D&O Insurance Coverage and Failed Banks

The financial crisis that occurred several years ago led to the failure of a number of financial institutions. The failure of those financial institutions inevitably led to litigation over who should bear the consequences of those failures. When the Federal Deposit Insurance Corporation (“FDIC”) took over a number of banks, it filed lawsuits against the directors and officers of the failed institutions, alleging negligence and improper banking practices. Those lawsuits led to further litigation over whether the D&O insurance for the banks provided coverage for those claims. Directors and officers liability Insurance (“D&O”) is liability insurance payable to the directors and officers of a company, or to the organization itself, as indemnification (reimbursement) for losses or advancement of defense costs in the event an insured suffers such a loss as a result of a legal action brought for alleged wrongful acts in their capacity as directors and officers. In St. Paul Mercury Ins. Co. v. FDIC, Case No. 13-14228 (decided December 17, 2014), the United States Court of Appeals for the Eleventh Circuit addressed an important issue raised by that coverage litigation: whether the “insured versus insured” exclusions in those D&O policies meant that there was no coverage for claims brought by the FDIC as receiver for failed banks.

The FDIC had become receiver for Community Bank & Trust of Cornelia, Georgia. The FDIC, as receiver, instituted a lawsuit against two former officers of the bank alleging gross negligence and breaches of fiduciary duty. The bank’s insurer, St. Paul Mercury Insurance Company, instituted a declaratory judgment action contending that the D&O policy it had issued to the bank did not provide coverage for the losses allegedly caused by actions of the two former officers.

A key issue in the litigation was the “insured versus insured” exclusion in the policy. Traditional liability insurance is intended to cover claims against an insured made by unrelated parties. The insured versus insured exclusion is designed to prevent the insured from making a claim under its liability policy. Allowing such a claim would potentially create a moral hazard, with an insured having little incentive to protect itself against its own malfeasance.

The application of the insured versus insured exception becomes tricky when an outside agency such as the FDIC, a receiver or a bankruptcy trustee takes over responsibility for the insured. A question can arise whether or not such a party is acting on its own behalf, acting on behalf of someone other than the insured, or merely stepping into the shoes of the insured and asserting the insured’s rights. The distinctions between those different roles can create problems in applying the insured versus insured exclusion.

That is the issue addressed by the Eleventh Circuit in the St. Paul Mercury case. The Court noted that the FDIC potentially represented a number of different interests as receiver: those of the bank, the bank’s stockholders, and the bank’s depositors.  Opinion, p. 10.

In looking at the language of the insured versus insured exclusion, the Court concluded that the language was ambiguous. The Court noted that different courts, including a federal court in Georgia, had looked at similar language and reached different interpretations of the exclusion. Opinion, pp. 10-11, 15-17. The Court remanded the case to the district court to consider extrinsic evidence about the parties’ intent regarding the exclusion.

Although the decision did not reach a conclusion about whether coverage existed, that the Court found the provision ambiguous suggests a willingness to narrowly interpret the insured versus insured exclusion in order to find coverage. This will be important to the former officers and directors of the failed banks looking for the protection of insurance.

The Opinion is available at

For more information on this topic, contact your Appellate Counsel at Smith, Gambrell & Russell.


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