In a decision that follows on the heels of a wave of divergent opinions from courts across the country, the 9th U.S. Circuit Court of Appeals held that an Insured v. Insured Exclusion (I v. I Exclusion) in a directors and officers liability policy barred coverage for the FDIC’s claims against a failed bank’s directors and officers. In FDIC v. BancInsure, Inc., the FDIC, as receiver for Security Pacific Bank, sought coverage under a D&O liability policy issued by Bancinsure for the FDIC’s claims against Security Pacific’s former directors and officers for losses arising from their negligence, gross negligence and breach of fiduciary duty.
BancInsure denied coverage for the FDIC’s claims pursuant to the policy’s I v. I Exclusion, which barred coverage for losses arising from legal actions brought “by, or on behalf of, or at the behest of” the bank, any person insured under the policy, or “any successor trustee, assignee or receiver” of Security Pacific, but excepted shareholder derivative lawsuits from the Exclusion. The FDIC argued that it does not constitute a “receiver” within the meaning of the policy’s I v. I Exclusion because, as receiver, it represents multiple interests, including those of Security Pacific’s shareholders.
The FDIC claimed that the shareholder exception evidences BancInsure’s intent to cover the FDIC’s claims against Security Pacific’s directors and officers because such claims are similar to those brought in shareholder derivative suits, and the FDIC succeeded the right of the shareholders to bring exactly those types of claims.
Reversing the U.S. District Court for the Central District of California, the 9th Circuit held that the I v. I Exclusion barred coverage for the entirety of the FDIC’s claim. The court found that causes of action against a corporation’s directors and officers belong to the corporation itself, not the shareholders. Because the FDIC’s claim against Security Pacific’s directors and officers was akin to a direct suit that could have been brought by Security Pacific’s board, the I v. I Exclusion, which the court noted expressly applied to claims brought by a receiver, would bar coverage for the FDIC’s claims.
The court further noted that a shareholder derivative suit is only a secondary means of enforcing a corporation’s rights and may only be brought when the board fails or refuses to bring an action against the corporation’s directors and officers. The fact that the I v. I Exclusion contained a shareholder-derivative suit exception “does not change that result or render the [I v. I Exclusion] ambiguous with respect to the FDIC as receiver merely because the FDIC also succeeded the right of Security Pacific’s shareholders to bring a derivative action”, particularly where that right is secondary to the FDIC’s right to bring such claims directly.
The court also rejected the FDIC’s argument that the deletion of the policy’s regulatory exclusion should be construed to favor coverage for the FDIC’s claims because its claims would have been “more naturally excluded” by the regulatory exclusion. It reasoned that the deletion of the regulatory exclusion did not alter the scope of the I v. I Exclusion.
The 9th Circuit’s reasoning in this case is substantially similar to that of the 10th U.S. Circuit Court of Appeals in BancInsure, Inc. v. FDIC, which held that the I v. I Exclusion in a nearly identical BancInsure policy also precluded coverage for the FDIC’s claims against a failed bank’s former directors and officers. Other courts have found I v. I Exclusions to be ambiguous in the context of claims brought by the FDIC due to its multiple roles as a receiver for failed financial institutions. In those cases, however, the I v. I Exclusion generally only barred coverage for claims brought by or on behalf of the bank. In this case and the 10th Circuit BancInsure case, the I v. I Exclusion specifically barred coverage for claims brought by a receiver.
Thus, this case, taken together with the 10th Circuit’s decision in BancInsure, indicates that whether the Exclusion specifically refers to claims brought by a receiver is potentially outcome-determinative as to coverage for FDIC receiver claims.