D&O Policy Exclusion Language: Lessons Learned from County Bank

D&O Policy Coverage For Banks

The risk of being an officer or a director at a bank is huge compared to other industries. How well does your D&O (director and officer insurance) protect you against the FDIC? If there ever was a time to perform a risk check the time would be now, as case law and legal actions are now rich in current precedence. While insurance policies have improved, not all of them have and many banks are still exposed. To highlight the liability, we can look at the FDIC’s legal action against County Bank for insight. One of our favorite attorneys, Kristina Del Vecchio, from Joseph & Cohen was making us smart on the issue and has put together this briefing that we found interesting and post it for your edification:


One of the major consequences of the fallout from the Great Recession was a surge of lawsuits filed by the FDIC against the directors and/or officers of failed banks.  From January 1, 2009 through April 24, 2014, the FDIC has filed 95 lawsuits naming 730 former directors and officers.  Of these lawsuits, 22 have settled and one resulted in a jury verdict favorable to the FDIC.  Among the cases that settled was FDIC v. Hawker, et al., No. 1:12-cv-00127-SAB in the U.S. District Court for the Eastern District of California, in which the FDIC, as receiver of County Bank brought claims against five former officers of the bank for negligence and breach of fiduciary duty.  The FDIC sought to recover losses allegedly caused by the officers in making 17 “high-risk” commercial real estate, construction and loan development and acquisition, development and construction loans.  The bank was closed by the California Department of Financial Institutions on February 6, 2009 and the lawsuit was filed on January 27, 2012.  In early 2013, the parties agreed to a settlement in which the officers consented to a default judgment entered against them for approximately $48 million, but the FDIC agreed not to collect any of this amount against any of the officers.  Instead, the officers assigned to the FDIC their pending claims against their director and officer insurance policy provider, BancInsurance, Inc. (“BancInsure”). 


Although the FDIC’s lawsuit against the officers was not filed until 2012, the FDIC’s potential claims against the officers were first reported to BancInsure on February 5, 2009 – the day before County Bank failed – and the FDIC thereafter made a formal claim to BancInsure on November 16, 2009.  However, BancInsure denied insurance coverage for the costs and expenses in defense of the FDIC’s action against the officers and refused indemnification.  The officers consequently filed a lawsuit against BancInsure on August 1, 2012, titled Hawker v. BankInsurance, Inc, No. 1:12-cv-01261-SAB in the U.S. District Court for the Eastern District of California.  The officers asserted claims for declaratory judgment on BancInsure’s obligation to provide coverage for the FDIC’s claim, breach of contract, insurance carrier bad faith and reformation.  As mentioned above, after the settlement in the FDIC’s case against the officers, the FDIC assumed the officer’s claims against BankInsure. 


The case proceeded to summary judgment on the question of whether the terms of the director and officer insurance policy (“D&O Policy”) bar coverage for losses arising out of the FDIC action.  The D&O Policy included a term typically referred to as an “insured versus insured exclusion” which provided that it excluded (with certain exceptions) “a claim by, or on behalf of, or at the behest of, any other insured person, the company, or any successor, trustee, assignee or receiver of the company…”  The FDIC argued, inter alia, that the term “receiver” refers to a type of court-appointed receiver, rather than the FDIC acting in its role as receiver of County Bank.  The court disagreed, looking to dictionary definitions of the term “receiver,” finding that the term should be interpreted in its “ordinary and popular sense” and it therefore includes the FDIC in its role as the bank’s receiver.  The FDIC also cited to several cases holding that “insured versus insured” exclusions did not apply to FDIC claims but the court rejected this argument because the exclusions in those policies did not contain the term “receiver.”  Finally, the FDIC relied on extrinsic evidence (emails, a report and deposition testimony) to show that the mutual intent of the bank and BancInsure was for the D&O Policy to include claims brought by the FDIC as receiver.  However, the court disagreed that the extrinsic evidence the FDIC presented showed this mutual intent, instead finding that it demonstrated that the bank interpreted the exclusion as including claims brought by the FDIC as receiver.       


The court rejected all of the FDIC’s arguments, concluding that the “insured versus insured” exclusion provision of the D&O Policy excluded civil actions brought by the FDIC as receiver.  The parties are currently in the process of briefing a proposal to (1) voluntarily dismiss the remaining claims, and (2) enter into a tolling agreement to extend the time available to pursue those remaining claims, so that the FDIC may appeal this decision to the Ninth Circuit.  The court previously indicated that it is unsure whether it will allow the parties to move forward with this proposal, but will decide after briefing and a hearing on the issue.  Even so, it is uncertain whether the Ninth Circuit will accept the appeal, and even more uncertain how the Ninth Circuit would rule if it does accept the case.  Moreover, an appeal could take a substantial amount of time to resolve, especially if the case is remanded to the district court.


Regardless of the ultimate outcome, this opinion serves as an important reminder to bank officers and directors to carefully review their own D&O Policy coverage, especially the exclusion language.  Even the FDIC has stated that it is imperative that directors and officers fully understand the policy’s exclusions and make well-informed decisions about coverage based on a thorough analysis of the costs and benefits of the policy and the potential impact that could result from exclusionary terms.  See FDIC Financial Institution Letter FIL-47-2013 (Oct. 10, 2013).  This is imperative both when shopping for a new policy and renewing an existing policy; it cannot be assumed that a renewal mirrors an existing policy.  Some of the key questions that must be answered are:


  • Do you have coverage for a claim by the FDIC?
  • Is there a regulatory exclusion?
  • How is the “insured versus insured” exclusion written and can it be bought back?
  • Is there coverage for the FDIC as receiver?
  • Can you choose your own counsel?
  • What, if any, deductible will you have to pay?


Along these lines, it is advisable to have experienced outside counsel review the terms of your existing policy and any proposed renewal or replacement policy to ensure your bank’s directors and officers thoroughly understand the policy terms and have the desired level of coverage.