A recent settlement by the FDIC of a lawsuit against five former bank officers whose bank failed (and, therefore, the FDIC contended, with the benefit of its customary 20/20 hindsight, MUST have been negligent, grossly negligent, and fatally debauched), led to some speculation by a few of my readers that the FDIC is not really interested in punishing the malign, but merely in squeezing blood out of turnips. While I agree that the FDIC as receiver of failed banks is always primarily interested in recouping its losses, I'm not so sanguine about the absence among the bank regulatory Tourquemadas of the desire to flay sinners. On the other hand, my readers have a point.
As discussed by Kevin LaCroix in his blog post on the case, the former officers sued the bank's D&O insurance carrier for denying coverage of the FDIC's claims, and the carrier defended on the "insured versus insured" exclusion contained in the insurance policy.
The individuals contend that the policy’s base form had a regulatory exclusion, which had it remained in the policy would have precluded coverage for the FDIC’s action against them. The individuals allege further that the bank had purchased an endorsement to the policy that removed the regulatory exclusion from the policy. The individuals essentially contend that the point of the endorsement to remove the regulatory exclusion was to ensure that the policy provided coverage for claims brought by the FDIC, and the carrier therefore should not be able to rely on a different exclusion to try to deny coverage for an FDIC claim.
According to defense counsel’s press release, in their settlement with the FDIC, the five individuals assigned their claim for bad faith and breach of contract to the FDIC, while retaining their right to try recover from the D&O insurer their defense fees incurred prior to the settlement. The parties also exchanged covenants not to bring any further actions against each other, and the settlement also included a covenant by the FDIC not to assert any claims against the five individuals’ property or assets. The FDIC will control and prosecute the assigned claims against the insurer at the agency’s own cost and expense. The officers maintained their right to continue their own retained claims.
Critically, the officers agreed to the entry of a judgment against them in favor of the FDIC, then assigned their claims against the insurance company to the FDIC. Since The FDIC will look solely to the insurance carrier to collect the agreed upon judgment, a cynic might posit that the defendants agreed to a judgment that might have been a wee bit higher than an objective view might have justified. As a slap-happy optimist, I'd never encourage that view, but Kevin LaCroix is not an optimist.
However, the problem with these type of consent judgment/covenant not to execute type deals is that this approach can run the risk of slipping into a collusive arrangement, with the insured individual willingly agreeing to a settlement amount that has no relation to the his or her true liability exposure. Without meaning to suggest anything one way or another about this particular deal, I will say that in my prior life as an insurer-side coverage attorney, I did see deals that were questionable.
You can't blame either side for doing what it believes is in its own best interest. In this case, the insurance company might have avoided any possibility of collusion between the defendants and the FDIC by deviating from the normal business model of an insurance company: collect premiums, deny liability.