Tag Archive: AIG

Sep 29

Policyholder D&Os and Claimant FDIC Prevail (AGAIN) Over AIG And Other Insurance Companies on Insured vs. Insured Exclusion And Related Acts Provision

insured vs insuredAIG does not give up easily.

As reported here in April, both the District of Puerto Rico and the First Circuit ruled that AIG could not evade coverage for claims brought by Westernbank of Puerto Rico against its former officers and directors, and ordered AIG to pay defense costs, even though the FDIC “stepped into the shoes” of Westernbank and could be considered an insured.

In W Holding Co. v. AIG Ins. Co., (D. P.R. July 2014), AIG and other excess insurance companies brought a new motion for summary judgment – raising this exact same issue – and lost again. AIG and the insurance companies also lost on the issue of whether a group of claims relating to one set of loans originated by the bank were interrelated with claims for all loans alleged to have been made under allegedly similar, reckless loan origination policies.

Noting that “AIG first poses a question the court already addressed”, the District of Puerto Rico ruled again that the exclusion does not apply, for all of its previously stated reasons, including some that would apply to cases not involving the FDIC or banks taken over by any other entity, such as the fact that the claims were not collusive, which was noted to be the presumed basis for Insured vs. Insured exclusions, even though the particular exclusion  at issue here states that it applies whether or not the claim is collusive.

Turning to new business, the court also ruled the new claims brought by the FDIC did not relate back to an earlier set of claims that concerned a single set of loans made to en entity known as Inyx. The newer FDIC claims concern several sets of loans, including, but not limited to the Inyx loans. The court noted that AIG and other insurance companies want the newer claims to relate back to the first set, which were handled under policies in effect from 2006-07, because that would leave a partially reduced set of limits to cover the new claims. In contrast, the D&Os plus the FDIC wanted the new claims covered under a 2008-09 tower whose limits have both previously been eroded.

Reviewing the facts of both sets of claims, the court ruled that – apart from the Inyx loans common to both claims – nothing else united them more than an allegedly common practice of loose and even reckless loan origination procedures. The court quoted a Ninth Circuit decision stating “the mere existence of an aggressive loan policy is insufficient as a matter of law to transform disparate acts and omissions made by five directors in connection with issuance of loans to [many] borrowers into a single loss.”

Accordingly, the court ruled that the Inyx loan portion of the new claims would be covered under the 2006-07 policies, while the remainder of the new claims would be handled under the 2008-09 policies, and in so doing, maximizing the amount of limits available to cover all of the claims.

About Mark Garbowski

Mark Garbowski is an attorney in the Insurance Recovery group in Anderson Kill's New York office. Mr. Garbowski's practice concentrates on insurance recovery, exclusively on behalf of policyholders, with particular emphasis on professional liability insurance (E&O), directors and officers insurance (D&O), fidelity and crime-loss policies, internet and high-tech liability insurance issues. Mr. Garbowski is also a member of Anderson Kill's Financial Services insurance coverage group which serves its clients in that industry, including broker/dealers, commercial banks, investment advisors, hedge funds, mutual funds and other financial institutions.

Permanent link to this article: http://www.financialinsurancelaw.com/2014/09/29/policyholder-dos-and-claimant-fdic-prevail-again-over-aig-and-other-insurance-companies-on-insured-vs-insured-exclusion-and-related-acts-provision/

Jul 24

Insured v. Insured Exclusion No Bar to FDIC Claim for Coverage under a D&O Policy

Insured v. Insured Exclusion On July 9, 2014, the United States District Court for the District of Puerto Rico denied AIG’s motion and granted the D&O’s and the FDIC’s motion for summary judgment relating to, among other things, the applicability of an Insured v. Insured Exclusion.  See W Holding Co., Inc. v. AIG Ins. Co.,  Civil No. 11-2271 (D.P.R.).

The Court described the Insured v. Insured Exclusion as follows:

Director and officer liability insurance policies commonly feature so-called insured vs. insured exclusions that exclude from coverage losses for claims brought by one ‘insured’ against another ‘insured,’ which includes “current and former [D&Os] as well as the corporation itself. . . to limit moral hazard.  Without such an exclusion, a D&O Policy could require the insurer to pay for business mistakes of insured directors and officers if the corporation . . . or if former officers or directors brought suit.”

The Court noted, among other points, that the “obvious intent” behind the Exclusion is “to protect insurance companies from collusive suits among insured parties”  and that the FDIC reaps “no benefits comparable to those enjoyed by collusive actors.”

