Court: D&O Insurer properly denied coverage based on regulatory exclusion for FDIC claims against former directors and officers of failed bank

by Chris Graham and Joseph Kelly

Reis, et al v. Federal Insurance Co., Case No. CV-11-09835 (C.D. Cal. July 12, 2013)

Federal issued a D&O policy to Alliance Bank of Culver City, California. Alliance Bank was shut down and the FDIC as receiver for the Alliance notified Federal that it had grounds to bring claims of negligence and breach of fiduciary duty against Alliance’s directors and officers and made a monetary demand for those claims.

Federal declined coverage, in part, based on its policy’s regulatory exclusion, which provided:

“[A]s respects the Directors & Officers Liability Coverage Section(s) of this policy, the Company shall not be liable for Loss on account of any Claim by, on behalf of, or at the behest of . . . [the] Federal Deposit Insurance Corporation. . . in any capacity whatsoever.”

Two years later, the former directors and officers sued Federal for breach of contract and bad faith. The District Court granted Federal’s motion for summary judgment, holding that “the FDIC’s claim against [the former directors and officers] was the type of claim contemplated by the Regulatory Exclusion Endorsement” and that Federal thus didn’t breach its contractual duties or act in bad faith in denying coverage based on the regulatory exclusion.

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