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Receiver’s Claims Against Former Officers Not Barred by Insured v. Insured Exclusion By Lindsey Dean, Esq., Tressler LLP

In January 2017, the 9th Circuit U.S. Court of Appeals held that an Insured v. Insured Exclusion barred coverage for claims brought by the FDIC as receiver for a failed financial institution. Shortly following that decision, Judge William E. Smith in the U.S. District Court for Rhode Island took a different view, albeit on slightly different policy language, holding in Philadelphia Indemnity Ins. Co. v. Providence Community Action Program, Inc., et al., no. 15-cv-388, 2017 WL 354279 (D.R.I. Jan. 24, 2017), that an Insured v. Insured Exclusion did not preclude coverage for claims brought by a court-appointed receiver against the insured’s directors and officers. 

Philadelphia Indemnity Insurance Company (Philadelphia) insured Providence Community Action Program, Inc. (ProCAP) under a directors and officers liability insurance policy. ProCAP began experiencing financial difficulty after it purchased the Policy from Philadelphia and was forced into receivership. The receiver appointed by the court brought a claim against two former ProCAP officers for breach of fiduciary duty and sent a demand to Philadelphia for payment under the Policy. Philadelphia denied coverage for the claim pursuant to the Insured v. Insured Exclusion in the Policy.

The Policy generally provided coverage for Claims first made against ProCAP during the Policy Period for a D&O Wrongful Act. The Policy’s Insured v. Insured Exclusion barred coverage for “Claims made against the Insured brought or maintained by, at the behest, or on behalf of the Organization.” After ProCAP went into receivership, the Policy was amended to include the receiver as an “Independent Contractor” that qualified as an “individual insured” under the Policy. The amendment to the Policy defined “Independent Contractor” as “an individual who is contracted to perform services for the Organization…”

The District Court held that the Insured v. Insured Exclusion did not preclude coverage for the receiver’s demand. The court first analyzed whether the receiver was taking action on behalf of ProCAP, or on his own behalf as an agent of the court that appointed him. Looking to Rhode Island law analyzing the role of a court-appointed receiver, the court noted that when the Rhode Island Superior Court orders a company into receivership, the court and its receiver take legal title of the company and its property, leaving the company with only a contingent right in the property. Accordingly, the court found that a receiver is “better understood” as an agent of the court and as working for the potential benefit of various parties, rather than as working on behalf of the company. The court therefore held that the receiver’s claim was not brought on behalf of ProCAP, and the Insured v. Insured Exclusion did not apply.

The court next rejected Philadelphia’s argument that the Insured v. Insured Exclusion should apply regardless of the legal status of the receiver because the Policy was amended to add the receiver as an “Independent Contractor” who was contracted to perform services for ProCAP. The court reasoned that Philadelphia could not alter the relationship between the receiver and the court through an amendment to the Policy. The court also differentiated between the language used in the Insured v. Insured Exclusion, which applied to claims brought on behalf of ProCAP, and the amendment, which defined “Independent Contractor” as someone who is contracted to perform services for the Organization. The court also noted that the Exclusion did not reference “Independent Contractors” and vice versa.

In its opinion, the District Court correctly noted that the question of whether a successor in interest, such as a receiver, bankruptcy trustee or the FDIC, acts on behalf of an insured “has been the subject of much debate and disagreement.” Courts take varying stances as to whether an Insured v. Insured Exclusion will bar coverage for claims brought against an insured by a receiver or similar successor. Oftentimes, courts will find that an insured v. insured exclusion does not apply because it is ambiguous in the context of claims brought by a receiver. Interestingly, the District Court here did not reach the issue of ambiguity. Instead, the court took a slightly different approach, focusing predominately on the legal role of the receiver under Rhode Island law.