D&O policyholders are often presented with the Insured v. Insured Exclusion when insurance companies seek to deny coverage under D&O policies.  However, as noted by the Court in W Holding, the Exclusion should not be divorced from its purpose.  A number of courts have analyzed the Exclusion in the context of its purpose to find coverage where insurance companies have sought to rely on the Exclusion.  See, e.g., Megavail v. Illinois Union Ins. Co., No. 05 Civ. 1374, 2006 U.S. Dist. LEXIS 78329 (D. Or. Oct. 26, 2006) (noting that, “A lawsuit is collusive if it seeks to force an insurer to pay for the poor business decisions of the insured company’s officers or managers, such as suits in which a corporation sues its officers or directors in an effort to recoup operation losses caused by their business mistakes.”); Megavail v. Illinois Union Ins. Co., No. 05 Civ. 1374, 2006 U.S. Dist. LEXIS 53658 (D. Or. July 19, 2006) (granting summary judgment and obligating AIG to defend the corporation and directors and officers, and collecting cases regarding the intent of the Exclusion, e.g., protection from collusive suits); Bodewes v. Ulico Cas. Co., 336 F. Supp. 2d 263 (W.D.N.Y. 2004) (finding a duty to defend and noting that “The purpose underlying the exclusion is to prevent collusion, ‘such as suits in which a corporation sues its officers and directors…thus turning liability insurance into business-loss insurance.’”), aff’d 165 F.App’x 125, 127-28 (2d Cir. 2006).

About Peter A. Halprin

Peter A. Halprin is an attorney in Anderson Kill's New York office. Mr. Halprin's practice concentrates in commercial litigation and insurance recovery, exclusively on behalf of policyholders. Mr. Halprin also acts as counsel for U.S. and foreign companies in domestic and international arbitrations (including London and Bermuda Form arbitrations).

Permanent link to this article: http://www.financialinsurancelaw.com/2014/07/24/insured-v-insured-exclusion-no-bar-to-fdic-claim-for-coverage-under-a-do-policy/

Apr 17

1st Circ. Rules on Insured vs Insured Exclusion in FDIC Bank Exec Suit

insured vs insured exclusionWhen the FDIC takes over a failed bank as receiver and then sues the bank’s former directors and officers, does that inevitably preclude coverage under an insured vs insured exclusion?  In a folksy and clearly written decision, with relevance even to banks and other firms that may never be taken over by the FDIC, the First Circuit decided that such a claim is not inevitably excluded, and affirmed an injunction ordering AIG to pay defense costs on behalf of the former directors and officers, even though the FDIC “stepped into the shoes” of the bank when it became receiver.

W Holding Co., Inc. v. AIG Insurance Co., decided very recently on March 31, arose from the demise of Westernbank of Puerto Rico. Westernbank had been one of Puerto Rico’s leading banks, but that status ended in the late 2000s when local regulators ordered the bank closed and appointed a federal regulator – the FDIC – as receiver. The FDIC investigated and concluded that certain bank officers and directors had violated their fiduciary duties to the bank. Further, the FDIC found that these violations caused more than $367 million in losses to the bank, and so the FDIC demanded that those officers and directors pay that amount.

AIG (at the time known as Chartis) denied coverage based primarily upon the “insured vs insured” exclusion, which provides that AIG:

shall not be liable to make any payment for Loss in connection with any Claim made against an Insured . . . which is brought by, on behalf of or in the right of, an Organization or any Insured Person other than an Employee of an Organization, in any respect and whether or not collusive.

In response, the directors and officers sued AIG, the FDIC intervened and added more directors and officers, as well as their spouses and conjugal partners, reduced the damage claim to $176 million, but also estimated that the federal deposit insurance fund could lose as much as $4 billion. After some involved procedural wrangling, AIG moved to dismiss all claims against it, and the directors, officers and other affected individuals counter-moved for an injunction ordering AIG to advance defense costs.

AIG argued that because the FDIC brought its claim “on behalf of or in the right of Westernbank,” and because Westernbank was a named insured, then there could be no coverage. Both the FDIC and the individuals argued that the insured vs insured exclusion should not include the FDIC, regardless of whose shoes it was wearing. In addition, they argued that the FDIC also brought claims on behalf of third-party creditors and depositors.

