United States Court of Appeals,
Fifth Circuit.
No. 94-30707.
FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Appellant,
Cross-Appellee,
v.
Burnice E. BOOTH, et al., Defendants,
Burnice E. BOOTH, et al., Defendants, Cross Claimants,
Plaintiffs-Appellants,
and
Burnice E. Booth, et al., Defendants, Cross Claimants,
Plaintiffs-Appellants, Cross-Appellees,
v.
The ST. PAUL INSURANCE COMPANY, Defendant, Cross Defendant-
Appellee, Cross Appellant.
May 14, 1996.
Appeals from the United States District Court for the Middle
District of Louisiana.
Before DeMOSS and DENNIS, Circuit Judges, and DUPLANTIER, District
Judge*.
DUPLANTIER, District Judge:
The Federal Deposit Insurance Corporation ("The FDIC") and the
directors of a failed bank appeal the district court's judgment
dismissing their suit against St. Paul Insurance Co. The district
court concluded that the defendant insurer's directors and officers
liability insurance policy did not provide coverage for the
activities of the directors for which the FDIC seeks recompense.
*
District Judge of the Eastern District of Louisiana,
sitting by designation.
1
We find no error in the district court's ruling and AFFIRM.
A directors and officers liability insurance policy issued by
St. Paul Insurance Co. to the Livingston Bank in Denham Springs,
Louisiana, covered the liability of the bank as an entity and that
of its directors and officers individually ("Directors"). The
policy was effective from January 2, 1983, with an initial three
year term ending January 2, 1986. St. Paul canceled coverage
effective May 29, 1985.1 Pursuant to a policy endorsement, the
1
The Directors argue that St. Paul's effort to cancel the
policy on May 29, 1985 was ineffective, and that the policy
period therefore continued until January 2, 1986, with an
extended one year discovery period from that date. We disagree.
The policy's cancellation provision reads as follows:
This policy may be canceled by the Company by mailing
to the insured ... written notice stating when not less
than thirty days thereafter such cancellation shall be
effective. The mailing of notice as aforesaid shall be
sufficient proof of notice. The time of the surrender,
or the effective date and hour of cancellation, shall
become the end of the policy period.
Both parties agree that St. Paul sent the Directors
written notice by letter dated April 23, 1985, via certified
mail, return receipt requested, stating that the policy
would be canceled thirty days from the receipt of notice.
The Directors acknowledge receipt of this letter, but argue
that the cancellation was ineffective because the letter of
cancellation did not name a specific date and/or hour of
cancellation. They insist that because the printed language
of an insurance policy is strictly construed against the
insurer, St. Paul's cancellation notice was ineffective.
This argument is far-fetched. Although a specific date
is not mentioned in the letter, the date of cancellation is
easily determinable by adding thirty days to the date of the
Directors' receipt of the letter. The certified mail return
receipt allows both parties to document this initial receipt
date. Although no "hour" of cancellation is noted, this
cannot invalidate the entire cancellation attempt. As a
result of St. Paul's failure to state the hour on which the
cancellation would be effective, coverage continued through
2
Bank then exercised its right to purchase an extended twelve month
discovery period providing coverage for acts or omissions prior to
the date of termination discovered during the ensuing twelve
months.
On March 13, 1994, the FDIC instituted this action against the
Directors, charging that they breached their duties in the
management of various loans made during the policy period. The
FDIC additionally named St. Paul as a defendant under the Louisiana
Direct Action Statute.2 Because St. Paul denied coverage of the
Directors' actions, a number of the Directors also filed a
cross-claim against St. Paul.
St. Paul moved for summary judgment on the ground that no
event had occurred during the period in which the policy was in
effect which would result in coverage under the terms of the
policy. The district court initially denied this motion without
assigning reasons.
Thereafter, the Directors moved for partial summary judgment,
seeking a declaration that the policy required St. Paul to provide
the Directors a defense. In response, the district court held that
the policy did not impose a duty to defend, but that it did require
a contemporaneous reimbursement of defense costs.3 The district
court certified that ruling for appeal, but this court denied
jurisdiction.
midnight on the effective date of cancellation.
