United States District Court, Central District of Illinois, Peoria Division
August 27, 1991
FEDERAL DEPOSIT INSURANCE CORPORATION, IN ITS CORPORATE CAPACITY, PLAINTIFF,
MARGIE ZABORAC, CHESTER JACOBUS, GEORGE BAYLOR, HARRY TARTER, WAYNE GROVE, AND LINDA GROVE, AND AMERICAN CASUALTY COMPANY OF READING, PENNSYLVANIA, GARNISHEE, DEFENDANTS.
The opinion of the court was delivered by: Mihm, District Judge.
Before the Court is a Motion by the Garnishee Defendant,
American Casualty Company of Reading, Pennsylvania, for summary
judgment (# 26) on the claim asserted against it. For the
reasons set forth in this opinion, this Motion is granted.
Joe R. Gibson, the original Plaintiff in this action,
commenced this action by filing a shareholder derivative
complaint against the directors and officers of the bank, Wayne
Grove, Linda Grove, Margie Zaborac, Chester Jacobus, George
Baylor, and Harry Tarter — in the Circuit Court of the Ninth
Judicial District, Fulton County, Illinois, on February 26,
1986. Gibson, now deceased, was a former director and officer
of the bank. He resigned as the bank's president in 1978 and as
chairman of the board on April 15, 1980. His complaint alleged
that the officers and directors had negligently mismanaged the
bank in connection with the lending function.
The director's and officer's liability insurance policy,
which was issued by American Casualty Company of Reading,
Pennsylvania (hereinafter American Casualty), covered the
period from July 1, 1985 through July 1, 1986. The bank
notified American Casualty of Gibson's claim during this
period. On or about May 20, 1986, American Casualty denied
coverage. See, Zaborac v. American Casualty Company,
663 F. Supp. 330 (C.D.Ill. 1987) (see, affidavit of Joe Anthony,
FDIC Exhibit 2).
On or about January 9, 1987, the Commissioner of Banks and
Trust Companies of the State of Illinois determined that the
bank was insolvent and ordered it closed. The FDIC*fn1 was
appointed as receiver of the bank and, in its corporate
capacity, acquired the bank's negligence claims against its
former directors and officers in a purchase and assumption
transaction. On April 15, 1988, the FDIC was substituted for
Gibson as the Plaintiff pursuant to Ill.Rev.Stat. ch. 110,
¶ 2-1008(a) (1987). After removing this action to federal court
on May 11, 1988, the FDIC filed a complaint alleging, as did
Gibson, that the directors and officers had negligently
mismanaged the bank in its lending policies and practices. The
jurisdiction over the removal and the complaint was based on
28 U.S.C. § 1345 and 12 U.S.C. § 1819. See also 12 U.S.C. § 1441a(l).
The Groves did not answer the complaint, and the FDIC
obtained a $1,194,822.27 default judgment against them on
October 20, 1989.*fn2 The FDIC's negligence claim against the
other individual Defendants is still pending in this action.
Pursuant to Federal Rule of Civil Procedure 69, the FDIC served
garnishment summonses and interrogatories on American Casualty
to obtain insurance proceeds due to the Groves under the policy
as a result of the judgment against them. American Casualty
answered the FDIC's interrogatories to the garnishee on
February 21, 1990, and asserted the regulatory exclusion
(endorsement # 7) and the insured versus insured exclusion
(endorsement # 8) as affirmative defenses. American Casualty
also asserted endorsement # 13 of the policy as an affirmative
but that endorsement is not in issue on this motion.
I. REGULATORY EXCLUSION
American Casualty contends that the regulatory exclusion
unambiguously precludes coverage for any claim against
directors and officers based upon or attributable to any action
by the FDIC in any capacity. In response, the FDIC maintains
that the regulatory exclusion does not apply to the FDIC in
this case based upon its own terms.
Endorsement # 7, the regulatory exclusion, entitled
"Limitation of Coverage" provides:
It is understood and agreed that the insurer shall
not be liable to make any payment for loss in
connection with any claim made against the
directors or officers based upon or attributable
to: any action or proceeding brought by or on
behalf of the Federal Deposit Insurance
Corporation, the Federal Savings and Loan Insurance
Corporation, any other depository insurance
organization, the Comptroller of the Currency, the
Federal Home Loan Bank Board or any other national
or state regulatory agency (all of said
organizations and agencies hereinafter referred to
as "agencies"), including any type of legal action
which such agencies have the legal right to bring
as receiver, conservator, liquidator, or otherwise;
whether such action or proceeding is brought in the
name of such agencies or by or on behalf of such
agencies in the name of any other entity or solely
in the name of any third party. All other
provisions of the policy remain unchanged.
