{"id":2761,"date":"2015-02-10T23:05:09","date_gmt":"2015-02-10T23:05:09","guid":{"rendered":"http:\/\/www.joneslemongraham.com\/blog\/?p=2761"},"modified":"2021-12-21T20:02:52","modified_gmt":"2021-12-21T20:02:52","slug":"iowa-federal-court-holds-unambiguous-insured-vs-insured-exclusion-doesnt-apply-to-fdic-suit-as-banks-receiver-providing-a-new-take-on-an-old-issue-and-no-hog-wash","status":"publish","type":"post","link":"https:\/\/www.joneslemongraham.com\/blog\/iowa-federal-court-holds-unambiguous-insured-vs-insured-exclusion-doesnt-apply-to-fdic-suit-as-banks-receiver-providing-a-new-take-on-an-old-issue-and-no-hog-wash\/","title":{"rendered":"Iowa federal court holds “unambiguous” insured-vs-insured exclusion doesn’t apply to FDIC suit as bank’s receiver–providing a new take on an old issue and no “hog wash”"},"content":{"rendered":"

by Christopher Graham<\/a> and Joseph Kelly<\/a><\/p>\n

\"577604_d3efbef6\"<\/a><\/p>\n

Today\u2019s post is about a federal case in Iowa, Progressive Casualty Ins. Co. v. FDIC, et al<\/em>, Case No. C 12-4041-MWB (N.D. Iowa Jan. 23 2015)<\/a>, which explains the happy hog pictured above. But you won\u2019t hear any squeals of joy from the insurer about the decision in this case.<\/p>\n

Here\u2019s the scenario:<\/strong> D&O policy is issued without a regulatory exclusion; bank fails; FDIC is appointed receiver; it sues directors and officers for negligence and otherwise; they ask D&O insurer to pay for a defense; insurer denies coverage based on an insured-versus-insured exclusion, but advances defense costs while reserving rights; coverage litigation follows.<\/p>\n

The decision:<\/strong> This Iowa court held that the insured-versus-insured exclusion did not apply<\/em> to the FDIC\u2019s Claim. It granted a summary judgment for the FDIC and directors and officers, finding that (1) the exclusion\u2019s \u201con behalf of . . . the Company\u201d wording is \u201cunambiguous,\u201d<\/em> (2) the exclusion\u2019s purpose\u2014as shown by the wording\u2014is to except collusive suits from coverage, (3) there was no evidence of collusion, (4) there\u2019s no ambiguity merely because there are conflicting court decisions about what the exclusion means, and (5) with no ambiguity, there\u2019s no need to consider \u201cextrinsic\u201d evidence. Those five points set this case apart from other recent cases addressing the exclusion, including some finding similar wording ambiguous.<\/p>\n

The wording:<\/strong> The exclusion provided:<\/p>\n

\n

The Insurer shall not be liable to make any payment for Loss in connection with any Claim<\/em> by, on behalf of<\/em>, or at the behest of the Company<\/em>, any affiliate of the Company or any Insured Person in any capacity except where such Claim is brought and maintained:<\/p>\n

(1) in the form of a cross-claim or third-party claim for contribution or indemnity which is part of and results directly from a Claim which is not otherwise excluded by the terms of the Policy;<\/p>\n

(2) by an Insured Person solely as a customer of the Company; provided such Claim is brought independently of, and totally without the solicitation, assistance, participation, or intervention of any other Insured; or<\/p>\n

(3) by a security holder of the Company as a derivative action on behalf of the Company or such affiliate; provided such Claim is brought independently of, and totally without the solicitation, assistance, participation, or intervention of any Insured of any affiliate of the Company. (Emphasis added).<\/p>\n<\/blockquote>\n

The court\u2019s explanation:<\/strong> The court explained its decision against the insurer as follows:<\/p>\n

(1) The FDIC\u2019s Claim was not a Claim \u201cby the Company\u201d<\/em>. Company as defined in the policy didn\u2019t include a receiver. When the insurer addressed receivers or successors, moreover, it used explicit wording. As the court pointed out, the policy definition of \u201cFinancial Impairment\u201d included \u201cappointment of any state or federal official, regulatory agency or court of any receiver . . . .\u201d The policy by express language also extended coverage to \u201clegal representatives or assigns\u201d of Insured Persons. \u201cThus, when the [bank\u2019s] Policy intended to address coverage issues relating to \u2018receivers\u2019 and other successors to the Bank, it expressly identified such successors.\u201d<\/p>\n