2
La.Rev.Stat.Ann. 22:655.
3
FDIC v. Booth, 824 F.Supp. 76 (M.D.La.1993).
3
St. Paul later reurged its motion for summary judgment on
coverage, citing new precedent from this circuit. The district
court reversed itself and granted St. Paul's motion. In its oral
reasons, the district court additionally found that, should this
court reverse the ruling on coverage, the policy would still
require contemporaneous reimbursement of defense costs. The
district court entered judgment dismissing all claims against St.
Paul.
The FDIC and Directors appeal on the coverage issues, and St.
Paul cross-appeals on the district court's order that it
contemporaneously reimburse defense costs in the event that we
conclude that there is coverage. Because we find that the district
court correctly determined that the policy does not cover the
Directors' activities, we do not address the issue of
contemporaneous reimbursement of defense fees.
We review the district court's summary judgment decisions de
novo, applying the same standards applicable to the district
court.4 We review the record independently and make any factual
inferences in favor of the non-moving party.5
St. Paul's policy contains the following relevant provisions
concerning coverage:
III. POLICY PERIOD: This Policy applies to any negligent act,
any error, any omission, or any breach of duty which occurs:
(1) During the policy period and then only if claim is
made or suit is brought during the policy period. If,
4
FDIC v. Myers, 955 F.2d 348, 349 (5th Cir.1992).
5
Degan v. Ford Motor Co., 869 F.2d 889, 892 (5th Cir.1989).
4
during this policy period, the Insured shall have
knowledge or become aware of any negligent act, any
error, any omission or any breach of duty and shall,
during the policy period, give written notice thereof to
the company, then such notice shall be considered a claim
hereunder;
* * * * * *
If the company shall cancel or refuse to renew this Policy,
the Named Insured shall have the right upon payment of an
additional premium of 10% of the three year premium hereunder,
to ninety (90) days after the date of such termination in
which to discover claims resulting from any negligent act, any
error, any omission or any breach of duty alleged to have been
committed prior to the date of termination....
ENDORSEMENT NO. 2
EXTENSION OF DISCOVERY PERIOD
It is hereby agreed that the discovery period of III POLICY
PERIOD shall be amended to read:
"... If the company shall cancel or refuse to renew this
policy the named insured shall have the right upon payment of
an additional premium of 20% of the three year premium
hereunder, to twelve months after the date of such termination
in which to discover claims resulting from any negligent act,
any error, any omission or any breach of duty alleged to have
been committed prior to the date of termination. Such right
hereunder must, however, be exercised by the named insured by
written notice not later than ten (10) days after such
termination date. If written notice is not given within the
afore mentioned ten day period, the insured shall not at a
later date be able to exercise such right." (Emphasis added.)
The Directors argue that under these provisions there are
three distinct situations which result in coverage for events
occurring during the policy period: 1) if a claim is made or a
suit is brought during the policy period; 2) if, during the policy
period, the insured has knowledge or becomes aware of any negligent
act, error, omission, or breach of duty and, during the policy
period, gives written notice thereof to St. Paul, or 3) if, during
the one year "discovery period" after the cancellation of the
5
policy by St. Paul, the insured "discovers" claims resulting from
any negligent act, error, omission, or breach of duty. The
Directors contend that there is no "notice" requirement for this
third situation; mere "discovery" by an insured during the twelve
month extended period is sufficient for coverage.
In contrast, St. Paul contends that there is coverage in only
two situations: 1) if a claim is made or suit is brought during
the policy period; or 2) if during the policy period or (in the
event of cancellation by St. Paul within twelve months after
cancellation if the insured takes advantage of the extension of the
discovery period) the insured gains knowledge, becomes aware of, or
"discovers" an activity committed prior to the date of termination
with claim potential and provides the company with written notice
thereof during the policy period or the twelve month extended
"discovery period." According to St. Paul, Endorsement No. 2
"Extension of Discovery Period" simply extends the period of time
in which one of these two situations must occur for coverage to
attach. We agree with St. Paul.