(See Exhibit 1 attached to Document # 31 at endorsement # 7)
A. Was This Action or Proceeding Brought by the FDIC as
Defined Under the Regulatory Exclusion?
The FDIC contends that the insurance policy uses two
different phrases, making a claim and bringing an action, which
are not defined in the policy and can encompass two different
concepts. The FDIC notes that the regulatory exclusion states
that the insurer is not liable for any loss:
In connection with any claim made against the
directors or officers based upon or attributable
to: any action or proceeding brought by or on
behalf of the Federal Deposit Insurance
Corporation. . . .
The FDIC contends that this exclusion by its own terms does
not apply here because this "action" was not "brought by or on
behalf of" the FDIC. As acknowledged by both parties in the
statement of undisputed facts, the FDIC notes that this action
was brought in state court by Mr. Gibson as a shareholder
derivative action against the Bank's directors and officers.
Also, it notes that, after the FDIC took an assignment of the
Bank's assets, it substituted as a Plaintiff in the derivative
lawsuit and removed this action to federal court.
Under Illinois law, an action is commenced by filing a
complaint with the court, and substitution of parties does not
result in the bringing of a new action. See, Ill.Rev.Stat. ch.
110, ¶¶ 2-201 and 2-1008. Under federal law, an action is
commenced by filing a complaint with the court, and removal
does not result in the bring of a new action, even where a
party chooses to replead in federal court as all injunctions,
orders, and other proceedings occurring in the action prior to
its removal remain in full force and effect until dissolved or
modified by the district court. See, Rule 3 and Rule 81(c) of
the Federal Rules of Civil Procedure and 28 U.S.C. § 1450.
Further, where there is a transfer of interests in federal
court, the action may be continued. Rule 25(c) of the Federal
Rules of Civil Procedure.
Interpreting identical exclusionary language under similar
circumstances, the district court in American Casualty Company
v. FSLIC, 683 F. Supp. 1183 (S.D.Ohio 1988), held that American
Casualty's regulatory exclusion did not preclude coverage for
the FSLIC's claims against former directors and officers of a
failed savings and loan institution. In that case, the failed
savings and loan itself brought an action
against its former directors and officers in state court. When
the savings and loan was declared insolvent, the FSLIC took
over the institution, substituted itself as the plaintiff in
the lawsuit against the former directors and officers, and
removed the action to federal court.
American Casualty, as it does in this case, argued that the
FSLIC's substitution as a party plaintiff in conjunction with
its removal of the director's and officer's action constituted
the bringing of an action in the United States District Court.
Id. at 1185. Chief Judge Rubin rejected American Casualty's
argument in holding that the regulatory exclusion did not
negate coverage because the action was brought by the failed
institution and not by the FSLIC. The judge explained, stating
To "bring" an action or suit refers to the
initiation, not the maintenance, (footnote
omitted) of legal proceedings. Black's Law
Dictionary, [5th Ed.], 174 (1977). Moreover, a suit
is "brought" at the time it is commenced. Id.;
Goldenberg v. Murphy, 108 U.S. 162, 2 S.Ct. 388, 27
L.Ed. 686 (1883). The phrase "on behalf of" is
defined as "in the interest of: as a representative
of." Webster's Ninth New Collegiate Dictionary, at
141 (1983). Clearly, [the bank] did not bring the
[directors and officers] action in the interest of
or as a representative of FSLIC which had not yet
been appointed as receiver. (Footnote omitted).
Such a reading is absurd.
Id. Judge Rubin further rejected American Casualty's contention
that maintaining a pre-existing suit is the same as bringing an
Plaintiffs suggest that "maintain" is a synonym
for "brought." To "maintain" a suit, however,
means to uphold, continue on foot and keep from
collapse a suit already begun. Smallwood v.
Gallardo, 275 U.S. 56, 61, 48 S.Ct. 23 , 72
L.Ed. 152 (1927); see also, George Moore Ice Cream
Company v. Rose, 289 U.S. 373, 53 S.Ct. 620, 77
L.Ed. 1265 (1933).
Id. at n. 2. Finally, the judge rejected American Casualty's
contention that its intent was to exclude coverage for all
suits to which a government regulatory agency is a party in
Indeed, the intention of the parties must control
in insurance contract, however, "this intent must
be demonstrated from the written contractual
matter expressed by the parties as contained in
the policy of insurance." (Citations omitted).
Furthermore, when words used in an insurance
contract have a plain, ordinary and unambiguous
meaning the court may not resort to construction
of such contract. (Citation omitted). The language
in the regulatory exclusion provision of the
policy is clear and unambiguous. Claims arising
from the [directors and officers] action are not
excluded from coverage under the plain meaning of
the regulatory exclusion.
