Insight The Insured vs. Insured Exclusion Can Exclude D&O Coverage in an Action by the FDIC

We’ve previously blogged about the importance of directors and officers (D&O) insurance for financial institutions and the renewed prevalence of the regulatory exclusion in the policy forms offered to financial institutions.

Another common exclusion in D&O policies, known as the “insured vs. insured exclusion,” also has particular bite in the banking world. This exclusion excludes coverage for lawsuits between insureds. The typical example would be a lawsuit by a bank against a former director, when the former director would otherwise qualify for coverage under a D&O policy that covers the directors and the institution under a single policy. Such policies, referred to as Side A, Side B, and Side C policies, constitute the most common type of D&O policy in the marketplace. As an aside, the Side A coverage covers the directors when the institution cannot legally or financially indemnify directors, Side B coverage covers the institution for the cost of indemnifying directors, and Side C coverage covers the institution when the institution is named in securities litigation.

The insured vs. insured exclusion has special relevance in the banking world when the FDIC acts as the receiver of a failed institution and then sues former directors. The FDIC “steps into the shoes” of the failed bank and an action by the FDIC against the former director arguably is excluded from coverage by the insured vs. insured exclusion. Case law from the Savings and Loan crisis in the late 1980s tended to suggest that the insured vs. insured exclusion would not operate to exclude coverage when the FDIC, as a receiver of a failed bank, sued the former directors and officers of the bank. The case law from that era, however, is not uniform, and recent federal cases from Georgia have answered this question differently. Accordingly, the best practice is for banks to negotiate the insured vs. insured exclusion to expressly carve back (i.e. not apply to) lawsuits by the FDIC in its capacity as receiver of a failed institution.

For more information, please contact our Banking Group or call 208.344.6000.