The United States Court of Appeals for the Ninth Circuit recently held in Federal Deposit Insurance Corporation v. BancInsure, Inc., that an action by the FDIC against a failed bank’s former directors and officers was excluded by a D&O policy’s “insured vs. insured” exclusion. Against the backdrop of recent decisions finding similar exclusions to be ambiguous as to FDIC actions, such as St. Paul Mercury Ins. Co. v. Federal Deposit Ins. Corp., No. 14-56830 (9th Cir. Oct. 19, 2016) (previously discussed in this client alert), this decision shows how insurers continue to proactively adjust policy language to fit evolving and new exposures.  Policyholders should be doing the same.

The FDIC, while acting as a receiver for the failed Security Pacific Bank, sued the bank’s former directors and officers seeking to hold them liable for losses arising from their misconduct. Security Pacific was insured under a D&O policy issued by BancInsure. The FDIC and Security Pacific entered into a settlement agreement whereby Security Pacific assigned its rights under the D&O policy to the FDIC. The FDIC then sued BancInsure seeking coverage for the settled loss.

BancInsure denied coverage based on the policy’s “insured vs. insured” exclusion, which applied to legal actions brought “by, or on behalf of, or at the behest of” Security Pacific, insured persons, or “any successor, trustee, assignee or receiver” of Security Pacific. In response, the FDIC argued that, although it was acting as a “receiver” of the bank, the exclusion was nevertheless ambiguous and should be construed in favor of coverage. First, the FDIC pointed to a carve out in the insured vs. insured exclusion for shareholder derivative actions. According to the FDIC, this carve out language created an ambiguity because the FDIC had succeeded to the rights of Security Pacific’s shareholders, in addition to the rights of the bank itself. Second, the FDIC argued that an endorsement that deleted a separate “regulatory investigation” exclusion also created an ambiguity because the regulatory exclusion would have undoubtedly excluded the FDIC’s claim; thus, the fact that it was deleted from the policy arguably showed an intent that FDIC regulatory actions be covered.

The Ninth Circuit rejected the FDIC’s arguments, finding the policy unambiguous. The court held that it must give effect to the terms “receiver” and “successor”, which clearly applied to bar the FDIC’s action as a receiver of the bank and successor to the bank’s, and its shareholders’, interests. The court recognized that several other courts had found insured vs. insured exclusions ambiguous as to similar FDIC actions, but distinguished those cases because the exclusions did not expressly refer to actions by “receivers” or “successors.”

This decision is an important reminder that banks, and other policyholders alike, should carefully review the language of proposed policies prior to accepting coverage to ensure that the language is a good fit for their particular business.