Id. at 1185-1186.
This Court disagrees with the findings of the court in the
American Casualty case. Id. This Court believes that the
construction suggested by the FDIC and the court in the
American Casualty case is technical and unreasonable. In the
case of Gary v. American Casualty Company of Reading,
Pennsylvania, 753 F. Supp. 1547, 1550-1551 (W.D.Okl. 1990), in
interpreting an identical regulatory exclusion under similar
facts, the court stated:
Although the language "based upon or attributable
to" is awkward when used in conjunction with the
language "any action or proceeding brought by or
on behalf of the Federal Deposit Insurance
Corporation" the court finds the FDIC's
construction of this exclusion to be strained and
unreasonable. (Footnote omitted). Reading the
endorsement as a whole, without placing undue
emphasis on the words "based upon or attributable
to," it is clear that the insured's intent was to
exclude coverage for any loss resulting from any
action brought by or on behalf of the FDIC in any
capacity against a bank director or officer.
(Footnote omitted). Accord, Continental Casualty
Company v. Allen, 710 F. Supp. 1088, 1097 (N.D.Tex.
1987) (holding that the language in an identical
endorsement in an MGIC-issued 1983 D and O
liability policy "is not ambiguous").
See also, McCuen v. International Insurance
Company, No. 87-54-D, slip op. (S.D. Iowa, Sept.
29, 1988). Contra, American Casualty Company of
Reading, Pennsylvania v. Federal Deposit Insurance
Corporation, 677 F. Supp. 600, 603-604 (N.D.Iowa
) (holding that the identical exclusion
endorsement is ambiguous, susceptible to the
interpretation urged by both the FDIC and ACCO
therein, also urged herein).
(See Exhibit attached to document # 32, Motion of American
Casualty for leave to file a reply in support of its Motion for
Summary Judgment) (emphasis added).*fn3
This Court adopts the holding and reasoning of the
Gary court on the regulatory exclusion and holds that this
exclusion unambiguously excludes coverage when read as a whole.
See also, FDIC v. Bowen, Nos. 88 CV 16746 and 89 CV 12616, slip
op. at 5 (July 18, 1991, Colo.Ct. of App). This Court would
note that the latter part of the regulatory exclusion states
that it includes any type of legal actions which the FDIC had a
right to bring whether it was brought in the name of the
agency, on behalf of the agency in the name of another entity,
or on behalf of a third party. (See earlier quotation of the
regulatory exclusion). Clearly, this exclusion was intended to
bar any action brought or maintained by the FDIC or other
regulatory agency. Simply because the FDIC did not technically
"bring" this action and is only "maintaining" this action does
not mean that the FDIC can escape the plain intent of the
B. Does the Regulatory Exclusion Unambiguously Exclude
Directly Caused by an FDIC Action?
Next, the FDIC contends that, even if it had initially
"brought" the action against the Groves, the literal language
of American Casualty's regulatory exclusion does not apply
here. Specifically, in its brief, the FDIC asserts that:
The exclusion bars coverage for losses in
connection with (1) any claim made against the
directors or officers based upon or attributable
to: (2) any action or proceeding brought by or on
behalf of the FDIC. Read literally, the regulatory
exclusion does not exclude losses based upon or
attributable to an action brought by or on behalf
of the FDIC itself. Rather, it excludes only losses
in connection with "secondary" claims
against the directors or officers which are in some
manner based upon or attributable to actions or
proceedings brought by the FDIC.
(See Defendants' Memorandum in Opposition to American
Casualty's Motion for Summary Judgment, document # 28 at 6-7).
The FDIC maintains that this "secondary liability"
interpretation of the same regulatory exclusion language at
issue here has been accepted as reasonable by at least one
federal district court which refused to enforce the exclusion
because of its ambiguity. See, Mmahat, 1988 WL 19304 at 2.*fn4
This Court does not agree with the proposition that the
regulatory exclusion unambiguously
excludes only losses in connection with secondary claims
against the directors or officers which are in some manner
based upon or attributable to actions or proceedings brought by
the FDIC. The plain and ordinary reading of the regulatory
exclusion includes direct claims or actions by the FDIC against
the directors or officers. See, Continental Casualty Co. v.
Allen, 710 F. Supp. 1088, 1097-1098 (N.D.Tex. 1989).
