United States: The Insured v. Insured Exclusion Isn't As Broad As D&O Insurers Try To Make It

Last Updated: January 6 2015
Article by Darren S. Teshima

Recent decisions demonstrate a growing consensus favorable to policyholders on a subject that has divided courts for decades: whether the insured v. insured exclusion in D&O policies prevents coverage for claims brought by a receiver of a failed bank against the bank's directors and officers. In the wake of the financial crisis, the Federal Deposit Insurance Corporation (the "FDIC") has brought numerous actions against former directors and officers alleging negligence and mismanagement. When directors and officers have tendered the claims to their D&O insurer, insurers often have denied coverage, citing the insured v. insured exclusion and arguing that the FDIC stepped into the shoes of the failed bank, another insured. Thankfully for policyholders, the majority of courts that have addressed this issue have rejected the insurers' argument. The recent decision in St. Paul Mercury Ins. Co. v. Hahn highlights this growing trend.

On October 8, 2014, the U.S. District Court for the Central District of California rejected an insurer's reliance on the insured v. insured exclusion. In that case, the FDIC stepped in as receiver for a failed bank, Pacific Coast National Bank ("Pacific Coast"). It brought a lawsuit against six of Pacific Coast's directors and officers, alleging that they failed to properly discharge their duties and obligations in managing Pacific Coast. The FDIC alleged that the directors and officers improperly originated and approved loans in violation of Pacific Coast's own policies, extended credit to borrowers who were not creditworthy, approved and originated speculative commercial real estate loans, and committed a series of other misdeeds. The directors and officers tendered the claim to Pacific Coast's D&O insurer, Travelers. Travelers (through St. Paul Mercury Insurance Company) denied coverage, arguing that the insured v. insured exclusion barred coverage because the FDIC was acting "on behalf" of Pacific Coast. On cross-motions for summary judgment, the district court ruled for the policyholders and held that the exclusion did not bar coverage.

While the Hahn decision is consistent with the majority of courts that have addressed the issue, the jurisprudence about the scope of the insured v. insured exclusion is far from settled. Indeed, there are decisions coming out on both sides of the issue dating back to the 1980s, when insurers relied on this exclusion to deny similar claims related to the savings and loan crisis.

The Insured v. Insured Exclusion

The insured v. insured exclusion in insurance policies excludes from coverage claims based on suits brought by one insured against another. The exclusion generally reads as follows, as it did in the policy at issue in Hahn:

The Insurer shall not be liable for Loss [including Defense Costs] on account of any Claim made against any Insured...brought or maintained by or on behalf of an Insured or Company [including the Bank] in any capacity, except a Claim that is a derivative action brought or maintained on behalf of the Company by one or more persons who are not Directors or Officers and who bring and maintain such Claim without the solicitation, assistance or active participation of any Director or Officer.

Insurers added the insured v. insured exclusion to their D&O policies in the mid-to-late 1980s when financial institutions allegedly "collusively" sued their own directors and officers for their allegedly poor business decisions in an attempt to recover their losses with proceeds from their D&O policies. A classic example of such a supposed "collusive" suit was in the 1980s when Bank of America sued six of its officers for millions of dollars in damages in Bank of America v. Powers. Bank of America blamed its officers and directors for their allegedly bad decisions related to their mortgage-backed securities practice, and it sought D&O coverage for the claims. Although the case ultimately settled, the insurer argued that the D&O policy did not provide coverage because Bank of America had brought its claims in an effort to negate its capital losses by suing its own directors and officers in order to gain access to their insurance coverage.

Since that time, insurers have regularly cited the exclusion in an effort to avoid covering claims brought by the FDIC after a bank failure. Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), the FDIC has broad authority to operate failed banks and dispose of their assets once it is appointed as a receiver. In its capacity as receiver, the FDIC will oftentimes sue the bank's directors and officers. The directors and officers in turn assert that the claims against them are covered by the bank's D&O policies, as the directors and officers did in Travelers in Hahn.

Insurers regularly deny coverage for these claims, arguing that if the bank could not have sued its directors and officers then a receiver that steps in the bank's shoes and sues on behalf of the bank likewise cannot sue the bank's directors and officers. On the other hand, directors and officers contend that a lawsuit brought by a receiver is not the sort of "collusive" lawsuit that the insured v. insured exclusion seeks to avoid. They assert that the FDIC is genuinely adverse to the defendant officers and directors. Although courts around the country have not adopted a uniform jurisprudence regarding these cases, they regularly hold that directors and officers are entitled to coverage when the FDIC sues them.

The Majority of Courts Hold that the Exclusion Does Not Preclude Coverage for Receivers' Claims

The Hahn court's decision granting coverage under the D&O policy follows the majority rule and the recent trend. When the FDIC stepped in as a failed bank's receiver, the insurer, Travelers, argued that the FDIC asserted claims against the directors and officers that belonged only to Pacific Coast, which was also an insured under the policy. Relying on the insured v. insured exclusion, which excluded coverage for claims brought "by or on behalf of an Insured or Company," Travelers contended that the FDIC was bringing those claims "on behalf of" Pacific Coast in a receivership capacity. Since the insured v. insured exclusion would apply if the Pacific Coast action had been brought by Pacific Coast, St. Paul contended, the FDIC could not transform Pacific Coast's claim into a covered claim simply because the FDIC had brought the claim on Pacific Coast's behalf.

The FDIC responded that because the policy defined the "Insured" to be Pacific Coast, the FDIC's action against the directors and officers could not be brought by Pacific Coast and was not on its behalf. The FDIC explained that nobody from the bank had any involvement in bringing the claim. Additionally, as the party drafting the policy, Travelers could have included a provision explicitly excluding coverage for a suit brought by federal regulators or receivers generally or by the FDIC specifically, but it did not.

