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Key D&O exclusion upheld by US courts

A crucial exclusion used in directors' and officers' (D&O) policies has been upheld in a case involving the Federal Deposit Insurance Corporation (FDIC).

In the landmark ruling, dated 17 September, US District Judge Richard Story ruled that the insured vs insured exclusion operated in such a way as to ensure that the FDIC's claim against the D&O policy of the failed Community Bank & Trust was not valid.

The exclusion prevents coverage in a case where a company is suing its own executives for negligence with a view to recovering its losses from its own D&O policy.

When taking control of the bank the FDIC stepped into the shoes of the failed financial institution, Story said, meaning that the FDIC is effectively pursuing itself rather than a third party.

Last year, the FDIC brought a case against two former officers of Community Bank & Trust, which the Fed took over in 2010. It alleged that Trent Fricks was improperly approving loans at the bank and that Charles Miller, his superior, was negligent in his supervision.

Sitting in the US District Court for the Northern District of Georgia, Judge Story said it was not acceptable to rewrite a contract between private parties in the name of saving the tax-paying public money.

"There is no rule that the federal insurance fund should always win," he added.

Kevin LaCroix, an attorney and author of The D&O Diary blog, said it was a significant ruling that D&O insurers will rely on in future cases disclaiming coverage for FDIC failed bank suits.

Lawyers for the insurer, St Paul Mercury, tried unsuccessfully to argue that ambiguities in the policy document required further discovery. Story dismissed the claim in the Georgian court, where policy ambiguities necessitate payment. He said "liability can be determined without resort to matters outside the four corners of the policy".

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