Insured v. Insured Exclusion Bars Coverage for Claim by FDIC Receiver Against Failed Bank’s Directors and Officers

The United States Court of Appeals for the Ninth Circuit, applying California law, has held that an insured v. insured exclusion in a directors and officers policy, which expressly barred coverage for actions brought by a “receiver,” precluded coverage for a claim against a failed bank’s directors and officers by the Federal Deposit Insurance Corporation (FDIC) in its capacity as receiver. FDIC v. BancInsure, Inc., 2017 WL 83489 (9th Cir. Jan. 10, 2017).

The FDIC, acting as the receiver of a failed bank, brought an action against the bank’s former directors and officers for damages arising from their alleged wrongful conduct.  The FDIC then filed coverage litigation against the bank’s insurer, seeking a declaratory judgment that the bank’s D&O policy provided coverage for the underlying action.  The United States District Court for the Central District of California granted summary judgment for the FDIC, holding that the bank’s D&O policy covered the FDIC’s claims.

On appeal, the insurer asserted that the policy’s insured v. insured exclusion barred coverage.  That exclusion precluded coverage for claims arising from legal actions “by, or on behalf of, or at the behest of” the insured bank, a person insured under the policy, or “any successor, trustee, assignee or receiver” of the insured bank.  The FDIC argued that it was not acting as a “receiver” within the meaning of the exclusion, but as successor to the interests of the bank’s shareholders, such that an exception to the insured v. insured exclusion for losses arising from a shareholder derivative action should apply.

The Ninth Circuit rejected the FDIC’s argument and reversed the district court’s decision, holding that the exclusion barred coverage.  The Ninth Circuit explained that causes of action against a corporation’s former directors and officers “belong to the corporation― not to the shareholders” and that the FDIC, as receiver, succeeded to the right of the corporation to bring the suit.  The court reasoned that reading the policy in context, the exception to the insured v. insured exclusion for shareholder derivative suits would not extend to suits brought by the FDIC, since its right to bring a derivative claim as a successor to the interests of the shareholders is secondary to its right to bring the same claims directly as the bank’s receiver.  The Ninth Circuit concluded that, under the insured v. insured exclusion, “the term ‘receiver’ is clear and unambiguous and includes the FDIC in its role as receiver of the [failed bank].”