(2) The FDIC\u2019s Claim also was not by \u201cany affiliate of the Company\u201d and wasn\u2019t by an Insured Person<\/em>. The FDIC as receiver wasn\u2019t an affiliate. Nor was the Claim by any Insured Person\u2014obviously! The insurer didn\u2019t argue otherwise on either point.<\/p>\n

(3) The FDIC\u2019s Claim was not \u201cat the behest of the Company.<\/em>\u201d That phrase was undefined\u2014so the dictionary definition\u2014a \u201ccommand, injunction or bidding\u201d\u2014controlled. \u201cThe insurer has not asserted as an undisputed fact any involvement of the Bank in commanding or bidding the FDIC-R to bring its claims against the [directors and officers],\u201d said the court. It didn\u2019t even argue the FDIC\u2019s Claim was \u201cat the behest of the Company.\u201d<\/p>\n

(4) The Claim was not \u201con behalf of . . . the Company<\/em>. Without a policy definition, an Oxford dictionary definition controlled\u2014defining \u201con behalf of\u201d as, \u201cOn the part of [another], in the name of, as the agent or representative of, on account of, for, instead of (With the notion of official agency)\u201d (brackets in original). The FDIC\u2019s Claim, said the court, wasn\u2019t \u201con behalf of . . . the Company . . . ,\u201d as that phrase is commonly understood based on that standard definition. There also was \u201cno basis to graft onto this interpretation of \u2018on behalf of . . . the Company\u2019 an action by a receiver or other successor.\u2019\u201d Indeed, \u201cwhen the [bank\u2019s] Policy intended to address coverage issues relating to \u2018receivers\u2019 and other successors to the Bank, it expressly identified such successors.\u201d<\/p>\n

(5) Policy wording demonstrated that \u201cthe intent of the \u2018insured-versus-insured exclusion\u2019 was to preclude collusive suits by and among the Company and Insured Persons, such as the [directors and officers], to recover for mismanagement.\u201d<\/em> \u201cThis intent is apparent from the interplay between the definition of Claim, inter alia, as a civil lawsuit against an Insured Person or against the Company\u2019 and the \u2018insured vs. insured exclusion,\u2019 which bars coverage \u2018by, on behalf of, or at the behest of\u2019 the same entities.\u201d<\/p>\n

(6) The FDIC\u2019s Claim was not \u201ccollusive\u201d<\/em>. \u201c[I]t was brought . . . well after [the] Bank was closed\u201d and under the FDIC\u2019s \u201cindependent statutory authority\u201d; and the insurer \u201cidentified no evidence to suggest or show beyond dispute that the [FDIC as receiver\u2019s] lawsuit involved the solicitation, assistance, involvement, or participation of anyone from the Bank in bringing or maintaining the claims.\u201d<\/p>\n

(7) O’Melveny & Meyers v. FDIC<\/em>, 512 U.S. 79 (1994)<\/a>, the insurer\u2019s principal authority, was irrelevant. Like other insurers, this insurer argued that under O’Melveny<\/em>, the FDIC as receiver \u201csteps into the shoes\u201d of a failed bank and, thus, its Claim is \u201con behalf of\u201d the Company (the bank) and within the Insured-versus-insured exclusion. But, as the Iowa court explained:<\/p>\n

a. O’Melveny<\/em> didn\u2019t address a D&O policy, let alone an insured-versus-insured exclusion, and wasn\u2019t even an insurance case;<\/p>\n

b. Equating \u201con behalf of\u201d with \u201cstepping into the shoes\u201d as used in O’Melveny was a \u201chypertechnical,\u201d rather than \u201creasonable viewpoint\u201d as required under Iowa law; and<\/p>\n

c. O’Melveny<\/em> didn’t equate “steps into the shoes” with “on behalf of\u201d, didn\u2019t address what \u201con behalf of\u201d means or even the word \u201cbehalf\u201d, didn\u2019t hold (as the insurer argued) that \u201cthe claims by the FDIC are necessarily claims of or that belonged to a failed bank\u201d, didn\u2019t address federal law providing that the FDIC succeeds not only to the rights of the failed institution, but to those \u201cof any stockholder, member, accountholder, depositor, officer, or director of such institution with respect to the institution and the assets of the institution\u201d, and didn\u2019t consider whether federal law authorized a suit by the FDIC on its own behalf, rather than just by \u201cstepping into the shoes\u201d of a failed bank.<\/p>\n

