Between the Lines

A Discussion of Case Law and Statutory Law Affecting Commercial Lines of Insurance


D&O Insurer Must Advance Defense Costs for Claim by FDIC

The FDIC might stand in a failed bank’s shoes, but that doesn’t quite make it the bank,
at least not in the insurance world.

First Circuit Discerns Likelihood of Success That “Insured v. Insured” Exclusion Will Not Apply

Appointed as the receiver of a failed bank, the FDIC asserted breach of fiduciary duty claims against the bank’s officers and directors.  They in turn sought coverage from the bank’s directors and officers liability insurer.

The insurer argued that FDIC stood in the shoes of the bank, an insured, so the policy’s “insured v. insured” exclusion barred coverage. A Puerto Rico District Court judge disagreed, finding that the FDIC was asserting claims on behalf of accountholders and depositors and its own insurance fund, in addition to claims on behalf of the failed bank.  The Court ordered the insurer to advance the officers’ and directors’ defense costs, without prejudice to seeking repayment, and also awarded the insureds’ costs in the coverage action as a sanction for the insurer’s obstinate position.  The insurer appealed.

The First Circuit affirmed.  The Court began its analysis by granting the insurer a pyrrhic victory in a threshold skirmish as to whether the District Court’s order was subject to review.  The First Circuit held that the District Court’s order was a mandatory preliminary injunction, which the appellate court has jurisdiction to review despite the lack of a final judgment.

However, as the Court pointed out, the standard for the review of a preliminary injunction requires only a likelihood of success on the merits.  Applying this test to the liberal standard for the advancement of defense costs under Puerto Rico law, the directors and officers only needed to show a “likelihood” of a “remote possibility” of coverage in order to prevail.

There was no controlling law on the question whether the “insured v. insured” exclusion applied to a claim by the FDIC, and the case law from other jurisdictions was divided.  Nevertheless, the First Circuit found the insurer’s position sufficiently weak to support the District Court’s award of a sanction, and added the directors’ and officers’ costs on appeal.  In so doing, the Court seems to have been influenced by what it called the insurer’s “unique” argument that the scope of the FDIC’s claims was defined by its first iteration, a claim letter, and not by its subsequent complaint and amended complaint, which referenced the claims on behalf of accountholders and depositors.

The Court also noted however, that the order it was affirming was only a determination that the insured had a likelihood of success on the coverage issue, and that the insurer still could prevail on the merits.

The case is W Holding Company v. AIG Insurance Company – Puerto Rico, _ F.3d _ (2014).

About the Author

Harvey Nosowitz – Counsel

Harvey helps clients with commercial litigation, in particular insurance coverage, personal injury and products liability cases.

Please contact him with any questions:
(617) 621-6555.

Posted In: Directors & Officers

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