II. INSURED V. INSURED EXCLUSION
In the American Casualty insurance policy there is an insured
versus insured exclusion which precludes coverage for loss
based upon a claim by an insured — the Bank or a director or
an officer — against another insured. In this case, the
original suit was a derivative suit brought by Joe Gibson for
the use and benefit of the State Bank of Cuba. American
Casualty asserts that the exclusion applied to that suit
because, although it was a shareholder derivative suit, it was
brought by a shareholder who had also been an officer and
director under its policy so that he was an insured under the
The FDIC contends that American Casualty's arguments are
flawed in two respects. First, the FDIC asserts that, even if
potential losses were not covered by virtue of the insured
versus insured exclusion when Gibson brought the action, the
exclusion does not apply to losses incurred after the FDIC was
substituted as the Plaintiff. Second, the FDIC maintains that
whether Joe Gibson was an insured under the policy is
ambiguous; therefore, that ambiguity must be resolved in favor
Endorsement # 8, the insured versus insured exclusion,
provides as follows:
It is understood and agreed that the insurer shall
not be liable to make any payment for loss, as
defined in clause D hereof, which is based upon or
attributable to any claim made against any
director or officer by any other director or
officer or by the institution defined in clause
1(a) of the policy (hereinafter called
"institution") except for a shareholder derivative
action brought by a shareholder of the institution
other than an insured.
(See, Endorsement # 8 to Exhibit 1 attached to Document # 31)
Endorsement # 4, the amended definition of director and
It is understood and agreed that clause 1(b) of
the policy is hereby amended to read as follows:
(1)(d) the term "directors and officers" shall mean
all persons who were, now are, or shall be
directors and/or officers of the financial
(Endorsement # 4, Exhibit 1 attached to Document # 31)
A. Does the Insured Versus Insured Exclusion Apply to the
FDIC Acting in its Corporate Capacity?
The FDIC notes that the insured versus insured exclusion
nowhere mentions the FDIC. Further, it asserts that the FDIC is
not "the institution defined in clause 1(a)" policy, nor is the
FDIC a "director or officer." In addition, it contends that the
exclusion applies only to losses based upon or attributable to
actions and not to losses based upon or attributable to claims.
Under the policy, the FDIC maintains that more than "one claim"
may be made for the same "wrongful acts." Thus, the FDIC argues
that the loss for which it seeks coverage is one which is based
upon and attributable to the claim the FDIC made after it
substituted as a Plaintiff in the action and not upon the claim
that Gibson made when he brought the action.
In Fidelity and Deposit Company v. Zandstra, 756 F. Supp. 429
(N.D.Cal. 1990) (Exhibit 6 attached to Document # 31), the
court held that a similarly worded insured versus insured
exclusion did not apply where a lawsuit initiated by a bank
against its former directors and officers was taken over by the
FDIC after the bank failed. The Zandstra court held that
excluding claims by the FDIC would not serve the purpose of the
insured versus insured clause, which was to prevent collusive
lawsuits. Id., at 432; accord, Conklin Company
v. National Union Fire Insurance Company, Case No. 4-86-860,
1987 WL 108957 (D.Minn., Jan. 28, 1987) (1987 U.S. Dist. Lexis
12337) (purpose of exclusion is to prevent collusive lawsuits)
(see, Exhibit 7 attached to Document # 31); American Casualty
Company v. FDIC, slip op. at 31 n. 25 (purpose to exclude
"internecine warfare and collusive suits") (see, Exhibit 5
attached to Document # 31). The Zandstra court reasoned:
There can be no real dispute that the FDIC is a
genuinely adverse party to the defendant officers
and directors. While Fidelity may be correct in
its contention that when the underlying actions
were originally filed by the new Home State
directors in June 1987, the exclusion applied to
that action, it does not follow that when the
FSLIC took over the action, the exclusion still
applied. The exclusion would properly apply to
action commenced by new, apparently "clean" board
of an insured company because the insurer
concerned about collusive suits should not be put
to the burden of scrutinizing the membership of
each new board, and deciding whether that board is
sufficiently "clean" and genuinely adverse to the
defendants being used to allay its concerns.
Similarly, Fidelity's contention is well-taken
that an insured company should not be able to
escape the effect of the exclusion merely be
selling to some unrelated third party the right to
maintain a collusive suit. Here, however, FSLIC
(and later FDIC) took over the action under
operation of law, pursuant to its statutory
mandate to pay insured depositors of the failed S
& L "as soon as possible," 12 U.S.C. § 1728(b), and
thereafter to maximize Home State's assets and
reimburse the expenditures incurred by
FSLIC/corporate. It is clear beyond doubt, and with
requiring Fidelity to engage in a close scrutiny,
that FSLIC's (and now FDIC's) involvement in the
underlying actions is not collusive. The insured
versus insured exclusion therefore does not excuse
Fidelity from coverage.
