Applying Puerto Rico law, the United States District Court for the District of Puerto Rico has held that only part of a claim made by the Federal Deposit Insurance Corporation (FDIC) against the directors and officers of a failed bank relates back to a prior claim against the insureds, and thus the complaint triggers two policy periods.  W Holding Co., Inc. v. AIG Ins. Co., No. 3:11cv2271 (D.P.R. July 9, 2014).  In addition, the court held that the policy’s insured v. insured exclusion does not warrant summary judgment for the insurer because the FDIC purports to bring its claim on behalf of non-insureds, including the bank’s depositors and accountholders. 

In 2009, the FDIC, as receiver for a failed Puerto Rican bank, brought a claim against the bank’s former directors and officers in connection with a pattern of allegedly reckless underwriting practices.  The FDIC’s complaint identified eight particular borrowers for which the FDIC sought damages.  One of those borrowers was also at issue in securities lawsuits filed against the directors and officers starting in 2006.  Like the FDIC’s claim, those earlier lawsuits also alleged negligent and reckless underwriting practices by the bank.

The directors and officers’ insurance policy defined “Claim” in relevant part as “a written demand” or “a civil . . . proceeding,” and it provided that where the insureds have given written notice of a Claim, then a subsequent Claim “alleging, arising out of, based upon or attributable to the facts alleged in the Claim or alleging any Wrongful Act which is the same as or related to any Wrongful Act alleged in the Claim shall be considered related to the first Claim of which such notice has been given” and is “subject to the one aggregate limit of liability.”

The insurers argued that the FDIC’s lawsuit was a single “Claim” under the policy definition defining the term as “a civil . . . .proceeding,” but that argument was not addressed in the Court’s opinion despite extensive briefing.  In addition, due to the overlapping allegations in the FDIC’s claim and the earlier securities lawsuits, the insurers argued that the FDIC’s lawsuit relates to and thus is considered a single “Claim” with the earlier lawsuits first made in the 2006-2007 policy period.  The directors and officers and the FDIC argued that the FDIC’s lawsuit triggers both policy periods, as only the allegations as to the single borrower at issue in the earlier suits relates back to the 2006-2007 policy period, and the allegations as to the remaining seven borrowers are a “Claim” under the 2009-2010 policy period.

The court sided with the directors and officers and the FDIC, holding that the FDIC’s claim triggers both policy periods.  The court noted that the FDIC’s complaint “substantially overlaps with the complaints in the Prior Suits regarding general allegations of grossly negligent practices,” but nonetheless held that only the allegations as to the single borrower at issue in the prior suits sufficiently overlap for purposes of the policy’s related claims provision.  Accordingly, the court held that the FDIC’s claim with respect to that single borrower relates back to and is treated as a single claim with the lawsuits first filed under the 2006-2007 policy period, but the FDIC’s claim as to the remaining seven borrower is a claim made under the 2009-2010 policy period.

The primary insurer had also argued that coverage is barred by the policy’s insured v. insured exclusion, which precludes coverage for claims against an insured “brought by, on behalf of or in the right of, an Organization or any Insured Person.”  According to the primary insurer, the FDIC, as receiver for the bank, had stepped into the shoes of the bank and thus was asserting the claim on behalf of or in the right of an insured against other insureds.  The court held that the primary insurer was not entitled to summary judgment on this issue, as the FDIC at least purports to represent such non-insureds as the bank’s depositors, accountholders and depositors insurance fund.  Thus, the court held, to the extent the FDIC proves at trial that it represents these non-insureds, the exclusion does not apply.