The court found there the duty to defend a suit filed by the FDIC against officers and directors was not excluded by the insured versus insured provision in the policy. W Holding Co., Inc. v. AIG Ins. Co. - Puerto Rico, 2014 U.S. App. LEXIS 5943 (1st Cir. March 31, 2014).
Regulators ordered the closure of the insured bank and the Federal Deposit Insurance Corporation (FDIC) was appointed as receiver. FDIC concluded certain bank directors and officers had breached their fiduciary duty by jeopardizing the bank's financial soundness. The FDIC concluded these breaches had caused more than $367 million in losses and demanded reimbursement by the directors and officers.
The directors and officers notified their insurer, Chartis, under the D&O policy. The policy paid defense costs. Chartis, however, denied coverage, relying primarily upon the "insured versus insured" exclusion. The exclusion provided Chartis would not be liable for loss,
in connection with any claim made against any 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.
Chartis maintained that the FDIC, as receiver, had stepped into the shoes of the bank. Any claims that FDIC had against the directors and officers were on behalf of the bank, triggering the insured versus insured exclusion.
The bank sued for a declaratory judgment. The district court found that the insured versus insured exclusion barred the FDIC from suing on behalf of the bank's officers, directors and shareholders. But because the FDIC also sued on behalf of account holders and depositors, the judge concluded that the FDIC's claims fell outside the exclusion.
The First Circuit affirmed. The FDIC alleged it had succeeded to the rights of the bank's depositors and account holders and was suing to recover money the FDIC-insurance fund had paid after the bank had shut down. These allegations made it likely possible - even if only remotely so- that the FDIC was suing on behalf of these non-insureds.