(8) There is no ambiguity merely because there are conflicting court decisions about what the exclusion means and, thus, there is no need to consider extrinsic evidence.<\/em> This was the opposite of what the Eleventh Circuit concluded in St. Paul Mercury Ins. Co. v. FDIC, et al<\/em>, Case No. 13-14228 (11th Cir. 2014)<\/a>, decided under Georgia law and involving the scenario of this Iowa case. The Georgia district court in St. Paul Mercury<\/em> held, moreover, that virtually identical \u201con behalf of . . . the Company\u201d wording unambiguously excluded<\/em> coverage for the FDIC\u2019s suit\u2014the opposite of this Iowa federal court\u2019s holding finding coverage<\/em>; and it refused to consider extrinsic evidence or allow further discovery. The Eleventh Circuit found ambiguity and, therefore, reversed and returned the case to the Georgia district court for consideration of evidence that may resolve it. It also explained that \u201cthe most compelling argument\u201d for ambiguity was \u201cthat the courts which have addressed similarly worded insured v. insured exclusions have reached different results.\u201d<\/p>\n

The Iowa court attributed the Eleventh Circuit\u2019s decision to differences between Iowa and Georgia law about reading insurance policies and explained further: \u201cWhile I acknowledge that different courts have reached different conclusions on whether or not the \u2018insured vs. insured exclusion\u2019 bars coverage for claims by the FDIC, I do not believe that the difference of opinion establishes ambiguity<\/em> as to the meaning of the exclusion, even if it creates some uncertainty about the construction<\/em> or legal effect of the exclusion.\u201d<\/p>\n

Other IvI arguments:<\/strong> The parties disputed whether the shareholder derivative exception to the IvI exclusion applied; in arguing for the exception, the FDIC stressed that its claims as receiver were at least in part on behalf of shareholders, as provided by statute.<\/p>\n

The parties also disputed whether extrinsic evidence showed that the exclusion \u201cwas intended to bar claims such as the [FDIC as receiver] has brought against the D&O Defendants and whether extrinsic evidence can be considered at all\u201d; \u201cwhether the \u2018reasonable expectations\u2019 of the D&O Defendants demonstrate that the \u2018insured vs. insured exclusion\u2019 does not apply and whether such \u2018reasonable expectations\u2019 are relevant\u201d; and \u201cwhether the industry practice demonstrates that \u2018regulatory exclusions,\u2019 rather than \u2018insured vs. insured exclusions,\u2019 are used when the insurer intends to bar coverage for claims by the [FDIC as receiver] and whether any evidence concerning \u2018regulatory exclusions\u2019 is relevant, where [the bank\u2019s] Policy contained no such exclusion.\u201d<\/p>\n

But the court didn\u2019t address any of the above arguments as it was unnecessary given its holding.<\/p>\n

“Investment loss carve-out”:<\/strong> The Iowa court also addressed an “investment loss carve-out” in the Loss definition, holding as a matter of law against the insurer and for the FDIC and directors and officers that the carve-out didn\u2019t apply. We plan to cover this part of the court\u2019s decision soon in a separate post.<\/p>\n

What\u2019s different about this case:<\/strong> The Iowa court\u2019s decision about the exclusion is distinct from other recent cases in that it held the exclusion unambiguously inapplicable to FDIC claims as receiver.<\/p>\n

While the Iowa court attributed the Eleventh Circuit\u2019s different result in St. Paul Mercury<\/em> to \u201cdifferences\u201d between Iowa and Georgia law for determining the meaning of policy wording, a close reading of the law cited in the opinions suggests those differences really were matters of form rather than substance. At least from the opinions, it doesn\u2019t appear that the FDIC argued that the insured-versus-insured exclusion was unambiguous<\/em>. Neither the Eleventh Circuit, nor Georgia district court opinions in St. Paul Mercury<\/em> address the meaning of \u201con behalf of\u201d in any way similar to the Iowa court. Whether the policy, outside of the exclusion, addressed receivers or successors explicitly like the policy in the Iowa case isn\u2019t stated in the opinions.<\/p>\n

In our prior blog post here<\/a>, about W Holding Company, et al v. AIG Insurance Company \u2013 Puerto Rico<\/em>, Case No. 12-2008 (1st Cir. Mar. 31, 2014), the directors and officers won the initial \u201cIvI\u201d exclusion round as the insurer by preliminary injunction was required to advance their defense fees, albeit without waiving the right to repayment. But the First Circuit didn\u2019t decide whether the exclusion applied to FDIC\u2019s claims, only that there was a \u201clikelihood\u201d of a \u201cremote possibility of coverage\u201d; that\u2019s all that was required in considering a preliminary injunction motion. There apparently was no argument that the IvI exclusions was unambiguous and no need to make the argument.<\/p>\n

