In This Issue:

• Insured v. Insured Exclusion Ambiguous When Applied to FDIC, 11th Circuit Rules
• Insurer Must Pay $30M for Bank Overdraft Fee Litigation
• California Court: Insured’s Request for Independent Counsel Doesn’t Violate Cooperation Clause
• Lacking Agreement on Right to Reimbursement, Insurer Can’t Recover

Insured v. Insured Exclusion Ambiguous When Applied to FDIC, 11th Circuit Rules

Why it matters
In the continuing split among courts considering insured v. insured exclusions, the Eleventh U.S. Circuit Court of Appeals recently found such an exclusion ambiguous and reversed summary judgment in favor of the insurer. The underlying dispute involved a failed bank and a lawsuit brought by the Federal Deposit Insurance Corporation (FDIC) as receiver against former officers of the institution. The district court ruled that the insurer had no obligation to defend the officers under the insured v. insured exclusion. The Eleventh Circuit reversed on the ground that it was ambiguous whether the exclusion applies when the FDIC, as the bank’s receiver, brings claims against insureds. This case is significant not only because it further continues the split of judicial opinions on the question, but also because it found that the most compelling evidence of the ambiguity was “that courts who have addressed similarly worded insured vs. insured exclusions have reached different results.”

Detailed Discussion
In 2010, Georgia-based Community Bank & Trust failed and the FDIC was appointed as receiver. In its capacity as receiver, the FDIC filed suit against two former bank officers, Miller and Fricks, asserting that they had approved loans in violation of the bank’s loan policy and prudent lending practices, causing damages of $15 million.

Miller and Fricks tendered the suit to St. Paul Mercury Insurance Company, the bank’s D&O insurer. In response, St. Paul filed a declaratory judgment action in Georgia federal court seeking a declaration that coverage was barred due to the policy’s insured v. insured exclusion.

The exclusion provided: “The Insurer shall not be liable for Loss [including Defense Costs] on account of any Claim made against any Insured: … 4. Brought or maintained by or on behalf of any Insured or Company in any capacity.”

The district court judge ruled that the exclusion was unambiguous and that St. Paul had no duty under the policy to defend or indemnify the officer defendants. The FDIC appealed.

The exclusion itself makes no references to the FDIC, regulators, or any liquidating entity. The FDIC argued that, as receiver, it “steps into a number of pairs of different shoes” – it acts on behalf of the bank, but also on behalf of stockholders, account holders, depositors and other creditors. As such, it is not a mere successor to an “Insured” for purposes of the exclusion.

St. Paul countered that the exclusion was unambiguous and that by bringing a claim in the bank’s behalf, the FDIC was stepping into the bank’s shoes and is subject to all defenses that could have been asserted against the bank.

Although the FDIC made a number of arguments as to why the exclusion is ambiguous, the Eleventh Circuit found that “the most compelling argument is that courts who have addressed similarly worded insured v. insured exclusions have reached different results.” The fact that multiple courts themselves have adopted multiple, inconsistent interpretations of the same exclusionary language demonstrates that the insured v. insured exclusion is ambiguous as it applies to the FDIC in its role as receiver.

Remanding the case to the district court, the panel noted that it might be necessary to consider extrinsic evidence to determine the intent of the parties.

To read the opinion in St. Paul Mercury Ins. Co. v. FDIC, click here.

Insurer Must Pay $30M for Bank Overdraft Fee Litigation

Why it matters
A federal district court found an insurer responsible to provide coverage for a $55 million class action settlement ($30 million after satisfaction of a $25 million retention) of a suit between a bank and a class of customers who alleged that the bank charged excessive overdraft fees. The class claimed that U.S. Bank improperly sequenced debits so as to increase the amount of overdraft fees, raising the bank’s revenue. The bank reached a $55 million settlement with the class and sought coverage, including defense costs, from its insurers. Applying Delaware law, a Minnesota federal court rejected the insurers’ argument that coverage was barred by public policy because the indemnity payment was for restitution. The court found that the policies at issue “unambiguously require that a final adjudication in the underlying action determine that a payment is restitution before the payment is barred from coverage as restitution.” No final adjudication occurred in the underlying litigation because the case settled and the settlement agreement did not characterize the fund as restitution.

Detailed Discussion
Beginning in 2009, multiple class action lawsuits were filed against U.S. Bank, challenging how the bank assessed fees when a customer overdrew his or her account. The plaintiffs alleged that U.S. Bank unlawfully posted transactions in order to maximize the assessed overdraft fees. The suits were consolidated in a multidistrict litigation in Florida federal court.

