The "I" of the Storm: Insured vs. Insured Exclusion Found to be Ambiguous, Insurance Policyholder Advocate

When banks fail, the FDIC generally steps in as receiver. Seemingly inevitably, these bank failures result in claims by the FDIC, acting as receiver for the failed bank, its creditors, its shareholders, etc.

In recent years, many D&O insurers have asserted that the Insured vs. Insured ("IvI") Exclusion bars coverage for claims asserted by the FDIC against former officers and directors. Those efforts have been met with mixed success, with courts increasingly ruling in recent decisions that the IvI Exclusion does not exclude claims asserted by the FDIC against individual insureds (i.e., former officers and directors of the bank). See, e.g., St. Paul Mercury Ins. Co. v. Hahn, No. SACV 13-0424 AG RNBX, 2014 WL 5369400, at *3 (C.D. Cal. Oct. 8, 2014) (holding that IvI exclusion is ambiguous as applied to FDIC claims); W. Holding Co. v. Chartis Ins. Co. Puerto Rico, 904 F. Supp. 2d 169, 182-84 (D.P.R. 2012) (same). In a very recent decision, the Court of Appeals for the Eleventh Circuit joined this trend, finding the exclusion ambiguous as it applies to claims asserted by the FDIC. See St. Paul Mercury Ins. Co. v. Federal Deposit Ins. Co., No. 13-14228 (11th Cir. Dec. 17, 2014) ("St. Paul v. FDIC"). http://media.ca11.uscourts.gov/opinions/pub/files/201314228.pdf

While the language of IvI exclusions varies somewhat, they commonly preclude coverage for claims "brought or maintained by or on behalf of" the insured company against individual insureds. Insurance carriers argue that the exclusion bars coverage because the FDIC "stands in the shoes of" the bank, and therefore, in the insurers' view, must be asserting claims "on its behalf." The insurers' argument to this effect is described in detail in the Eleventh Circuit's opinion in St. Paul v. FDIC at pp. 10-11. As practitioners in this area know, a few courts have agreed with the insurers' argument (including the trial court in FDIC v. St. Paul), holding that because the FDIC, acting as receiver, asserts (at least in part) claims that would have belonged to the corporation (e.g., claims against former directors and officers for malfeasance), the IvI exclusion bars coverage. See, e.g., St. Paul Mercury Ins. Co. v. Miller, 968 F. Supp. 2d 1236,1243-44 (N.D. Ga. 2013) (holding exclusion applies); and Fid. & Deposit Co. of Md. v. Conner, 973 F.2d 1236, 1244-45 (5th Cir. 1992) (same).

This approach is wrong for at least two reasons. First, this overly simplistic analysis goes against the plain language of the exclusion and the true nature of the claims the FDIC brings against former bank executives. While some claims the FDIC brings could be described as claims that would have been the bank's claims—had they been brought when the bank still existed, which they were not—when such claims are brought by the FDIC, they are brought after the bank has failed, when the FDIC is trying to recover funds it has paid, money owed to the bank's creditors, etc. Thus, they are not claims "on behalf of" the bank, which no longer has the legal capacity to do anything and has no interest in such claims; rather, they are claims on behalf of the FDIC and the bank's creditors for the benefit of the FDIC, the taxpayers that fund it, and the creditors.

Second, any lack of clarity in the scope of the IvI exclusion was created—and, perhaps more importantly, left unaddressed for decades—by the insurance industry. If D&O insurers wanted to exclude claims by the FDIC against bank executives, they could say so in plain language. They have not done so because it would be difficult to sell such a narrow policy to financial institutions, since the precise coverage bank directors and officers want to have—personal asset protection if the bank fails—would be excluded from coverage. For that apparent reason, the insurers have left the exclusion untouched, preferring instead to dispute coverage later, if claims are asserted.

The Eleventh Circuit plainly saw this drafting practice for what it is. After reviewing the various decisions construing the IvI decision over the years, the court (applying Georgia law) took a very practical approach. It first noted that the standard for finding ambiguity in an insurance policy is low:

There is a low threshold for establishing ambiguity in an insurance policy. "Ambiguity in an insurance contract is duplicity, indistinctiveness, uncertainty of meaning of expression, and words or phrases which cause uncertainty of meaning and may be fairly construed in more than one way." Ga. Farm Bureau Mut. Ins. Co. v. Meyers, 548 S.E.2d 67, 69 (Ga. Ct. App. 2001). As recognized by Georgia courts, "if a provision of an insurance contract is susceptible of two or more constructions, even when the multiple constructions are all logical and reasonable, it is ambiguous . . . ." Hurst v. Grange Mut. Cas. Co., 470 S.E.2d 659, 663 (Ga. 1996) (citing Lakeshore Marine, Inc. v. Hartford Acc. & Indem. Co., 296 S.E.2d 418 (Ga. Ct. App. 1982)).

St. Paul v. FDIC, p. 14. The court then noted that traditional contra proferentem construction techniques should be applied to resolve the ambiguous language:

What is more, "Georgia courts have long acknowledged that insurance policies are prepared and proposed by insurers. Thus, if an insurance contract is capable of being construed two ways, it will be construed against the insurance company and in favor of the insured." Bituminous Cas. Corp. v. Advanced Adhesive Tech., Inc., 73 F.3d 335, 337 (11th Cir. 1996) (quoting Claussen v. Aetna Cas. & Sur. Co., 380 S.E.2d 686, 687–88 (Ga. 1989)). In other words, "[t]he number of reasonable and logical interpretations makes the clause ambiguous, and the statutory rules of construction require that we construe the ambiguous clause against the insurer." Hurst, 470 S.E.2d at 663 (internal citation omitted). Finally, an important indication of ambiguity in a policy is whether nearly identical or similar language has been construed differently by other courts. Boston Ins. Co. v. Gable, 352 F.2d 368, 370 (5th Cir. 1965) (applying Georgia law).

St. Paul v. FDIC, pp. 14-15.

Applying this standard, the court held that the exclusion was ambiguous, in large part because it had been construed differently by different courts (including in Georgia):

The fact that the district court in this case and the Progressive Court reached opposite conclusions about the effect of a nearly identically worded insured v. insured exclusion appears to us to plainly support a finding of ambiguity under Georgia law. In Georgia, "'[i]f the courts cannot with any degree of assurance, or unanimity, interpret exclusion provisions of this kind, that fact alone weighs heavily against the insurer because the fine print of the policy, where ambiguous, is construed in favor of the assured.'" First Ga. Ins. Co. v. Goodrum, 370 S.E.2d 162, 164 (Ga. Ct. App. 1988) (quoting Travelers Ins. Co. v. State Farm Mut. Auto. Ins. Co., 175 F. Supp. 673, 676 (E.D. La. 1959)). Consequently, we conclude that the insured v. insured exclusion is ambiguous.

St. Paul v. FDIC, p. 17. The court accordingly reversed the trial court's grant of summary judgment to the insurer and remanded the case to the district court to resolve the ambiguity (through extrinsic evidence, if necessary, after the above-described rules of construction are applied).

Courts going back more than 15 years have pointed out that the language of the IvI exclusion is unclear as it applies to claims by the FDIC, yet the insurance industry, seemingly for marketing reasons, has failed to make its intent clear. In such circumstances, the language should be construed against the insurer as drafter, as the Eleventh Circuit recognized.

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