Id. at 432 (emphasis added).
This Court disagrees with the conclusion reached by the
Zandstra court. Certainly, one of the purposes of the insured
versus insured clause could be to prevent collusive lawsuits;
however, that is not the only possibility. Before a court can
start divining the intent behind a clause such as this one, the
Court must determine that the clause was ambiguous. This Court
does not believe that the clause is in any way ambiguous. The
clause unambiguously excludes listed insureds from coverage.
In Zandstra, the court basically found that anyone else who
steps into the shoes of the bank is precluded from bringing a
lawsuit except the FDIC. The reason the FDIC was treated
differently in Zandstra was because it was clear that a
collusive lawsuit was not intended. However, there are other
situations in which it is clear that the party assigned the
rights to a lawsuit was not bringing it collusively. This fact
alone is not enough to treat a party differently under the
plain language of the exclusion. Simply stated, if the FDIC
merely steps into the shoes of Grove and Grove is precluded
from bringing a claim, then the FDIC cannot bring a claim. See,
Gary v. American Casualty Company, 753 F. Supp. at 1554-1555
(Exhibit attached to Document # 33).
Despite the above difference of opinion, this Court does
agree with the finding in Zandstra that the FDIC does not
merely stand in the shoes of the party under which it assumed
the lawsuit. Zandstra, at 432-433. As the Zandstra court
"Courts which have analyzed the role of FDIC
corporate have recognized for over 40 years that
the FDIC does not strictly `step into the shoes'
of a failed bank." American Casualty Company of
Reading, Pennsylvania v. FDIC, 713 F. Supp. 311, 316
(N.D.Iowa 1988) (citing, D'Oench, Duhme and
Company, Inc. v. FDIC, 315 U.S. 447, 472-473 [62
S.Ct. 676, 686-687, 86 L.Ed. 956] (1942) (Jackson,
J., concurring); see also, FDIC v. National Union
Fire Insurance Company of Pittsburgh, 630 F. Supp. 1149
(W.D.La. 1986). Under statute and regulations,
FDIC (and formerly FSLIC) may bring suit not only
as a successor to
Home State, and not only on behalf of itself as a
creditor, but also on behalf of the creditors and
shareholders of Home State, and as subrogee to
rights of depositors against Home State. 12 U.S.C. § 1821(d),
(g), as amended by FIRREA § 212, 103
Stat. 222, 225, 241; 12 U.S.C. § 1823(d)(3) as
amended by FIRREA; § 217, 103 Stat. 254;
12 U.S.C. § 1729(b)(2), 1729(c)(1)(B)(i)(II); 12 C.F.R. §§
548.2(f), 549.3(a), 569a.6(3).
Id. In this case, the FDIC does not merely stand in the shoes
of Grove, it can also stand in the shoes of the shareholders;
therefore, as a shareholder, it has the independent authority
to bring a suit against American Casualty.*fn5
Branning v. CNA Insurance Companies, 721 F. Supp. 1180,
1184-1185 (W.D.Wash. 1989). Therefore, this Court concludes
that the insured versus insured exclusion does not prevent the
FDIC from bringing this lawsuit.
B. Is This American Casualty Policy Ambiguous Regarding
Whether Joe Gibson is an Insured Under the Policy?
As an alternative argument, the FDIC argues that the
insurance policy is also ambiguous regarding whether Joe Gibson
was an insured under the insured versus insured exclusion. The
FDIC maintains that whether Gibson is an insured or not is
ambiguous because of a discrepancy between the application for
insurance, which is expressly incorporated into the policy, and
the policy's definition of directors and officers.
The Court rejects this argument. The term "directors and
officers" is defined in the policy and articulates the scope of
the people insured. The failure of the Bank to list all former
directors in a renewal application cannot does not change the
terms of the policy.
III. DO THE EXCLUSIONS IN THE AMERICAN CASUALTY POLICY VIOLATE
Even if the regulatory exclusion and the insured versus
insured exclusion unambiguously excluded coverage for the
FDIC's judgment against the Groves, the FDIC asserts that these
exclusions cannot be applied against the FDIC because doing so
would violate federal statutes and federal public policy. The
FDIC maintains that contract construction and enforceability is
limited by the interests of public policy. Kaiser Steel Corp.
v. Mullins, 455 U.S. 72
, 83-84, 102 S.Ct. 851, 859-860, 70
L.Ed.2d 833 (1982). Since the FDIC is a party in this case, it
asserts that the insurance coverage dispute in this case arises
under federal and not state law. See, 12 U.S.C. § 1819(b)(2)
Further, the FDIC notes that, as a matter of
Illinois law, contracts that violate federal public policy are
not enforceable. See, American Buyers Club, Inc. v. Grayling,
53 Ill. App.3d 611, 368 N.E.2d 1057
, 1059, 11 Ill.Dec. 449, 451
(5th Dist. 1977).