Under Louisiana law, an insurance contract must be interpreted
as a whole.6 The Directors' argument focuses only on specific
provisions of the policy. They argue that because of the absence
of a specific requirement of notice in the extended discovery
period endorsement, no notice is required if the discovery occurs
after termination. The Directors contend that in this respect the
6
Scarborough v. Travelers Ins. Co., 718 F.2d 702, 708 (5th
Cir.1983).
6
policy is ambiguous and must be interpreted in their favor.7
The Directors' argument ignores the fact that the "extension
of discovery period" endorsement accomplishes nothing more than
what it states: an extension of the discovery period. The
endorsement merely amends a similar ninety day discovery period
which is part of "Policy Period" in the body of the policy, in
section III, which includes the notice requirement. The provision
allowing the insureds to "discover" claims is part of the same
section which provides that mere awareness by an insured of a
negligent act is not considered a "claim" such as to trigger
coverage unless the insured provides St. Paul with written notice
within the policy (or the extended discovery) period. Interpreting
the policy as suggested by the Directors entirely negates this
provision.
The Directors also argue that because the provisions in
Section III(1) of the policy begin with the words "during the
policy period," those provisions do not apply to the extended
"discovery" period. This reading of the contract does not make
sense considering the policy as a whole. The only sensible reading
of Section III leads to the conclusion that the extended discovery
period in Endorsement No. 2 merely extends the "knowledge" or
"aware" coverage period during which notice must be given to the
company by twelve months after cancellation by the company. The
Directors' interpretation would result in the policy providing
7
Williams v. Galliano, 601 So.2d 769 (La.App. 1st Cir.1992).
7
coverage after a notice of cancellation under circumstances which
would not be covered had they occurred prior thereto. Nothing in
the policy suggests such a strange policy construction. In effect,
the Directors' interpretation would provide an extra benefit to an
insured whose policy has been canceled, a benefit unavailable to an
insured who is still covered during the regular policy period.
Such a result is untenable.
We conclude that this policy provides coverage for any
negligent act, error, omission or breach of duty which occurs
during the policy period, but only if a claim is made or suit is
brought during the policy period. In addition to the ordinary
meaning of "claim", the policy provides that notice by the insured
to the company of such activity is considered to be a claim if such
notice is given before the end of the policy period or extended
"discovery period" (in the event of cancellation).
There is no dispute that certain activity of the Directors of
which the FDIC complains occurred during the policy period, nor
that suit was not brought during the policy period. The only
question is whether a "claim" was made within 12 months after the
termination of the policy on May 29, 1985 (the last day of the
extended discovery period). In order to resolve this issue, we
must first determine what was contemplated by the use of the term
"claim" in the D & O policy. Unfortunately, the policy itself does
not define the term.
Although this court has not yet addressed a case with a
policy identical to the one at hand, it has addressed cases
8
involving similar policies. In FDIC v. Barham,8 and FDIC v.
Mijalis,9 this court determined that when the terms "claim" and
"loss," are intimately connected in a policy, then a "claim" is a
"demand which if sustained necessarily results in a loss."10 The
present policy meets this description.11 Thus, we will apply
Barham-Mijalis definition of "claim" to the present case.
Considering the undisputed facts, we conclude that no "claim"
was made under the policy during the period of coverage. It is
undisputed that no claim was made prior to the cancellation of the
policy period. During the extended "discovery period," however,
the FDIC sent the following correspondence to the Directors: 1) a
March 27, 1986 letter that summarizes and encloses a 1985 FDIC
Report of Examination of the Bank; and 2) a March 27, 1986 letter
reminding the Directors of their obligations and warning them that
"failure to take corrective action ... could result in civil money
8
995 F.2d 600 (5th Cir.1993).
9
15 F.3d 1314 (5th Cir.1994).
10
Id. at 1332; Barham, 995 F.2d at 604.
11
The policy provides that St. Paul will pay on behalf of
the Directors "any claim(s) made against them," for "loss,"
caused by "any negligent act, any error, any omission, or any
breach of duty while acting in their capacities as Directors and
Officers...." Thus, the terms "loss" and "claim" are connected
in the basic insuring agreement.
