basic extended reporting period.
After a detailed review of the communications between the various parties involved in the acquisition of the supplemental extended reporting period, the court concluded that
Although the Policy provided a 60-day basic Extended Reporting Period automatically, [the D&O insurer] charged the Bank the maximum permitted under the Policy, a 200 percent premium, for the 12-months of Supplemental Extended Reporting Period coverage. However [the D&O insurer] erroneously used the dates November 3, 2010 to November 3, 2011. Thus under [the D&O insurer's] argument, the Bank paid for 12 months and received only 10 months of additional extended reporting coverage. Based on the foregoing, the court finds that the starting and ending dates of the Endorsement conflict with the terms of the Policy and is ambiguous because it is subject to different interpretations regarding the 60-day Basic Extended Reporting Period and the 12-month Supplemental Extended Reporting Period.
The D&O insurer argued that all of the documents and communications, including in particular the endorsement showing a supplemental extended reporting period from November 3, 2010 to November 3, 2011, "support a finding that the intent of the parties was to eliminate the 60-day Basic Extended Reporting Period."
Judge Herlong said that this "is an amazing argument, " asking the question "Why would the Bank forfeit the 60-day Basic Extended Reporting Period when the Policy specifically provides that if the Bank purchases an extended reporting period of 12 months, the 12-month period begins when the 60-day Basic Extended Reporting Period 'ends'?"
Judge Herlong concluded that "the evidence is clear that the Plaintiffs did not know or intend to forfeit the 60-day Basic Extended Reporting Period. To the contrary, the only inference that can be drawn from the evidence is that the Plaintiffs paid for 14-months of extended reporting coverage, which includes the 60-day Basic Extended Reporting Period and the 12-month Supplemental Extended Reporting Period." Judge Herlong granted the directors request to reform the schedule of the endorsement to allow for notice during the period January 3, 2011 to January 3, 2012, as a result of which the directors' notice to the insurer of the FDIC's lawsuit was timely.
Although this decision is fact intensive and is a reflection of the specific policy language involved, it nevertheless represents a cautionary tale that is worth heeding. D&O policies are complex contracts with a variety of parts that interact in myriad subtle ways. My review of the sequence of events here as well as a familiarity with the way that the transaction of the kind involved here are processed suggests to me that the parties really were not fully conscious of the possible complications arising from the interaction between the basic extended reporting period and the supplemental extended reporting period.
Once the dispute arose, the parties tried to argue over what had been intended, when in reality there had really been no intent, as the persons involved in the transaction may not have been conscious of the potential issue in the first place; the carrier provided a quote with and issued the supplemental extended reporting period endorsement with dates that did not take the 60-day basic extended reporting period into account. The bank and its representatives accepted the quote and placed the order for the supplemental extended reporting period without objecting that the specific period that the carrier proposed to provide did not take the 60-day basic extended reporting period into account. Accordingly, faced with a fundamentally ambiguous situation (but taking into account the policy's provision that the supplemental extended reporting period starts when the basic extended reporting period ends), the court construed the situation in the directors' favor.
I think anyone who has been involved in these kinds of situations can see how this happened. The policy allowed for a 12 month reporting period extension, the bank said it wanted a 12 month extension, and the carrier issued an endorsement that extended the reporting period 12 months. Because I can see how what happened here could happen, I am reluctant to try to draw conclusions too broadly, other than to say that this case does provide a lesson for us all on the need when modifying a policy to consider all of the ways that the proposed modification will affect the policy. On a much simpler level, the case does provide an important illustration of the ways that the policy's various extended reporting provisions interact. I want to make clear that in stating these conclusions here, I do not mean to suggest that I am finding fault with anyone's actions. As I said, I can see how this situation came about.
Read more at The D & O Diary.
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