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Paul Zimmerman
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Directors and Officers Insurance: the Insured v. Insured Exclusion

In the arena of directors and officers insurance (D&O), one of the most controversial and litigated issues involves the insured v. insured exclusion. Since the seminal case of O’Melveny & Myers v. FDIC 512 U.S. 79, 86 (1994), this exclusion, particularly with respect to its application in cases in which the FDIC has stepped in and taken over a failed bank, has been frequently litigated.

The insured v. insured exclusion in D&O policies excludes some coverage claims based on suits brought by one insured against another. The exclusion in a typical D&O policy usually reads something similar to the following:

The insurer shall not be liable for loss on account of any claim made against any     insured...brought or maintained by or on behalf of an insured or Company in any capacity, except a claim that is a derivative action brought or maintained on behalf of the Company by one or more persons who are not directors or officers . . .

Insurers added the insured v. insured exclusion with respect to Directors and Officers’ policies approximately 30 years ago when financial institutions “collusively” were suing their own directors for poor business decisions in order to recover losses by obtaining proceeds from their insurers.

Cases from around the country have been unable to agree on applicability of this exclusion with respect to whether the FDIC is an insured.  For cases which have held that the exclusion applies, see, Mt. Hawley Insurance Company v. Fed. Sav. & Loan Corp. 695 F.Supp.469, 481 (C.D.Cal.1987);  Gary v. Am.Cas.Co. 753 F. Supp.1547, 1554 (W.D.Okla. 1990);  St. Paul Mercury Ins. Co. v. Miller 968 F. Supp. 2d 1236, 1243 (N.D. GA 2013); Fid. & Deposit Company v. Conner 973 F. Supp. 2 d. 1236, 1244 (5th Cir. 1991). 

For cases in which the exclusion was held not to apply, see Am.Cas.Co. v. Baker 758 F. Supp. 1340 (C.D.Cal. 1991); Fid & Deposit Co. v. Zandstra 756 F. Supp. 429, 433 (N.D. Cal. 1990);  St. Paul Mercury Ins. Co. v. FDIC 774 F. 3d 702 (11th Cir.2014); W. Holding Co. Inc. v. Chartis Ins. Co. 904 F. Supp. 2d 169, 182, (D.P.R. 2012).

Many of the cases that have held the insured v. insured exclusion inapplicable with respect to the FDIC have issued rulings that the exclusion is ambiguous in determining if the FDIC can be considered an insured. Based on our reading of the various exclusion in these cases, it is difficult to determine and predict which way a court may go on this issue.  It is always imperative to proactively review policies for possible pitfalls, and analyze the potentially applicable exclusion in order to best understand and predict whether coverage will apply in a given situation.

This article is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.