In our prior blog posts here<\/a> about Hawker v. Bancinsure<\/em>, Case No. 1:12-cv-01261 (E.D. Ca. Apr. 7, 2014), and here<\/a> about Bancinsure v. McCaffree, et al.<\/em>, Case No. 12-2110-KHV (D. Kan. Feb. 27, 2014), the insurer won an initial round that the IvI exclusion applied, but the exclusion explicitly referenced a Claim by a \u201creceiver.\u201d Ironically, that insurer, Bancinsure, now known as Red Rock Insurance Co., later entered into a receivership itself! With the \u201creceiver\u201d included in the IvI exclusion, the FDIC obviously couldn\u2019t make the same kind of argument as in the Iowa case.<\/p>\n

In St. Paul Mercury Insurance Co. v. Hahn<\/em>, Case # SACV 13-0424 AG (RNBx) (October 8, 2014 C.D. Cal.), a California federal court addressed \u201cby or on behalf of\u201d wording in a scenario like the Iowa case and granted a summary judgment for the FDIC that the IvI exclusion was inapplicable. Like the Iowa court, the Hahn<\/em> court found O\u2019Melveny<\/em> irrelevant. Unlike the Iowa court, the Hahn<\/em> court held that the exclusion was ambiguous, rather than unambiguous. But, under California law, ambiguity meant that the policy must be construed against the D&O insurer. So the insurer still lost.<\/p>\n

From the opinion in Hahn<\/em>, it appears that the FDIC didn\u2019t argue that the exclusion was unambiguous. Like the Eleventh Circuit, the Hahn<\/em> court found the exclusion ambiguous<\/em> at least in part because there were conflicting decisions about whether it applied to claims by the FDIC and similar receivers. As the Hahn<\/em> court stated, \u201cthe question presented in this case has been litigated numerous times over many years across the country.\u201d And, \u201cThere can be little doubt that repeated disputes over the IvI exclusion have placed insurers on notice that it is ambiguous<\/em>\u201d (Emphasis added).<\/p>\n

After highlighting the FDIC\u2019s statutory power as receiver to sue on behalf of a failed bank\u2019s shareholders, the Hahn<\/em> court also stated that it \u201cwas unconvinced that the Shareholder [Derivative] Exception [to the IvI exclusion] does not apply to FDIC-R\u2019s [(as receiver)] claims.\u201d It thus \u201cconstrue[d] the IvI Exclusion to allow coverage for [those] claims . . . .\u201d The Hahn<\/em> court stated, \u201cThe Shareholder Exception \u2018evidences an intent to place on insurer the risk for actions against the D&O\u2019s based upon allegations of mismanagement, waste, fraud, or abuse of a failed institution\u2019\u201d (quoting FDIC v Bancinsure<\/em>, No. CV 12-09882, 2014 U.S. Dist. LEXIS, at * 26 (C.D. Cal. June 16, 2014)). The Iowa court had no need to address this issue.<\/p>\n

The uncertainty of what a D&O policy gives bank directors and officers when a bank fails<\/em><\/strong>: Except when there were IvI exclusions explicitly addressing receiver claims, no insurer won outright any of the cases discussed above; but the FDIC and directors and officers won two of them outright on summary judgment. Any D&O insurer relying on an IvI exclusion to exclude FDIC claims as receiver may be in for an unpleasant surprise. But, as these cases show, brokers and bank risk managers, directors, and officers can\u2019t necessarily count on D&O insurers to step up when disaster hits and the FDIC sues\u2014even absent a regulatory exclusion or explicit IvI wording addressing receiver Claims. Isn\u2019t it time for a change to how D&O policies address this issue? We\u2019ll have more on this on a future post.<\/p>\n

Tags<\/strong> Iowa, directors and officers liability insurance, D&O insurance, insured-versus-insured exclusion, IVI exclusion, derivative suit exception, insured versus insured exclusion, FDIC, FDIC-R, failed bank, directors, officers , investment loss carve out, Loss, community banks, regulatory exclusion, collusion, Company defined, \u201con behalf of”<\/p>\n","protected":false},"excerpt":{"rendered":"

by Christopher Graham and Joseph Kelly Today\u2019s post is about a federal case in Iowa, Progressive Casualty Ins. Co. v. FDIC, et al, Case No. C 12-4041-MWB (N.D. Iowa Jan. 23 2015), which explains the happy hog pictured above. But you won\u2019t hear any squeals of joy from the insurer about the decision in this […]<\/p>\n","protected":false},"author":6,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[3],"tags":[],"_links":{"self":[{"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/posts\/2761"}],"collection":[{"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/comments?post=2761"}],"version-history":[{"count":9,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/posts\/2761\/revisions"}],"predecessor-version":[{"id":2796,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/posts\/2761\/revisions\/2796"}],"wp:attachment":[{"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/media?parent=2761"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/categories?post=2761"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/tags?post=2761"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}