9th Circuit Holds Insured vs. Insured Exclusion Applicable to Claims Brought by FDIC

In its recent decision in FDIC v. BancIsure, Inc., 2017 U.S. App. LEXIS 452 (Jan. 10, 2017), the United States Court of Appeals had occasion to consider the scope of an insured vs. insured exclusion in the context of malfeasance claims brought by the FDIC in its capacity as a receiver.

BancInsure insured Security Pacific Bank under a D&O policy containing an exclusion applicable to:

11. a Claim by, or on behalf, or at the behest of, any other Insured Person, the Company, or any successor, trustee, assignee or receiver of the Company except for:


(a) a shareholder’s derivative action brought on behalf of the Company by one or more shareholders who are not Insured Persons and make a Claim without the cooperation or solicitation of any Insured Person or the Company. . . .

Security Pacific ceased operations and FDIC was appointed by the State of California as the bank’s receiver.  FDIC subsequently asserted claims against the former directors and officers of the bank for the alleged losses they caused to the bank.  These individuals sought coverage for the FDIC claims under the BancInsure policy.  BancInsure, in turn, denied coverage on the basis of the policy’s insured vs. insured exclusion.

FDIC acknowledged that on its face, the exclusion applied to the claims it brought in its capacity as a received of the bank.  It nevertheless contended that the exception for shareholder derivative actions should apply since its claims were similar to those asserted in shareholder derivative suits, and because the FDIC in addition to succeeding to the interests of the bank also succeeded to the interests of Security Pacific’s shareholders.

The Ninth Circuit disagreed, noting that malfeasance claims such as those brought by FDIC against Security Pacific’s directors and officers “belong to the corporation – not to the shareholders – and the board of directors is primarily responsible for enforcing the corporation’s rights.”  The court distinguished such a claim from a shareholder derivative suit, which it explained is a suit that can be brought only when a board of directors fails or refuses to enforce a corporation’s rights.  The court reasoned that the insured vs. insured exclusion is not rendered ambiguous merely because the FDIC, in addition to succeeding to the rights of Security Pacific’s board also succeeds to the rights of its shareholders.  The court found such a conclusion contrary to the plain language of the exclusion:

Interpreting the shareholder-derivative-suit exception to provide coverage to the FDIC’s claims may very well read the term ‘receiver’ out of the insured-versus-insured exclusion.  We think the term ‘receiver’ is clear and unambiguous and includes the FDIC in its role as receiver of Security Pacific.

Add to Flipboard Magazine.