McCullough v. Fidelity & Deposit Co.

Brief Fact Summary.

The Federal Deposit Insurance Corporation (FDIC) (Plaintiff) brought this action against Fidelity & Deposit Co. (Defendant) when they cancelled the liability policies covering claims against officers and directors of certain insolvent banks and refused to defend those officers and directors.

Synopsis of Rule of Law.

So long as an insured notifies the insurer of any specified wrongful act, error, or omission that may later give rise to a claim being made against its directors or officers, the insurer is required to provide coverage for claims made following the expiration of a policy.

Facts.

Fidelity & Deposit Co. (F & Defendant) (Defendant) issued liability policies, covering claims made against insured officers and directors if the required notice was given to the insurer during the time the policy was in force, to four affiliate banks and three subsidiaries.  Because of increasing loan losses and delinquencies, F & Defendant (Defendant) informed the banks that it intended to cancel their policies.  A cease-and-desist order was issued by the Office of the Comptroller of the Currency (OCC) to one of the subsidiaries by its primary regulator.  When the banks were declared insolvent, the Federal Deposit Insurance Corporation (FDIC) (Plaintiff) then sued the directors and officers for improperly making, administering, or collecting loans.  Defendant denied coverage to the officers and directors under the policies.  Plaintiff then filed this action.  The court found that Plaintiff had not shown that Defendant received written notice of a potential claim under the policy and granted summary judgment to Defendant.  Plaintiff appealed.

Issue.

Will coverage be provided if the insured informs the insurer or any special wrongful act, error, or omission that may later give rise to a claim?

Held.

(Davis, J.)  Yes.  So long as an insured notifies the insurer of any specified wrongful act, error, or omission that may later give rise to a claim being made against its directors or officers, the insurer is required to provide coverage for claims made following the expiration of a policy.  Here, the insured banks failed to provide F & Defendant (Defendant) with a copy of the cease-and-desist order and gave Defendant no notice of the particular subsidiary involved, the particular agents, officers, or directors involved, the time period when the events occurred, the identity of potential claimants, or the specific unsound practices the order was based on.  Notice of an institution’s worsening financial condition, which the banks failed to provide, is not notice of an officer’s or director’s act, error, or omission.  Plus, rising delinquencies and bad loan portfolios are not sufficient to constitute such notice.  Affirmed.

Discussion.

Claims against an insured, covered by “occurrence†policies—i.e., those policies that cover injuries that occur during the time the policy was in force, regardless of when the loss is actually reported—may not surface for years.  Toxic tort claims covered by such policies may cause financial havoc for an insurer.  Therefore, directors’ and officers’ liability (D&O) policies are limited to “claims made†policies, which only cover claims made against a company during the policy period.