McCullough v. Fidelity & Deposit Co.
2 F.3d 110, 1993 WL 328114 (1993)
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Rule of Law:
Under a 'claims made' directors' and officers' liability insurance policy, coverage is triggered only by the insured providing objective written notice of 'specified Wrongful Acts' during the policy period, not merely general information about an institution's deteriorating financial condition or a vague reference to regulatory action.
Facts:
- Fidelity & Deposit Company of Maryland (F&D) issued four directors' and officers' (D&O) liability policies to four affiliate banks, including Harris County Bankshares, Inc. and its subsidiaries.
- The D&O policies covered claims made against insured officers and directors if certain written notice of potential claims, arising from 'specified Wrongful Act[s],' was given to F&D during the policy period.
- From June 1984 to March 1985, the banks provided F&D with quarterly Call Reports detailing increasing loan losses and delinquencies.
- In conjunction with policy renewal in 1985, the banks provided F&D a 1984 annual report that included a footnote referring to the issuance of a cease and desist order by the Office of the Comptroller of the Currency (OCC) to one of the subsidiary banks, but the banks did not provide the actual order.
- F&D continued to express concern about the banks' financial condition, noting their 'problem with the Feds'.
- In September 1985, F&D informed the banks that it intended to cancel their policies mid-term, effective October 9.
- In February 1988, after a merger of the subsidiary banks, the OCC declared the bank insolvent and appointed the Federal Deposit Insurance Corporation (FDIC) as Receiver.
- The FDIC subsequently sued the banks' directors and officers for improperly or illegally making, administering, or collecting loans, and F&D denied coverage under the D&O policies.
- The FDIC sought to inspect F&D's underwriting files and depose F&D representatives regarding claims F&D anticipated against directors and officers.
Procedural Posture:
- The Federal Deposit Insurance Corporation (FDIC) filed a declaratory judgment action against Fidelity & Deposit Company of Maryland (F&D) in the United States District Court for the Southern District of Texas, seeking a determination that F&D provided coverage under its D&O liability policies.
- F&D filed a motion to dismiss the action, which was later converted to a motion for summary judgment.
- The FDIC argued, under Fed.R.Civ.P. 56(f), that the court should postpone the motion for summary judgment until discovery was completed, specifically requesting discovery of F&D's underwriting files and depositions of its representatives.
- The district court initially granted the FDIC's request for limited discovery and denied F&D's motion for summary judgment.
- F&D filed a motion for reconsideration.
- On reconsideration, the district court found that information revealing F&D's subjective interpretation of the documents it received was irrelevant, concluded that the FDIC had failed to show that F&D received written notice of a potential claim under § 6(a)(2) of the policy, and entered final judgment for F&D.
- The FDIC timely appealed the district court's decision to the United States Court of Appeals for the Fifth Circuit.
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Issue:
1. Does providing an insurer with general information about a bank's deteriorating financial condition and a reference to a cease and desist order constitute sufficient objective written notice of 'specified Wrongful Acts' to trigger coverage under a 'claims made' directors' and officers' liability policy? 2. Did the district court abuse its discretion by granting summary judgment without allowing further discovery into the insurer's subjective interpretation of the notice received?
Opinions:
Majority - W. Eugene Davis
No, providing an insurer with general information about a bank's deteriorating financial condition and a reference to a cease and desist order does not constitute sufficient objective written notice of 'specified Wrongful Acts' to trigger coverage under a 'claims made' directors' and officers' liability policy. Additionally, no, the district court did not abuse its discretion by granting summary judgment without allowing further discovery into the insurer's subjective interpretation of the notice received. The court reasoned that the plain language of Section 6(a) of the policy requires notice of 'specified Wrongful Act[s],' with 'specified' modifying 'Wrongful Act,' not 'claim.' This interpretation ensures the term 'specified' has meaning, as an 'unspecified claim' is nonsensical. Notice in a 'claims made' policy serves a critical function of triggering coverage, unlike prejudice-preventing notice in 'occurrence' policies, and relaxing this requirement would impermissibly expand coverage, as noted in Hirsch v. Texas Lawyers Ins. Exchange. The information furnished by the banks (Call Reports, annual report with footnote M) was inadequate because it did not identify specific wrongful acts, such as the particular subsidiary, individuals involved, time period, potential claimants, or specific unsound practices that formed the basis of the cease and desist order. Notice of an institution's worsening financial condition is not notice of an officer's or director's specific act, error, or omission (American Casualty Co. v. FDIC; California Union Ins. Co. v. American Diversified Savings Bank). Furthermore, the court held that the subjective inferences an insurer's representatives draw from the notice are irrelevant; the relevant inquiry is whether the insured objectively complied with the policy's written notice provision. Since all communications from the insureds were already produced and objectively failed to show notice of a specified wrongful act, further discovery into F&D's subjective underwriting analysis was unnecessary and properly denied.
Analysis:
This case provides a significant interpretation of 'claims made' insurance policies, particularly for D&O coverage, by strictly defining the type of notice required. It establishes that general awareness of financial difficulties or regulatory involvement is insufficient; insureds must provide specific details of alleged wrongful acts. This ruling solidifies the objective standard for evaluating notice, preventing insureds from relying on an insurer's subjective inferences or later discovery to expand coverage. It underscores the importance for D&O policyholders to provide clear, detailed, and specific written notice of potential wrongful acts to their insurers to ensure coverage, impacting how companies and their fiduciaries manage risk and comply with policy terms.