In this case, the FDIC obtained its judgment against the
Groves in its corporate capacity. As the FDIC notes, in this
capacity under the federal statutes, the FDIC has:
All rights, titles, powers and privileges of the
insured depository institution, and of any
stockholder, member, account holder, depositor,
officer, or director of such institution with
respect to the institution and the assets of the
See, 12 U.S.C. § 1821(d)(2)(A)(i) (capacity of FDIC as
receiver) and § 1823(d) (FDIC's corporate capacity). Any
stockholder of the Bank in this case had the right and the
power to sue the Groves derivatively for wrongful acts alleged
in this action. The American Casualty policy provides coverage
for shareholder derivative claims so that any stockholder who
obtains a judgment in such an action as the right and the power
to garnish the proceeds of the policy to satisfy the judgment.
Because federal law gives the FDIC the same rights and powers
as these stockholders, the FDIC contends that the regulatory
and insured versus insured exclusions cannot be enforced
against the FDIC because doing so would deprive the FDIC of the
rights and power conferred on it by statute. Under federal law,
the FDIC maintains that the exclusions which purport to bar
coverage solely on the basis of the identity of the party
making the claim, the FDIC, and not because of the nature of
the insured's wrongful acts is void as against public policy.
The court in Branning v. CNA Insurance Companies, 721 F. Supp. 1180,
1184 (W.D.Wash. 1989) stated supporting this argument:
If the court were to enforce the FSLIC exclusion
as written, all of FSLIC's claims, regardless of
their origin or status under the policy, would not
be covered simply because FSLIC rather than a
shareholder, depositor, or third party prosecuted
the claim. Private parties to an insurance
contract might not frustrate the congressional
purpose behind receivership by annulling FSLIC's
federal powers. FSLIC v. Oldenburg, 671 F. Supp. 720,
723 (D.Utah 1987) (footnote omitted).
This Court disagrees with the FDIC and the court's conclusion
in the Branning and Oldenburg cases because this Court simply
does not believe that the regulatory exclusion excluding the
FDIC undermines any congressional purpose or that it annuls the
FDIC's powers. In this case, the FDIC assumed all of the rights
given under the insurance policy. However, the insurance policy
did not give the FDIC the right to recover under the policy. No
rights have been taken away from the FDIC. The FDIC simply did
not have the right to sue under the policy because the Bank did
not contractually negotiate for this type of coverage.
Presumably, the reason the Bank did not request this coverage
was because the costs of the additional coverage were higher or
because this type of coverage was unavailable.*fn7
If this Court were to find that the FDIC was covered where
there was an unambiguous exclusion of coverage, the FDIC would
acquire greater rights under the contract than the Bank had
originally bargained for. This Court, therefore, cannot
conclude that Congress would mandate coverage based upon the
general statement of the FDIC's rights and powers.
Furthermore, as one court has noted:
For contractual provisions to be void for public
policy reasons, they must be injurious of the
public good or be subversive to sound morality.
Ritter v. Mutual Life Ins. Co., 169 U.S. 139, 154,
18 S.Ct. 300, 305, 42 L.Ed. 693 (1898). Thus, the
most often found violators of public policy are
contracts that induce criminal conduct or are
contrary to statutory law. Northwestern Mut. Life
Ins. Co. v. McCue, 223 U.S. 234, 245-46, 32 S.Ct.
220, 221-22, 56 L.Ed. 57, 419 (1911) (criminal
conduct); Connolly v. Union Sewer Pipe Co.,
184 U.S. 540, 548, 22 S.Ct. 431, 435, 46 L.Ed. 679
(1902) (contravene statutory law). (Footnote
The Court finds that neither Endorsement 1 nor 3
meets such a standard. No statutory insurance
minimum exists in the case at bar which the 1983
Policy with its endorsements would violate. Rather
directors' and officers' liability insurance is
optional under all the rules and regulations
promulgated by the various regulatory agencies of
(Footnote omitted). Thus policies providing limited
insurance, which are not required by statute or
mandated as to form of coverage, are not
invalidated on a public policy argument. Simons v.
City of Columbus, 593 F. Supp. 876, 880-81 (N.D.
Miss. 1984), aff'd, 805 F.2d 1031 (5th Cir. 1986)
(contract exclusions do not violate public policy).
Continental Casualty Co. v. Allen, 710 F. Supp. 1088, 1098-1099
(N.D.Tex. 1989) (emphasis added).