Furthermore, "loss" is defined as "any amount the
Insured is obligated to pay as respects his legal liability,
whether actual or asserted, for any negligent act...." We
note that this definition of "loss" is remarkably similar to
the definition of "loss" in the Barham policy, i.e., the
"total amount which any insured person becomes legally
obligated to pay."
9
penalties12 being recommended and/or more severe enforcement actions
being recommended to the FDIC Board of Directors." The FDIC and
Directors assert that this language regarding a "more severe
enforcement action," threatens personal liability against the
Directors, and that this threat satisfies the Barham-Mijalis
definition of the term "claim."
This court has not previously determined whether the mere
"threat" of liability is sufficient to qualify as a "claim." In
FDIC v. Barham, the only documentation received by the insurer was
a 1982 letter of agreement between the bank and regulators, in
which the bank agreed to "adopt and implement policies and
procedures to prevent future violations of the law and
regulation."13 The document made no reference to the directors'
personal liability for bad loans.14 In that case the court held
that a "mere demand for regulatory compliance does not rise to the
level of a claim." It reasoned, "[b]ecause the 1982 letter makes
no reference to a loss which [the bank] may sustain as a result of
its failure to comply with certain banking regulations, we conclude
that no claim was reported."15
Similarly, in FDIC v. Mijalis, the alleged "claims," with one
exception, consisted of various demands by the regulators for
12
Such civil money penalties are not covered by this policy.
See, Insuring Agreement at 3.
13
995 F.2d at 604.
14
Id.
15
Id. at 605.
10
corrective action by the Bank. The court reiterated that such
demands will not be considered a claim if they "make no reference
to a loss which [the bank] may sustain as a result of failure to
comply with the demands."16 The one exception in the Mijalis case
was a statement by the FDIC that it was "considering recommending
civil money penalties."17 The court did not ultimately decide if
this threat qualified as a "claim," because the policy in that
case, as is true of the policy in the instant case, did not provide
coverage for civil money penalties.18 Nonetheless, in dicta, the
court stated,
In a broad sense, certainly, a threat to recommend civil money
penalties would appear to come within the definition of
"claim" we settled on in Barham. By warning that such
penalties would be recommended if the Bank's regulatory
violations were not corrected, the letter arguably makes a
"demand which necessarily results in a loss—i.e., a legal
obligation to pay—on behalf of the directors."19
The FDIC and the Directors argue that the FDIC's
communications satisfy the standards suggested by Barham and
Mijalis. The FDIC warned that the Directors could "be held liable
for losses caused by [their] failure to properly supervise the
affairs of the bank."20 The agency also threatened to take other
legal action, including seeking civil money penalties "and/or more
16
15 F.3d at 1332.
17
Id. at 1333.
18
Id.
19
Id.
20
Record Excerpts, Tab "J".
11
severe enforcement actions."21 Finally, the FDIC suggested that the
Directors consult with their attorneys, who could more fully
explain the "potential liability."22
In spite of the Mijalis dicta, we do not consider the FDIC
correspondence to the Directors to be a "demand that necessarily
results in a loss." The language of the letter indicates that even
the FDIC considered the correspondence only a warning of "potential
liability," making it more akin to a potential claim than a true
claim. Equating the mere threat of a claim with an actual claim
negates the "necessarily" element in the very definition of
"claim." Such an interpretation would contradict the intentions of
the insurance contract.
In making this ruling, we join the Sixth and Ninth Circuits in
their interpretations of similar D & O policies. In MGIC Indemnity
Corp. v. Home State Savings Assn.,23 cited approvingly by this court
in Barham and Mijalis, the Sixth Circuit determined that a letter
targeting directors as the subject of a grand jury indictment did
not qualify as a "claim." It reasoned that "a claim that a
wrongful act has occurred is not the same thing as a claim for
payment on account of a wrongful act," and that the "mere potential
for such a claim is not enough to meet the condition imposed by the
policy."24
21
Id.
22
Id.
23
797 F.2d 285 (6th Cir.1986).
24
Id. at 288.
