{"id":2806,"date":"2015-02-26T03:52:13","date_gmt":"2015-02-26T03:52:13","guid":{"rendered":"http:\/\/www.joneslemongraham.com\/blog\/?p=2806"},"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","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\/","title":{"rendered":"Iowa federal court holds D&O policy’s “investment loss” exception to Loss definition didn’t apply to FDIC’s claim"},"content":{"rendered":"

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

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

Today\u2019s post is our second about a 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>. In our first post here<\/a>, we addressed how the court found that the FDIC\u2019s Claim as receiver fell outside of a D&O policy\u2019s insured-versus-insured exclusion. Today\u2019s post addresses an exception to the D&O policy\u2019s Loss definition, for investment loss\u2014which the court also concluded was inapplicable to the FDIC\u2019s Claim. Hog heaven for the FDIC and bank directors and officers!<\/p>\n

Here\u2019s the scenario:<\/em><\/strong> 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; although the D&O policy has no regulatory exclusion, the insurer denies coverage based on insured-versus-insured exclusion; it also cites an investment loss carve-out in the policy\u2019s Loss definition; it advances defense costs while reserving rights; coverage litigation follows.<\/p>\n

What\u2019s different about this failed bank case? (Allegations about investment decisions):<\/em><\/strong> Most failed bank cases have been about bad decisions relating to loans, many of which were real estate loans. But in this case, the FDIC\u2019s Claim as the court described it was \u201cbased primarily on its allegations that the D&O Defendants caused Vantus Bank to use $65 million\u2014120 percent of its core capital\u2014to purchase fifteen high risk collateralized debt obligations backed by Trust Preferred Securities (CDO-TruPS) without due diligence and in disregard and ignorance of regulatory guidance about the risks of and limits on purchase of securities, resulting in losses of some $58 million.\u201d<\/p>\n

What else is different? (An investment loss carve-out):<\/em><\/strong> Given the FDIC\u2019s focus on damages resulting from investing in Trust Preferred Securities, a central issue in the coverage litigation between the FDIC and directors and officers, on one hand, and the D&O insurer, on the other, was the effect of a part of the D&O policy\u2019s Loss definition, providing that \u201cLoss shall not include: . . . (6) the depreciation (or failure to appreciate) in value of any investment product, including securities, commodities, currencies, options or futures due to market fluctuation unrelated to any Wrongful Act.\u201d<\/p>\n

The D&O insurer\u2019s main argument:<\/em><\/strong> The D&O insurer cited the investment loss carve-out as an additional ground\u2014besides the insured-versus-insured exclusion\u2014for why the D&O policy supposedly didn\u2019t cover the FDIC\u2019s Claim. As stated in the court\u2019s decision, the D&O insurer argued \u201cthat the investment loss that FDIC-R seeks to recover is precisely the result of depreciation in the value of the securities and that depreciation was undeniably caused by market fluctuation, not by the alleged Wrongful Acts of the D&O Defendants.\u201d Under the D&O insurer\u2019s reading of the investment loss carve-out, \u201cLoss does not include \u2018depreciation . . . in value of any investment product,\u2019 where depreciation is \u2018due to market fluctuation,\u2019 and that \u2018market fluctuation\u2019 is \u2018unrelated to any Wrongful Act\u2019\u201d\u2014meaning the Wrongful Act had no \u201ccausal effect on the \u2018market fluctuation,\u2019\u201d as supposedly was the case in this instance.<\/p>\n

The Decision:<\/em><\/strong> \u201cAs a matter of law, the \u2018investment loss carve-out\u2019 does not bar coverage for the D&O Defendants for the FDIC-R\u2019s claims,\u201d said the court. The court rejected the D&O insurer\u2019s argument that the phrase \u201cunrelated to any Wrongful Act\u201d modifies the phrase \u201cmarket fluctuation\u201d and that \u201cmarket fluctuation\u201d \u201cunrelated to any Wrongful Act\u2019\u201d means a Wrongful Act having no \u201ccausal effect\u201d on the \u201cmarket fluctuation.\u201d<\/p>\n

According to the court, the phrase \u201cunrelated to any Wrongful Act\u201d instead could be read\u2014as FDIC and directors and officers argued\u2014to modify the phrase \u201cdepreciation (or failure to appreciate) in value of any investment product\u201d\u2014rather than \u201cmarket fluctuation\u201d; so \u201cdepreciation in value\u201d rather than \u201cmarket fluctuation\u201d would have to be \u201cunrelated to\u201d a Wrongful Act.<\/p>\n

Given that there\u2019s more than one reasonable way to read the investment loss carve-out, there\u2019s an ambiguity and, in those circumstances, the reading favorable to the insureds controls.<\/p>\n

As the court also explained:<\/p>\n

\n

Yet, even if “unrelated to any Wrongful Act” unambiguously modifies “market fluctuation,” the appropriate construction still requires coverage for the FDIC-R’s claims against the D&O Defendants, in light of the interpretation of “unrelated to” as unambiguously meaning “having no connection to.” The FDIC-R’s allegations, if proved, would establish some “connection” between the Wrongful Acts and the “market fluctuation” in the value of the securities at issue, even if the Wrongful Acts did not directly cause the “market fluctuation”\u2014for example, by artificially manipulating the value of the securities for a time or actually causing the crash in the value of the securities. Again, it is the interrelationship or interplay of the alleged Wrongful Acts and the “market fluctuation” that ultimately caused the damage to the Bank, where the alleged Wrongful Acts were purchasing and holding the securities in question, or too many of those securities, which were subject to such “market fluctuation.”<\/p>\n<\/blockquote>\n

Comments:<\/em><\/strong> If there\u2019s more than one reasonable way to read policy wording, it\u2019s not unusual for the policyholder\u2019s reading to control. The \u201crule\u201d that ambiguous policy wording gets construed against the insurer is an application of the broader rule applicable to contracts generally that ambiguous wording gets construed against the drafter. If the policy was a negotiated contract, perhaps a manuscript policy, with sophisticated parties on both sides, then the rule that wording gets construed against the insurer may not apply. In some instances, where there\u2019s ambiguity, extrinsic evidence may be considered to attempt to resolve an ambiguity. All of these issues are matters of state law.<\/p>\n

As this court pointed out, there was a \u201cdearth\u201d of case law on the investment loss carve-out. We couldn\u2019t find any case about it, other than this one.<\/p>\n

What has been more typical in bank D&O policies has been unpaid loan carve outs in loss definitions, which may apply, for example, to \u201cany unrepaid, unrecoverable or outstanding loan, lease or extension of any credit to any Affiliated Person or Borrower.\u201d<\/p>\n

And there\u2019s been a bit of litigation about those during the recent wave of failed bank litigation. See, for example, discussion here<\/a> in Kevin La Croix\u2019s D&O Diary.<\/p>\n

Tags:<\/em><\/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\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"

by Christopher Graham and Joseph Kelly Today\u2019s post is our second about a case in Iowa, Progressive Casualty Ins. Co. v. FDIC, et al, Case No. C 12-4041-MWB (N.D. Iowa Jan. 23 2015). In our first post here, we addressed how the court found that the FDIC\u2019s Claim as receiver fell outside of a D&O […]<\/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\/2806"}],"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=2806"}],"version-history":[{"count":4,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/posts\/2806\/revisions"}],"predecessor-version":[{"id":2809,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/posts\/2806\/revisions\/2809"}],"wp:attachment":[{"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/media?parent=2806"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/categories?post=2806"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/tags?post=2806"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}