Furthermore, the FDIC argued that the shareholder exception to the insured v. insured exclusion provided coverage because it specifically allowed derivative claims by shareholders on behalf of the bank. Travelers disagreed, noting that the FDIC action was not technically a derivative action. The court favored FDIC's position, noting that the FDIC can act in a variety of capacities, and that the shareholder exception "evidences an intent to place on [the] insurer the risk for actions against the D&Os." St. Paul Mercury Ins. Co. v. Hahn, Case No. SACV 13-0424 AG (RNBx), 2014 WL 5369400, at *5 (C.D. Cal. Oct. 8, 2014); see also FDIC v. BancInsure, No. CV 12-09882, 2014 U.S. Dist. LEXIS 82892, at *25 (C.D. Cal. June 16, 2014).

The Hahn court agreed with the FDIC and the directors and officers, holding that the exclusion was ambiguous as to the FDIC, particularly because courts across the country have reached conflicting interpretations of the exclusion. The court stated that the unsettled caselaw placed insurers on notice that the exclusion was ambiguous, and that to be effective in this circumstance it should be more clearly explained. The court also noted that Travelers could have included an exclusion to bar claims asserted by the FDIC, as the insurer offered an optional regulatory exclusion that explicitly named the FDIC. Since California law, like the law of most states, requires ambiguities in an insurance policy to be resolved against the insurer, the district court held that the insured v. insured exclusion did not apply.

Other courts have similarly recognized that a receiver does not merely "stand in the shoes" of a failed institution, but also can bring claims on behalf of the institution's shareholders and creditors. See W Holding Co., Inc. v. AIG Ins. Co., Civil No. 11-2271 (GAG), 2014 WL 3378671, at *1-2 (D.P.R. July 9, 2014) (granting summary judgment to the policyholders and rejecting the insurer's argument that the insured v. insured exclusion prevented coverage for the FDIC's claims against the directors and offers because they were made "on behalf of" or "in the right of" the failed bank); see also Fidelity & Deposit Co. of Maryland v. Zandstra, 756 F. Supp. 429, 433 (N.D. Cal. 1990); American Cas. Co. v. FDIC, 713 F. Supp. 311 (N.D. Iowa 1988). These holdings comport with statutory law as well, which recognizes the FDIC's capacity to bring derivative claims. Under FIRREA, the FDIC has the authority to succeed not only to the rights of the failed bank, but also to those "of any stockholder, member, [or] accountholder...of such institution." 12 U.S.C. § 1821(d)(2)(A)(i). Therefore, "the FDIC differs from other receivers insofar as it is given the exclusive authority to bring claims to recover losses by shareholders." BancInsure, 2014 U.S. Dist. LEXIS 82892, at *20).

Nevertheless, the Caselaw Is Unsettled

Despite decisions like Hahn and W Holding, application of the insured v. insured exclusion to FDIC claims remains unsettled. As the First Circuit put it in W Holding, "[w]hat we have is a classic battle of dueling caselaw." W Holding Co. v. AIG Ins. Co., 748 F.3d 377, at 386 (1st Cir. 2014). Courts that have applied the insured v. insured exclusion to claims brought by the FDIC have pointed to insurers' fears of collusion—the reason insurers included insured v. insured exclusions in the first place. For example, in St. Paul Mercury Ins. Co. v. Miller, 968 F. Supp. 2d 1236, 1243 (N.D. Ga. 2013), the FDIC took over for a failed bank as receiver and then sued two bank employees for improper and negligent activities. The individuals sought coverage under the bank's D&O policy, issued by St. Paul Mercury Insurance Company. St. Paul agreed to cover defense costs under a reservation of rights and initiated a lawsuit to establish no coverage based in part on the insured v. insured exclusion. The exclusion provided that the insurer was not liable for any claim "brought or maintained by or on behalf of any Insured or Company in any capacity," except when certain exceptions applied. The court rejected the FDIC's argument that because the purpose of the insured v. insured exclusion is to prevent collusive suits, the exclusion is inapplicable to the FDIC, which it asserted was clearly not collusive. The court disagreed with the FDIC and stated that it could not refuse to give effect to an "unambiguous term of the policy based on an assumption of why the language was put into the policy." Miller, 968 F. Supp. 2d at 1243. The Miller court agreed with the insurer, holding that because the FDIC stood in the failed bank's shoes, the insured v. insured exclusion precluded coverage.

How Policyholders Can Protect Themselves Against a Possible Coverage Denial

While decisions like Miller are unfavorable to policyholders, they are fortunately outnumbered by the decisions like Hahn, which signal a growing consensus among courts that the insured v. insured exclusion should not apply to suits brought by the FDIC and other regulators. Hahn correctly recognizes that the FDIC acts in a variety of capacities and "on behalf of" a variety of interests, not just the failed bank. The insured v. insured exclusion, therefore, should not be read to exclude coverage for claims by a receiver. Policyholder financial institutions that are concerned about whether D&O coverage will be available in the unfortunate event of being taken over by a receiver should consider obtaining policy language that specifically carves out such claims from the insured v. insured exclusion. For example, a recent policy includes an insured v. insured exclusion with the following exception: "This Policy shall not cover any Loss in connection with any Claim brought by or on behalf of an Insured, provided however, that this Exclusion shall not apply to any Claim brought or maintained by or on behalf of a bankruptcy or insolvency trustee, examiner, receiver or similar official for the Company or any assignee of such trustee, examiner, receiver or similar official." Such policy language will better serve policyholders in challenging an insurer's denial of such a claim.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.