U.S. Bank maintained a primary insurance policy with Indian Harbor Insurance Company and an excess policy with ACE American. Both policies required the consent of the insurers prior to settling a claim. Indian Harbor consented to a $45 million settlement and ACE consented to a settlement of $60 million, both reserving their rights to later challenge coverage.

The underlying litigation settled for $55 million in 2013. U.S. Bank did not admit liability on the claims, and the nature of the payment (e.g., damages or restitution) was not specified.

U.S. Bank then sought coverage from its insurers for its settlement fund (net of a $25 million deductible) and defense costs.

The insurers denied coverage, relying on (1) an Uninsurable Provision, which excluded coverage for losses for “[m]atters which are uninsurable under the law pursuant to which this Policy is construed,” and (2) an Extension-of-Credit Provision, which excluded coverage for “principal, interest, or other monies either paid, accrued, or due as the result of any loan, lease or extension of credit by [U.S. Bank].”

Finding the policy language unambiguous, the court granted summary judgment for U.S. Bank.

As to the public policy argument, the court assumed without deciding that Delaware law forbids insurance coverage for restitution, and then found that the settlement payment was not restitution. The Uninsurable Provision, construed in connection with an Ill-Gotten Gains Provision, shows that there must be a final adjudication in the underlying action that the payment was of a prohibited nature.

As such, even if restitution payments were deemed to be uninsurable, there was no final adjudication that the payment was for restitution and, as such, the exclusionary language was not satisfied.

The court refused to assume that the settlement constituted restitution based simply on the allegations in the underlying complaint. “If a settlement resolves claims alleging unlawful activity but excludes an admission of liability for the activity, it does not establish that the underlying allegations are true or false,” the court explained. “Instead, a settlement represents the parties’ willingness to resolve the claims after weighing the negotiated settlement amount against the potential judgment amount and accounting for the costs and benefits of continued litigation. That is exactly what this settlement was.”

Although the insurers argued that this interpretation would lead to an absurd result and allow the insured to contract around public policy, the court said that it was simply tracking the language of the policies. The policy itself required a final adjudication, the judge noted, and the insurers could have refused to provide consent for the settlement if they were concerned that it constituted restitution.

Turning to the Extension-of-Credit Provision, the court clarified that the case was not about overdraft protection, but the assessment of overdraft fees, precluding application of the exclusion. “This is a distinction that makes a difference given that an overdraft fee is simply a fee for a service and overdraft protection is likely an extension of credit,” he wrote.

The court ordered the insurers to indemnify U.S. Bank for $30 million and reimburse the insured for related defense costs.

To read the order in U.S. Bank v. Indian Harbor Ins. Co., click here.

California Court: Insured’s Request for Independent Counsel Doesn’t Violate Cooperation Clause

Why it matters
Facing multiple lawsuits, an insured sought coverage from two insurers. Subject to a reservation of rights and the right to retain counsel, the insurers agreed. But the insured asserted that it was entitled to independent counsel paid by the insurers, albeit with a willingness to accept co-counsel. The insurers then filed for declaratory relief, arguing that the request violated the cooperation clause in the policies, a breach of contract that left the insured without coverage. Nice try, the court said. The mere request for independent counsel does not constitute a breach of the duty to cooperate given an insured’s statutory right in California to make such a request, particularly as the insured had indicated a willingness to accept co-counsel, the court explained.

Detailed Discussion
Centex Homes was sued in a series of construction defect lawsuits and tendered its defense to St. Paul Fire and Marine Insurance Company and Traveler’s Property Casualty Company (together, “Travelers”). Travelers agreed to defend, subject to reservation of rights, and appointed defense counsel for Centex.

Centex notified Travelers that Centex believed the counsel Travelers had appointed lacked independence and that Centex was entitled to counsel of its own selection. Centex further stated that it accepted that Travelers could appoint a co-counsel to participate in the defense at Travelers’ expense.

According to the insurers, Centex’s refusal to accept appointed counsel constituted a breach of the policies’ cooperation clause.

The court disagreed. California Civil Code section 2860 provides that “[i]f the provisions of a policy of insurance impose a duty to defend upon an insurer and a conflict of interest arises which creates a duty on the part of the insurer to provide independent counsel to the insured, the insurer shall provide independent counsel to represent the insured unless, at the time the insured is informed that a possible conflict may arise or does exist, the insured expressly waives, in writing, the right to independent counsel.”

The court found that the statute contemplates that an insured may inform an insurer of a possible conflict of interest and request independent counsel, and the “mere request for independent counsel did not constitute a breach of [Centex’s] duty to cooperate’ because Centex had a statutory right to make such a request.”