In addition, despite the fact that the FDIC has rule-making
power by which it could require institutions to carry
director's and officer's liability insurance (see, 12 U.S.C. § 1819),
the FDIC has failed to use this rule-making power to
include a requirement that institutions have coverage which
does not have the regulatory exclusion.
Moreover, the public policy rationale accepted in
Oldenburg has been sharply criticized and rejected for
analogous coverage matters in FDIC v. Aetna Casualty and Surety
Company, 903 F.2d 1073, 1079 (6th Cir. 1990). In Aetna, the
FDIC sought coverage under two banker's blanket bonds issued by
Aetna. Discovery of the claimed loss did not occur until after
the FDIC took over the bank. Aetna denied coverage on grounds
that any loss was excluded because the bond was terminated
immediately upon taking over of the insured by a receiver or
other liquidator. The FDIC argued that the termination
provision was contrary to public policy. The district court
accepted this argument.
The Sixth Circuit rejected the public policy argument and
Insurance policies which have sections limiting
coverage are not contrary to public policy
where such policies are not required by statute and
where the form of coverage has not been mandated.
Id. at 1078 (emphasis added). The court went on to note that
since there was no existing law which would justify the
invalidation of the termination provisions, the dominant public
policy was that the parties' freedom of contract should not be
The FDIC attempts to distinguish Aetna by arguing that the
case involved banker's blanket bond coverage which totally
terminated coverage rather than director's and officer's
liability coverage which only partially terminated coverage.
Further, the FDIC asserts that the exclusion discriminates
against the FDIC as a shareholder derivative plaintiff as
opposed to other shareholder derivative plaintiffs.
This Court does not find the argument that this case involves
a partial exclusion of coverage rather than a total exclusion
of coverage significant. Also, it is reasonable and often
necessary for insurance companies to exclude certain types of
plaintiffs from coverage because, as stated earlier, there are
different risks and costs involved in covering and litigating
with different plaintiffs.
Further, this Court does not believe that it should
invalidate an exclusion where there is not clear public policy
interest. The Supreme Court has stated:
Public policy is to be ascertained by reference to
the laws and legal precedents and not from general
considerations of supposed public interest.
(Citation omitted). As the term "public policy" is
vague, there must be found definite indications in
the law of the sovereignty to justify the
invalidation of a contract as contrary to that
policy. (Citations omitted).
Muschany v. United States, 324 U.S. 49
, 66, 65 S.Ct. 442, 451,
89 L.Ed. 744 (1945) (emphasis added). As American Casualty
suggests, to invalid its exclusions in this case on grounds of
public policy would be tantamount to performing what is
properly a legislative function. The FDIC's claim that these
exclusions hinder it from performing its statutory function are
adequately rebutted by American Casualty's assertion that:
If the FDIC is allowed to enforce any contract
entered into by the Bank, notwithstanding any
provision of the contract providing for
termination, default, acceleration or exercise of
rights upon or
solely by reasons of insolvency or the appointment
of a conservatory receiver, no troubled or problem
bank would be able to purchase a fidelity bond at
any price, this causing more banks to fail and
more direct loss to the FDIC insurance fund.
The effect of the contractual provision that limits
the FDIC from making such claims is to increase the
availability and decrease cost of bonds and
policies which has a direct impact on the survival
of financial institutions.
(See, letter from James D. McLaughlin to the FDIC dated
February 15, 1990 which is attached to American Casualty's
memorandum of law in support of its Motion for Summary
Judgment) (emphasis added). A policy question such as whether
these exclusions will ultimately benefit or burden the federal
banking system is a policy question to be decided by Congress
or by an agency under its rule-making power.
IV. DOES THE REASONABLE EXPECTATIONS DOCTRINE APPLY IN THIS
In the alternative, the FDIC has made a motion under Rule
56(f) of the Federal Rules of Civil Procedure requesting more
discovery to determine whether the exclusions in the policy
were contrary to the reasonable expectations of the insured
under federal common law or whether the exclusions unreasonably
and deceptively affected the risk under Illinois law
(see, Ill. Rev.Stat. ch. 73, ¶ 755(2)). See also, American
Casualty v. FDIC, Case No. 86-4018 (N.D.Iowa, Feb. 26, 1990)
(1990 WL 66505 at 14-15); Standard Mutual Insurance v. General
Casualty Companies, 171 Ill. App.3d 758, 525 N.E.2d 965, 121
Ill.Dec. 658 (1st Dist. 1988), appeal denied, 122 Ill.2d 594,
530 N.E.2d 265 (1988). The FDIC has submitted an affidavit
under Rule 56(f) stating that it is presently unable to present
facts essential to justify its opposition to American
Casualty's Motion for Summary Judgment on the above grounds
until it has received certain documents which American Casualty
has refused to produce and until it has deposed certain
individuals regarding what their reasonable expectations of
coverage were under the policy. (See, Exhibit 12 attached to
American Casualty asserts that there is no federal common law
supporting a reasonable expectations doctrine. This Court
agrees. Although the courts in Hancock Laboratories, Inc. v.
