The U.S. Court of Appeals for the Eleventh Circuit has held that a prior acts exclusion in a directors and officers liability policy does not bar coverage for a lawsuit brought by the Federal Deposit Insurance Corporation (FDIC) against a failed bank, because the wrongful acts at issue occurred after the prior acts date and were not “inextricably linked” to the bank’s wrongful acts before that date.  Certain Underwriters at Lloyd’s of London v. FDIC, 2018 WL 509095 (11th Cir. Jan. 23, 2018).

The insured bank engaged in lending practices that led to the foreclosure of many properties.  Instead of selling the properties “as-is,” board members instituted a plan to renovate the properties.  At the time the plan was initiated, the bank was financially sound.  However, bank regulators later downgraded the bank’s rating to failing.  Despite the change, board members continued to invest millions into the properties.  After the bank closed, the FDIC brought an action against the bank.

The bank’s D&O liability policy contained a prior acts exclusion that barred coverage for claims arising from a wrongful act committed before the prior acts date or for claims related to a wrongful act committed before the prior acts date.  In resulting coverage litigation, the bank’s insurer argued that the exclusion barred coverage for the FDIC action because the lawsuit arose out of the bank’s unsound lending practices and its decision to implement the rehabilitation project, which both occurred before the prior acts date.  The district court held the exclusion did not apply.

The Eleventh Circuit affirmed.  The court reasoned that the claim for coverage in the instant case was not “inextricably linked” to the bank’s unsound lending practices, which occurred before the prior acts date.  According to the court, the claim was based on the bank’s “independent business decision” to rehabilitate properties.  That decision only became wrongful after the prior acts date, when the board continued to fund the project despite the decline of the bank’s financial condition.