On February 1, 2024, the U.S. Court of Appeals for the Sixth Circuit, in an unpublished opinion, held that a bank’s professional liability insurance includes coverage for a $32 million settlement payment the bank made to settle allegations that it facilitated a Ponzi scheme. The court ruled the bank’s loss is insurable under Ohio law because the settlement payment was not on account of punitive damages or intended to punish an intentional bad act, which are the only categories of uninsurable claims. The panel also held that the bank's claim is not barred by an exclusion for claims based on “unrepaid, unrecoverable, or outstanding credit” in its bankers professional liability policy or its excess policy, each of which were issued by different insurance carriers.
The coverage dispute stemmed from loans the bank extended to computer services business Cyberco Holdings Inc. ostensibly to purchase equipment from Teleservices Group Inc., which Cyberco said was a vendor but was actually a “paper company” created to perpetuate a fraudulent scheme. After noticing discrepancies in Cyberco’s reporting in 2003, the bank's security department discovered that Cyberco’s principal was being investigated by the FBI and had previously confessed to, and served time for, fraud-related crimes. The security team failed to report the findings to the client team responsible for Cyberco, however, and Cyberco gradually repaid its loan to the bank between May and October 2004. Later that year, the FBI raided Cyberco's offices. After Cyberco and Teleservices filed for bankruptcy, the companies’ bankruptcy trustees sued the bank to recover the loan payments as alleged fraudulent transfers. The bank settled the trustees’ claims for $32 million.
The bank’s insurers denied coverage, and as reported in our January 2023 edition, the district court granted summary judgment to the insurers on the ground the settlement was a repayment of the wrongful taking of money and was thus uninsurable under Ohio law. The Sixth Circuit disagreed, observing instead that “Ohio law demonstrates that for insurance coverage to be uninsurable under the law, the damages claimed must be based on an intent to injure, malice, ill will, or other similar culpability.” The insurers, the Sixth Circuit panel found, had not shown the bank committed any intentionally malicious acts. The bank's “acceptance of loan repayments, even while lacking a legitimate belief that Teleservices's transfers to Cyberco's account were merely Cyberco's receivables, was a step or two removed from any intentionally malicious act.” Additionally, the Sixth Circuit held that the policy exclusion based on the bank’s performance of lending acts did not apply because it the provision is open to more than one reasonable interpretation, and, applying rules of contract interpretation, the Sixth Circuit ruled that ambiguity must be resolved in the bank’s favor.
The case is Huntington National Bank v. AIG Specialty Insurance Co., No. 23-3039 (6th Cir. Feb. 1, 2024). The plaintiff-appellant is represented by Haynes and Boone, LLP and Carpenter Lipps LLP. The defendants-appellees are represented by Arnold & Porter Kaye Scholer LLP. The opinion is available here.