The court also found that Centex, by demanding independent counsel, had not refused to cooperate with Travelers’ appointed counsel. To the contrary, the court found that Centex expressly agreed to work with Travelers’ appointed counsel as co-counsel.

Finally, the insurers did not “identify any basis to conclude that a demand that Travelers pay all expert and vendor bills constitutes a breach of the duty to cooperate.” “A reservation of rights to possibly seek reimbursement at some unknown future time is not a present demand, and does not amount to a breach of the cooperation clause.”

To read the order in St. Paul Fire and Marine Ins. Co. v. Centex Homes, click here.

Lacking Agreement on Right to Reimbursement, Insurer Can’t Recover

Why it matters
A federal district judge in Minnesota rejected an insurer’s effort to recover a portion of the money it paid to resolve a class action suit on behalf of its insured. The court held that there was no agreement that would entitle the insurer to such reimbursement. When the underlying litigation settled, the insurer agreed to pay 33 percent of the total fund. The insured later sued the insurer to recover additional defense payments, and the insurer countersued, claiming it had overpaid and was entitled to a refund. This decision concerned the insured’s motion for summary judgment concerning the insurer’s reimbursement claim. The court found no evidence that the insurer conditioned its payment on a subsequent reapportionment of the settlement, much less that the insured acquiesced to such an agreement.

Detailed Discussion
Select Comfort, the maker of the Sleep Number bed, faced a putative class action alleging that the plaintiffs suffered health problems from mold in beds purchased over a roughly 18-year period.

Select Comfort requested defense coverage for the suit from several insurers with whom it held liability policies during the time period, including Arrowood.

Arrowood, which sold policies to Select Comfort for 2 of the 18 relevant years, accepted the tender with a reservation of rights. The insured hired its own defense counsel and argued that the reservation of rights created a conflict converting Arrowood’s obligation into a duty to pay Select Comfort’s reasonable attorney’s fees and costs.

Select Comfort reached a settlement agreement with the plaintiffs in the underlying litigation after successfully resisting class certification. Arrowood agreed to pay 33 percent of the settlement, and Arrowood and two other insurers paid about half of the defense costs.

Select Comfort then filed suit seeking to recover the roughly $500,000 in defense costs not paid by the insurers. Arrowood responded with a counterclaim for reimbursement of what the insurer argued was an overpayment of its fair portion of the underlying settlement.

Granting Select Comfort’s motion for summary judgment on Arrowood’s counterclaim, the court found no evidence that Arrowood conditioned its payment on a subsequent ability to seek reapportionment of the settlement, much less that the insured assented to such an arrangement.

Arrowood argued that, under Minnesota law, it was responsible for only a pro rata portion of the claims, that it provided insurance in only 2 of the 18 years at issue, and that its liability thus should have been capped at two-eighteenths of the settlement, rather than the 33 percent it actually paid.

The court ruled that, even if the insurer correctly stated Minnesota allocation law, its reimbursement cause of action necessarily had to be founded on contract, not equity. The contracts, however, “contain no provision, and contemplate no ground, on which an amount paid by Arrowood in fulfillment of [its] obligations could later be extracted from Select Comfort and returned to Arrowood.” Although the parties could have agreed to condition the insurer’s participation in the settlement on a later reapportionment, they elected not to do so.

“Arrowood may only maintain its counterclaim if it can show a genuine issue of material fact with respect to whether the parties mutually agreed that Arrowood’s payment towards [the settlement] was subject to a right of reimbursement from Select Comfort,” the court said. “It cannot. There is no evidence in the record before the Court that Select Comfort consented to any such condition, nor even that Arrowood ever sought such consent from Select Comfort.”

The insurer’s reservation of rights letter, which stated that “Arrowood may advance legal fees, court costs, expert expenses, settlement payments, or payments to satisfy a judgment, and then seek reimbursement of such sums from Select Comfort on the ground that it had no obligation to make those payments in the first place,” was insufficient, court explained.

“Arrowood cannot create a right to reimbursement from its insured by unilateral declaration,” the judge wrote. “[T]he undisputed facts show that the parties negotiated the division of [the settlement] between themselves. Arrowood agreed to, and did, pay 33 percent. There is no evidence that Arrowood conditioned that payment on a subsequent re-apportionment of the settlement between itself and Select Comfort, much less that Select Comfort assented to such an arrangement.”

To read the opinion in Select Comfort Corp. v. Arrowood Indemnity Co., click here.