Georgia's Failed Bank Litigation Addresses “Insured vs. Insured” Coverage Exclusion


By: Kelly Morrison
Georgia is no stranger to failed banks, and thus continues to host to a number of FDIC lawsuits against former directors and officers.  Not surprisingly, these lawsuits are testing the legal waters regarding several coverage exclusions, as D&O insurers batten down the hatches in anticipation of further lawsuits.
On January 4, 2013, Northern District of Georgia Judge Robert L. Vining, Jr., issued an opinion regarding the common “insured vs. insured” coverage exclusion.  This recurring issue addresses whether the FDIC’s claims as receiver for a failed bank against the bank’s former officers and directors triggers the standard D&O policy’s “insured vs. insured exclusion.”
The case arose from the failure of Omni National Bank of Atlanta.  After suit was instituted in March 2012, the bank’s D&O insurer filed a separate declaratory judgment action, seeking a holding that no coverage existed due to the FDIC’s role as receiver for Omni.  Essentially, the D&O insurer argued that the FDIC had “stepped into the shoes” of Omni Bank, and their subsequent claims against former officers and directors were thus barred under the insured vs. insured exclusion.
Judge Vining rejected this argument, finding the policy language ambiguous due to the FDIC’s “multiple roles” as governmental regulator and receiver, noting that receivership gave the agency power to act on behalf of the bank’s depositors, creditors, and shareholders.  This reasoning is consistent with an earlier holding from the District of Puerto Rico in October 2012.
Although the insurer can develop and renew this argument in the FDIC’s lawsuit, this is undoubtedly a negative development for D&O insurers, who can now expect to defend FDIC actions through the summary judgment stage, a much more expensive proposition than the quick exit offered by a declaratory judgment.