11th Circuit Holds Conflicting Case Law Creates Ambiguity in Insurance Policy Exclusion

On December 17, 2014, the Eleventh Circuit, interpreting Georgia law, determined there was ambiguity in an insured v. insured exclusion found within a D&O policy held by an FDIC controlled community bank. As seen herein, the decision could impact future directors and officers of failed banks seeking coverage.

In 2010, the FDIC was appointed receiver of Community Bank & Trust of Cornelia, Georgia. As receiver, the FDIC assumed the obligation to determine and pay creditors’ claims from receivership assets. However, the FDIC, in its corporate capacity, also became one of the receivership’s biggest creditors by paying insured deposits from its Deposit Insurance Fund. As a result, the FDIC filed suit against two former officers of the bank alleging gross negligence and various breaches of fiduciary duty and sought $15 million in damages.

The bank’s insurer, St. Paul Mercury Insurance Company, filed a declaratory judgment, asserting that the D&O policy it had issued to the bank did not provide coverage for the claims asserted by the FDIC. A key argument made by St. Paul was that the “insured versus insured” exclusion applied to eliminate coverage; the pertinent language of the exclusion reading that St. Paul would not be liable for loss for claims against the bank “brought or maintained by or on behalf of any Insured Company in any capacity…” The Georgia District Court agreed and found the policy unambiguously precluded coverage without the need to consider external evidence.

On appeal, the Eleventh Circuit first examined whether the insured v. insured exclusion applied; the key question being whether the FDIC, in its role as receiver, is the equivalent of the bank for purposes of triggering the exclusion. Unfortunately, while the Court examined both parties’ arguments on this issue, it ultimately never provided its opinion because it determined the exclusion was ambiguous.

Acknowledging Georgia’s “low threshold for establishing ambiguity,” the Court found that other courts interpreting similar exclusion language had reached different results. In particular, another Georgia District Court had reached a different outcome when interpreting a similarly worded exclusion. Because there was no unanimity among the Georgia courts in interpreting the language, the Court found the insured v. insured exclusion ambiguous. As a result, the case was remanded back to the district court to consider external evidence about the parties’ intent regarding the exclusion.

Ultimately, the biggest question in this case went unanswered; whether an outside agency taking over responsibility for an insured can trigger an insured v. insured exclusion. That said, the Court did reaffirm the law of Georgia, as well as most states, that policy exclusions will be narrowly interpreted with any discrepancies being resolved in favor of the insured.

Jordan-WoodPrepared by R. Jordan Wood