12
Similarly, the Ninth Circuit has determined that threats of
potential liability do not rise to the level of a demand for a
particularized loss. In Winkler v. Nat'l Union Fire Ins. Co. of
Pittsburgh, Pa.,25 the court determined that a letter announcing
that legal action would be instituted in the future to recoup
losses, coupled with a meeting to discuss problems, did not
constitute a "claim."26 Although that decision was based on the
particular policy language, the court emphasized in a footnote that
they would reach the same conclusion even without the specific
policy provisions. It reasoned, "to constitute a claim, a demand
for something due or believed to be due must be made."27 Likewise,
in California Union Ins. Co. v. American Diversified Savings Bank,28
also cited approvingly by this court in Barham and Mijalis, the
Ninth Circuit again emphasized that a "claim" is a demand for a
loss immediately due.29
The reasoning of these circuits appears more in line with the
definition of a "claim" as a "demand that necessarily results in a
loss." The mere "threat" of liability will not necessarily develop
into an actual demand for compensation. Thus a letter suggesting
that, in the future, charges may be filed against the Directors, if
they do not comply with regulations, is too tenuous to constitute
25
930 F.2d 1364 (9th Cir.1991).
26
Id.
27
Id. at 1367, n. 4.
28
914 F.2d 1271 (9th Cir.1990).
29
Id. at 1277.
13
a claim. We conclude that the FDIC correspondence does not rise to
the level of a claim against the Directors.
Alternatively, the Directors and the FDIC contend that St.
Paul "received written notice" of a potential claim arising out of
the Directors' negligent acts, because St. Paul required the Bank
to provide general financial and regulatory material during the
time of coverage. They argue that the notice provision of the
policy does not specify the manner of providing notice, and that
the documents provided to St. Paul documented the Directors'
negligent acts sufficiently to qualify as "such notice".
In response, St. Paul contends that the notice provision
requires the Directors to provide notice in a separate and distinct
act based on their awareness of a potential claim; as provided in
the policy, the insured must "give written notice" that the insured
has "knowledge or [has] become aware of" activity such as a
negligent act or breach of duty. At the time the Bank transmitted
the documentation to St. Paul, the Bank affirmatively represented
that it knew of no potential claims arising from the acts of its
officers and directors. We agree with St. Paul's contention that
such a transmittal of FDIC documents cannot constitute "such
notice" as to "be considered a claim" under the "Policy Period"
provision.
St. Paul points out that when the Bank submitted to it a
financial statement, copies of FDIC regulatory examinations, and a
response to an underwriting questionnaire, it do so as part of a
1984 request by the Bank for an increase in coverage. On the
14
related Increase Application, the Bank indicated the following:
"Question 2: Has there been during the last three years, or
is there now pending, any claim against any person proposed
for this insurance in their capacity as either director,
officer or employee (past or present)? ...
"Answer: No.
"Question 3: Does any director or officer have knowledge or
information of any act, error or omission which might give
rise to a claim under the proposed policy? ...
"Answer: No.
Similarly, in 1985, a Bank officer wrote to St. Paul
transmitting a copy of a loan watch list and a 1984 Report of
Examination from the Louisiana Commissioner of Financial
Institutions. Although the report does list as an "asset listed
for special mention" one of the loans that later became the subject
of this suit, it also states specifically that the borrower had
sufficient income and net worth to support the credit. The bank
officer also attached a letter that stated he had "personally
reviewed the Report of Examination and [found] that there [was] no
information of a material nature that has not been previously
reported to [St. Paul] that would have an adverse impact on our
liability coverage."
This court has not addressed this coverage issue in a case
with a notice requirement identical to that of the present policy.
It has, however, addressed very similar provisions in other
claims-made policies. For example, in Barham, and in RTC v. Ayo,30
the court examined policies that required notice of a "specified
30
31 F.3d 285 (5th Cir.1994).
15
wrongful act."31 And, in both Mijalis, and McCullough v. Fidelity
& Deposit Co. of Maryland,32 the court analyzed policies requiring
written notice of "any such alleged wrongful act," referring to
"specified wrongful act" in the previous paragraphs.33 In each
case, the court determined that mere constructive notice of
wrongful acts did not satisfy the policy's notice requirement.
