Insured-versus-Insured Exclusion Deemed Ambiguous as Applied to FDIC as Receiver

The United States Court of Appeals for the Ninth Circuit, applying California law, has held that an insured-versus-insured exclusion was ambiguous where the plaintiff FDIC, in its capacity as receiver, sued the directors and officers of a defunct bank.  St. Paul Mercury Ins. Co. v. Federal Deposit Ins. Corp., 2016 WL 6092400 (9th Cir. Oct. 19, 2016).  The court also held that the policy’s “unrepaid loan” carve-out from the definition of damages did not unambiguously bar coverage for damages that were based on loan charge-offs.

The FDIC filed suit against the directors and officers of a defunct bank in its capacity as the bank’s receiver.  The bank’s D&O insurer argued that the insured-versus-insured exclusion barred coverage for the directors and officers.  The district court disagreed, determining that the exclusion’s language was ambiguous.  The insurer also argued that the policy’s “unrepaid loan carve-out” barred coverage for the damages sought by the FDIC.  The district court found that this carve-out did not unambiguously bar coverage, reasoning that the FDIC did not seek loan repayment, but instead used charge-offs on loans to calculate the losses caused by the directors’ and officers’ allegedly tortious conduct in carrying out the bank’s lending functions.  The insurer appealed.

The Ninth Circuit affirmed, holding that the insured-versus-insured exclusion was ambiguous and must be construed in favor of the FDIC.  The court reasoned that it was ambiguous whether the FDIC as a receiver was pursuing its claims against the directors and officers “on behalf of” the bank within the meaning of the exclusion because the FDIC “represents a number of interests and does not operate as a normal successor in interest.”  The court also noted that the exclusion did not refer to claims brought by the FDIC as receiver, and the insurance policy did not have a regulatory exclusion.

The court also affirmed the district court’s holding regarding the unrepaid loan carve-out.  The court emphasized that “it was reasonable for the insured to expect that the policy would provide coverage for damages awarded as a result of tortious mismanagement by the bank’s directors and officers.”   Because the provision was subject to a reasonable interpretation that allowed coverage, the court affirmed the district court’s holding that the carve-out did not bar coverage.