Neither “Insured v. Insured” Exclusion nor “Investment Loss Carve-Out” Bars Coverage for Receiver’s Action Against Bank’s Former Directors and Officers
Applying Iowa law, a federal district court has held that neither a D&O policy’s “insured v. insured” exclusion nor its “investment loss carve-out” provision barred coverage for an action brought by a receiver against a bank’s former directors and officers for losses resulting from the purchase of high-risk securities. Progressive Cas. Ins. Co. v. FDIC, 2015 WL 310225 (N.D. Iowa Jan. 23, 2015).
As receiver for a closed federal savings bank, the Federal Deposit Insurance Corporation (FDIC) filed two suits seeking money damages based on allegations that the bank’s former directors and officers caused the bank to purchase high-risk collateralized debt obligations that resulted in losses totaling $58 million. The FDIC alleged negligence in purchasing the securities without due diligence and in disregard and ignorance of regulatory guidance about the risks of such securities. After reserving its rights under the applicable D&O policy, the insurer brought suit for a declaration of no coverage based on the policy’s insured v. insured exclusion and its “investment loan carve-out.”
On the parties’ cross motions for summary judgment, the court first held that the policy’s insured v. insured exclusion did not bar coverage for the claims. This exclusion provided that the insurer “shall not be liable . . . for Loss in connection with any Claim by, on behalf of, or at the behest of the Company.” The court found that the term “Company” in the exclusion did not include the FDIC, pointing out that where the policy “intended to address coverage issues relating to ‘receivers’ and other successors to the bank, it expressly identified such successors.” Applying the same logic and citing the dictionary definition of “behalf,” the court also rejected the insurer’s argument that “on behalf of” meant “stepping into the shoes of.” The court therefore reasoned that because the FDIC had the “exclusive” statutory right to bring the action, it did not assert claims “on behalf of” the bank or insured persons.
Next, the court rejected the insurer’s argument that coverage was unavailable as a result of the policy’s “investment loss carve-out.” Under this provision, the definition of covered loss expressly did not include damages measured by “the depreciation . . . in value of any investment product . . . due to market fluctuation unrelated to any Wrongful Act.” Contending that the policy was not designed to be the guarantor of the bank’s unwise investment decisions, the insurer argued that the carve-out applied to preclude coverage here because the losses claimed by the FDIC equaled the amount that the securities depreciated in value. The court, however, found that the phrase “unrelated to any Wrongful Act” was ambiguous because it could modify either “market fluctuation” or “depreciation . . . in value of any investment product.” The court also found that while the phrase “due to” required a causal effect, the phrase “unrelated to” did not. As a result, the court concluded that even if the alleged Wrongful Act did not cause the depreciation, coverage was available because the FDIC’s allegations, if proved, would establish “some connection” between the depreciation and the alleged Wrongful Acts.
