Bank’s Failure to Submit Proof of Loss Precludes FDIC’s Claim as Receiver Under Crime Bond

The Court of Appeals for the Tenth Circuit, applying Colorado law, has held that an insurer’s denial of coverage to the Federal Deposit Insurance Corporation (FDIC), standing in the shoes of an insured as receiver, does not violate public policy where the insured’s rights under a policy have not vested.  FDIC v. Kan. Bankers Sur. Co., 2016 WL 6440367 (10th Cir. Nov. 1, 2016).  The court also held that the FDIC forfeited two arguments related to policy interpretation on appeal.

A bank was insured under a financial institution crime bond.  The bond contained two pertinent provisions: (1) if the insurer elected not to defend the bank against a lawsuit for covered loss, the bank’s deadline for submitting a proof of loss would be extended until six months after settlement or adjudication of such lawsuit, and (2) because the bond terminated upon the taking over of the bank by a receiver, a proof of loss was required to be submitted to the insurer prior to the takeover of the bank by a receiver in order for the receiver to obtain coverage under the bond.

The bank was sued in early 2009 by a borrower for alleged misconduct by the bank in connection with a $50 million loan.  The insurer declined to defend the bank.  Prior to the bank sending the insurer a proof of loss, a bank commissioner closed the bank and appointed the FDIC as receiver.  After settling the borrower’s claim, the FDIC sought coverage under the bond, which the insurer refused based on the bond’s proof of loss provision.  The FDIC filed suit.  A district court ruled in favor of the insurer, holding that because the bank did not complete a proof of loss before the FDIC’s takeover, the FDIC could not recover under the bond.  The FDIC appealed, raising three arguments.

The appeals court affirmed, holding that the FDIC had forfeited two of its arguments – that the bond language was non-standard and that the bank had substantially complied with the proof of loss requirement – by failing to raise them before the district court.  As to the third argument, the FDIC argued that the district court’s interpretation of the proof of loss condition violates public policy because it restricts the exercise of the bank’s rights held by the FDIC.  The FDIC relied on FDIC v. St. Paul Companies, 634 F. Supp. 2d 1213 (D. Colo. 2008), where a court held that the FDIC’s takeover did not terminate coverage because the insured need only have discovered the loss prior to the takeover.  The FDIC argued that, similarly, the insured bank had discovered the loss prior to the FDIC’s takeover and so the FDIC had the right to enforce coverage.

The court first noted that both federal and Colorado law expressly permit insurance provisions to limit the broad powers of receivers, like the FDIC.  Second, the court held that, even standing in the bank’s shoes, the FDIC had no right to enforce coverage.  In particular, unlike St. Paul Companies where the bond contained no express language requiring a proof of loss, the proof of loss provision here required strict compliance as a condition precedent to coverage.  Because the bank did not submit a proof of loss in accordance with the provision, the bank never acquired the right to coverage and, therefore, neither did the FDIC.