Crime Bond Affords No Coverage Where Insured Bank Fails to Submit Complete Proof of Loss Prior to FDIC’s Appointment as Receiver
A Colorado federal court has held that a claim under a financial institution crime bond was “extinguished” when the insured bank failed to comply with all notice requirements before it was placed in receivership. FDIC v. Kan. Bankers Sur. Co., 2015 WL 2452988 (D. Colo. May 21, 2015).
An insurer issued to a bank a financial institution crime bond that afforded coverage for, among other things, loss to the bank resulting from an employee’s dishonest or fraudulent acts. The bond contained two notice requirements: (1) notice of discovery of the loss as soon as practicable and (2) within six months of discovery, a proof of loss. However, the bond also provided that, if the insurer opted not to exercise its right, but not duty, to defend a lawsuit, the bank had six months from any settlement or judgment to submit a proof of loss. The bond also provided that it “terminated in its entirety” “upon the taking over of the Insured by a receiver or other liquidator or by State or Federal officials.”
In February 2009, the bank notified the insurer of a claim arising out of an employee’s lending of money to a farm allegedly in a manner intended to circumvent the bank’s lending limits. The farm had gone into bankruptcy and could not repay the loans. The farm sued the bank for breach of fiduciary duty and sought the discharge of its indebtedness. The insurer chose not to defend the suit, and the bank did not submit a complete proof of loss, despite requests from the insurer. During the underlying lawsuit, the Federal Deposit Insurance Corporation (FDIC) was appointed as receiver for the bank. The FDIC subsequently settled the underlying suit and recovered a portion of the unpaid loans. The FDIC then sought the remainder of the bank’s loss from the unpaid loans under the bond. The insurer denied coverage, arguing that the bank had not submitted a proof of loss prior to the FDIC’s appointment as receiver and that the receivership terminated the bond.
In the ensuing coverage litigation, the court disagreed with the FDIC’s argument that the proof-of-loss requirement was excused. First, the court rejected the argument that the bank’s notice of a claim was sufficient because the bond expressly required a proof of loss. Second, the court disagreed that the provision allowing for the submission of a proof of loss within six months of a settlement or judgment in the underlying suit trumped the provision providing for termination of the bond upon the date of receivership. The court concluded that the termination provision was a more specific provision that trumped the general condition relating to the due date for the proof of loss. The court also held that the result was not so inherently unreasonable as to violate Colorado public policy and noted that federal law specifically allows termination provisions in financial institution bonds. The court therefore granted summary judgment in favor of the insurer.