Federal Deposit Insurance v. Booth

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