Insured vs Insured Exclusion Does Not Apply – AIG Must Defend Failed Bank D&Os

In the end, the directors and officers prevailed – both in the trial court and in the First Circuit – on the second argument, and also because of the traditionally broad application of the duty to defend or to pay defense costs. In affirming the District Court’s injunction that ordered AIG to advance defense costs, the First Circuit noted Puerto Rico’s rule that an insurance company must advance those costs if there is a “remote possibility” of coverage, which it described as “A pretty low standard, indeed.”

Further, because the court treated the cost-advancement order as a preliminary injunction, it determined that the individuals needed only to demonstrate a mere “likelihood” of a “remote possibility” of coverage in order to prevail at this stage. Under that standard, the court upheld the cost-advancement order, on the substantive grounds that the FDIC has sued not only as receiver for Westernbank, but as successor to the depositors and creditors of the bank, and also alleged that it was suing to recover money that the FDIC spent after the bank shut down. The court also rejected AIG’s novel argument that the application of the insured vs insured exclusion was determined solely on the initial demand letter, and because the FDIC did not mention the alternative theories for recovery until later, both coverage and the defense obligation were precluded.

Lessons for Policyholders and Counsel

There are three primary lessons for policyholders and counsel in this case:

  • the duty to defend or to advance defense costs can be won based upon what seem to be minor, alternative, claims in the underlying suit;
  • if you can meet the irreparable harm element of a preliminary injunction (here the policyholders argued they could not afford a defense on their own), the “likelihood of success” element can then provide an easier path to defense costs than summary judgment; and
  • when analyzing the insured vs insured exclusion, one party can be both an insured, and not-an-insured, at the same time.

About Mark Garbowski

Mark Garbowski is an attorney in the Insurance Recovery group in Anderson Kill's New York office. Mr. Garbowski's practice concentrates on insurance recovery, exclusively on behalf of policyholders, with particular emphasis on professional liability insurance (E&O), directors and officers insurance (D&O), fidelity and crime-loss policies, internet and high-tech liability insurance issues. Mr. Garbowski is also a member of Anderson Kill's Financial Services insurance coverage group which serves its clients in that industry, including broker/dealers, commercial banks, investment advisors, hedge funds, mutual funds and other financial institutions.

Permanent link to this article: http://www.financialinsurancelaw.com/2014/04/17/1st-circ-rules-on-insured-vs-insured-exclusion-in-fdic-bank-exec-suit/

Jan 10

D&O Liability Insurance and Bank Failures

bank failuresTowards the end of 2013: the FDIC provided suggestions regarding D&O liability insurance for bank failures and other losses to financial institutions; the FDIC reported that the trend in bank failures continues to improve; and governmental investigations and securities suits continued to evolve.

FDIC Provides Suggestions Regarding D&O Liability Insurance

The apparent reductions in bank failure losses should be reflected in improvements in D&O and E&O losses or other losses to financial institutions. The FDIC also issued a Financial Institutions Letter (FIL) on October 10, 2013, which unusually suggested that directors and officers of financial institutions “clearly understand” the recent additions of “exclusionary language” in D&O policies, since the changes may “limit coverage.”

The October 10 FIL notes that, “D&O” liability insurance is an important risk mitigation tool for financial institutions…” The FDIC may well be protecting its interests as a receiver in situations when it may make claims against directors and officers of failed banks, as liability insurance often forms an important asset in such recovery efforts.

Trend In Bank Failures Continues To Improve

During the third quarter of 2013 the trend in bank failures of FDIC insured institutions continued to improve. The number of banks on the FDIC’s “Problem List” declined for the 10th consecutive quarter from 553 to 515, and total assets at the “problem” institutions fell from $192.5 billion to $174.2 billion. Also during the third quarter, forty-three banks were absorbed in mergers, and six institutions failed.

D&O Issues–Investigations and Securities Suits

Increased regulatory scrutiny has led during 2013 to classic securities lawsuits. Traditionally, an SEC investigation might lead to a securities suit, and that tradition continued in 2013. Further Foreign Corrupt Practices Act (FCPA) investigations also led to class action lawsuits, for example involving Walmart of Mexico.

Similarly, such suits followed investigations by U.S. Department of Health and Human Services, State Medicare Fraud Limits, and the U.S. Department of Agriculture. It may well be that such recent losses following diverse governmental investigations will continue the upward trend in 2014.