Admiral Insurance Company, 777 F.2d 520, 523 n. 5 (9th Cir.
1985) and Keene Corp. v. Insurance Company of North America,
667 F.2d 1034, 1041-1042 (D.C. Cir. 1981), cert. denied,
455 U.S. 1007, 102 S.Ct. 1644, 71 L.Ed.2d 875 (1982) recognized the
reasonable expectations doctrine, they did not recognize the
doctrine as a doctrine of federal common law. Rather, they
recognized the doctrine in diversity cases in applying a
state's product liability law.
In addition, it is not readily apparent that Illinois would
apply the reasonable expectations doctrine. The FDIC suggests
that Ill.Rev.Stat. ch. 73, ¶ 755(2) provides a basis for the
application of the reasonable expectations doctrine. However,
the very title of the section "Casualty, Fire and Marine"
suggests that this section should not even be applied to other
types of insurance policies such as the director's and
officer's liability insurance policy in this case. Id. Further,
under the section cited by the FDIC, the director of the
Illinois Department of Insurance is given the responsibility
for monitoring policy terms and conditions. Id. Under this
section, when the director finds that policy terms and
conditions unreasonably or deceptively affect risk assumed by
the policy, the director is empowered to act. Id. In this case,
there is no evidence that the director has ever found the
exclusions in this case to be unreasonable or deceptive.
Moreover, subsection 3 of ch. 73, ¶ 755 states:
This section shall not apply to surety contracts
or fidelity bonds nor to riders or endorsements
prepared to meet special, unusual, peculiar or
extraordinary conditions applying to an individual
Although the parties have not mentioned this point, a
director's and officer's insurance policy is a fidelity bond.
See, Black's Law Dictionary, 5th Ed. Therefore, ¶ 755
could not apply to a director's and officer's insurance policy.
Furthermore, the two Illinois cases cited by the FDIC,
Standard Mutual Insurance Company v. General Casualty
Companies, 171 Ill. App.3d 758, 525 N.E.2d 965, 121 Ill.Dec.
658 (1st Dist. 1988) and Fidelity General Insurance Company v.
Nelsen Steel and Wire Company, 132 Ill. App.2d 635,
270 N.E.2d 616 (1st Dist. 1971) are distinguishable because they involved
cases where Illinois courts held that the provisions of a
liability policy for a rental automobile were unenforceable
based upon the ambiguity in the policies and based upon public
policy under ch. 73, ¶ 755(2). These cases clearly involved
casualty-type insurance, whereas this case involved director's
and officer's liability insurance.
Furthermore, most Illinois courts have rejected any doctrine
which conflicts with the traditional principle that unambiguous
policy language must be given effect. Bain v. Benefit Trust
Life Insurance Company, 123 Ill. App.3d 1025, 463 N.E.2d 1082,
1086, 79 Ill.Dec. 528, 532 (5th Dist. 1984) (the reasonable
expectations doctrine has not been adopted in Illinois);
American Country Insurance v. Cash, 171 Ill. App.3d 9,
524 N.E.2d 1016, 1018, 120 Ill. Dec. 834, 836 (1st Dist. 1988)
(Illinois courts have declined to apply the reasonable
expectation doctrine to insurance contract); Zurich Insurance
v. Northbrook Excess and Surplus, 145 Ill. App.3d 175,
494 N.E.2d 634, 645, 98 Ill.Dec. 512, 523 (1st Dist. 1986) (the
reasonable expectation doctrine is not recognized in Illinois).
In addition, one Illinois court noted that, although a number
of states have adopted the reasonable expectations doctrine in
one form or another, in nearly every case it has been used as a
rule of construction. Insurance Company of North America v.
Adkisson, 121 Ill. App.3d 224, 459 N.E.2d 310, 313, 76 Ill.Dec.
673, 676 (3rd Dist. 1984). The court then noted:
Apart from the question of ambiguity, if such a
principle is to become the law of Illinois
generally, it is not the province of this court so
Therefore, from an examination of the cited cases, this Court
concludes that the reasonable expectations doctrine is not
applicable in this case.
Based upon the foregoing, this Court GRANTS the Defendants'
Motion for Summary Judgment (# 26). The Clerk is directed to
enter judgment in favor of the Defendants and against the