The Directors and the FDIC attempt to distinguish these cases,
because those notice provisions require notice of "specific" acts,
whereas the present policy requires only written notice of any
negligent act or breach of duty of which the insured has
"knowledge" or is "aware." This distinction is of no consequence;
a provision requiring the insured's knowledge or awareness of the
activity and "written notice thereof" clearly implies specificity
in the notice.
A more pertinent distinction suggested by the Directors is
that all of the above cited cases concern situations in which the
insurer inadvertently obtained the documentation of the alleged
claims. In contrast, in the present case, St. Paul affirmatively
required the Directors to supply the financial information. We do
not find this factual distinction significant enough to cause a
different result, however. In this case, the Directors gave
specific assurances to St. Paul that the documentation they
provided indicated no potential liability. Delivery of documents
31
Id. at 288; Barham, 995 F.2d at 602.
32
2 F.3d 110 (5th Cir.1993).
33
Id.; Mijalis, 15 F.3d at 1329.
16
accompanied by such statements cannot later serve the opposite
function of providing notice of potential liability, regardless of
which party initiated the delivery of information.
The FDIC suggests yet another approach, relying on Louisiana
state law precedent that suggests a "liberal" position regarding
the necessary "form" for policy notice requirements.34 The FDIC
argues that the documentation provided to St. Paul's in this case
satisfies the purpose of the notice provision, which is to apprise
the insurer of the facts underlying the insurer's potential
liability, as required by the Louisiana courts; the Directors
should not be penalized for mere "technical" noncompliance with the
notice requirement.
The cases cited by the FDIC all address "occurrence" based
policies, however, and not "claims-made" policies, as in the
present case. In occurrence based policies, the notice requirement
is generally included to aid the insurer in administration of its
coverage of claims; in claims-made policies, the notice
requirement actually serves to aid the insured by extending
claims-made coverage beyond the policy period.35 As such, we
believe it should be strictly construed.36
Finally, we address the FDIC's contention that it should be
34
Deville v. Louisiana Farm Bureau Mutual Ins. Co., 378
So.2d 457 (La.App. 3d Cir.1979); Paul v. Nat'l Amer. Ins. Co.,
361 So.2d 1281 (La.App. 1st Cir.), writ denied, 363 So.2d 1385
(La.1978).
35
Barham, 995 F.2d at 604, n 9, citing FDIC v. Continental
Casualty Co., 796 F.Supp. 1344, 1351 (D.Or.1991).
36
Id.
17
allowed to recover as an injured third party under the Louisiana
Direct Action Statute, even if the Directors failed to comply with
the policy's notice requirements. The FDIC relies upon Louisiana
state court cases to the effect that failure of an insured to give
timely notice of a claim or of the filing of a suit is not a
defense to a direct action suit by a third party against a
liability insurer absent prejudice to the insurer from the lack of
notice. See, e.g., Williams v. Lemaire, 655 So.2d 765 (La.App. 4th
Cir.1995), cert. denied, 660 So.2d 481 (1995).
We need not decide whether the FDIC is a third party, as in
those Louisiana cases, or instead an assignee or successor in
interest to the Bank, the insured. This contention by the FDIC is
based upon the premise, as stated in its brief, that "the FDIC made
a claim during the policy period." We have already determined that
no claim was made during the policy period. What is at issue here
is not merely a policy provision requiring notice of a claim. St.
Paul's policy provides coverage for designated activity during the
policy period but only if a claim is made or suit is brought during
the policy period. It is undisputed that no suit was brought
during the policy period. Under the policy, absent suit the only
way a claim is made is if the insured gives written notice "to the
Company" of covered activity during the policy period.
To state it differently, this is not a situation in which a
claim is made during the policy period and the insurer defends on
lack of notice. Under the St. Paul policy, the written notice to
the insurer constitutes the claim. There having been no written
18
notice, there was no claim during the (extended) policy period, and
thus no coverage.
CONCLUSION
For the reasons set forth above, we AFFIRM the district
court's dismissal of the plaintiffs' claim against The St. Paul
Insurance Company.
19