No claw-back from the acquitted

In August 2013, a Delaware Superior Court dismissed an attempt by an AIG subsidiary to recoup defense costs advanced on behalf of directors and officers who were eventually acquitted of charges or had all charges dropped. The court-ordered dismissal of the insurance company’s attempt at recoupment of defense costs expended in the successful defense took place after the insurance company agreed to withdraw its claims to recouping defense costs previously advanced. The dismissal confirmed the finality of advancement of defense costs in this significant D&O liability insurance matter.

About William G. Passannante

William G. Passannante is a nationally recognized authority on policyholder insurance recovery in D&O, E&O, asbestos, environmental, property, food-borne illness, and other insurance disputes, with an emphasis on insurance recovery for corporate policyholders and educational and governmental institutions.

Permanent link to this article: http://www.financialinsurancelaw.com/2014/01/10/do-liability-insurance-and-bank-failures/

Sep 06

Sixth Circuit Rejects AIG “Direct Loss” Defense Under Crime Insurance Policy For Computer Hacking Claim

hacking claimSeveral days ago, we obtained for a client an insurance recovery when the United States Court of Appeals for the Sixth Circuit rejected AIG’s denial of insurance coverage for the losses that resulted when the policyholder suffered a data breach at the hands of a computer hacker.

The Sixth Circuit’s decision underscores two important insurance coverage points: (1) policyholders should resist the routine insurance company claims handling tactic of applying an unduly narrow interpretation to the “direct loss” clause to crime insurance  and fidelity bond insurance claims; and (2) when a loss occurs, policyholders are well advised to consider whether more than one policy covers their losses.

With regard to the “direct loss” defense to coverage, a number of federal courts have now rejected unduly narrow insurance company arguments about the scope of insurance coverage available under the “direct loss” insuring clause for crime/fidelity losses, including the Second, Third and Sixth Circuit Courts of Appeals.  Several state courts have also rejected insurance company arguments over the direct loss clause (especially in the context of claims against the policyholder from customers and other third parties who have entrusted or transferred to the policyholder property or information that is later stolen).  Since the “direct loss” argument is a recurring defense that insurance companies raise come claims time, the Sixth Circuit’s recent ruling is of particular importance to those in the financial industry that are mandated to purchase fidelity and financial institution bond coverage.

As for the issue of claims that implicate two or more insurance policy types, policyholders should make sure that they provide prompt notice to all potentially relevant insurance companies.  In the context of the Sixth Circuit case referenced here, the policyholder received defense cost coverage for certain class actions from its general liability insurance company which were filed as a consequence of the data breach.  In addition, the policyholder was able to recover for other losses suffered as a result of the data breach which led to, among other things, fraudulent credit card charges, credit monitoring expenses, and costs for re-establishing checking accounts.

As such, prudent risk management mandates that policyholders have a clear inventory of their insurance assets and take proactive steps to preserve their coverage rights under all potentially applicable insurance policies when claims surface.


About Joshua Gold

Joshua Gold is a shareholder in Anderson Kill's New York office. He has represented numerous corporate and non-profit policyholders in various industries, with recoveries for his clients well in excess of $1.5 billion. Mr. Gold is chair of the Cyber Insurance Recovery Practice Group. He is also co-chair of Anderson Kill's Financial Services Industry Group and a member of the firm's Hospitality Industry Group.

Permanent link to this article: http://www.financialinsurancelaw.com/2012/09/06/sixth-circuit-rejects-aig-direct-loss-defense-under-crime-insurance-policy-for-computer-hacking-claim/

Mar 13

Will the AIG Gravy Train Ever Be Stopped?

Congress has joined us in decrying the bailout of AIG. A Congressional committee said that the tax breaks given to the insurance giant during the economic meltdown of 2008 accounted for 90 percent of the company’s profits last quarter. I wrote about the unfair advantage given to AIG in a March 2009 article for “Dealbook,” the blog of New York Times reporter Andrew Sorkin. American taxpayers have been bailing out this company for four years. It’s time for the handouts to stop.

About David E. Wood

David E. Wood is co-managing shareholder in the Ventura office of Anderson Kill. He is also a member of Anderson Kill's Financial Services Industry Group. With more than 25 years of experience in the insurance industry, Mr. Wood devotes his practice to liability and errors and omissions coverage, professional liability insurance, crime coverage, primary-excess disputes, and rights of additional insureds.

Permanent link to this article: http://www.financialinsurancelaw.com/2012/03/13/will-the-aig-gravy-train-ever-be-stopped/