California Court Finds Insolvency Exclusion Ambiguous, Limits Application to Insolvency of Third Parties Other Than Claimant

A California federal district court, applying California law, has held that an insolvency exclusion in a bankers’ professional liability policy did not bar coverage for a lawsuit filed by a receiver against a bank, finding that the exclusion was ambiguous and could reasonably be interpreted as limited to claims arising out of the insolvency of third parties other than the claimant. Pacific West Bank v. AIG Specialty Ins. Co., 2021 WL 5238578 (C.D. Cal. Sept. 29, 2021).

The insured bank marketed certain asset financing products to a health management organization.  A state regulator then determined that the assets needed to be reclassified, and the HMO became unable to meet financial requirements mandated by the state.  It then consented to enter into receivership, and the receiver for the HMO sued the bank.  The bank’s insurers denied coverage based on an exclusion for claims arising out of “the bankruptcy, insolvency, conservatorship, receivership or liquidation of . . . any insurance or reinsurance entity[.]”  The bank sued the insurers for breaches of contract and bad faith, and the insurers moved to dismiss on the ground that the insolvency exclusion barred coverage.

In denying the insurer’s motion, the court acknowledged that the exclusion was broadly worded and that the underlying action arose out of the insolvency of an insurance entity.  However, the court noted that the exclusion contained an exception for “Wrongful Acts solely in connection with an Insured’s investment on behalf of the claimant in the stock of any of the foregoing entities.”  In the court’s view, this language “contemplates that ‘claimants’ and ‘insurance entities’ are two distinct categories.”  In addition, the court determined it would be nonsensical to “bar claims for the bank’s wrongful acts merely because the claimant happens to be an insurance company.”  

The court therefore held that the insolvency exclusion was ambiguous and could reasonably be interpreted to apply only to claims arising out of the insolvency of third parties other than the claimant.