filed: February 28, 1994; As Amended March 15, 1994.
Appeal from the United States District Court for the District of New Jersey. D.C. Civil No. 91-05107.
Before: Mansmann, Nygaard and Seitz, Circuit Judges.
The Federal Deposit Insurance Corporation ("FDIC") appeals from a summary judgment finding no insurance coverage of the former directors and officers of a failed thrift, First Federal Savings and Loan Association of Hammonton, New Jersey ("First Federal"). The district court had federal question jurisdiction over this declaratory judgment action under 28 U.S.C. § 1331 construed with 12 U.S.C. § 1819(b)(2)(A), which deems any lawsuit to which the FDIC is a party to arise under the laws of the United States. This court has jurisdiction to review the district court's grant of summary judgment under 28 U.S.C. § 1291.
In the 1970's, First Federal Savings and Loan of Hammonton, New Jersey ("First Federal") purchased directors' and officers' ("D&O") liability insurance written by MGIC Indemnity Corporation ("MGIC"). MGIC renewed First Federal's D&O policy for the period June 26, 1981 to June 26, 1984 (the "1981 policy"). In 1983, Continental Casualty Company, a subsidiary of American Casualty Company of Reading, Pennsylvania (collectively "CNA"), acquired MGIC's casualty insurance business and assumed all obligations under the 1981 policy.
The 1981 policy was a "claims-made" policy that provided coverage for
loss in respect of any Wrongful Act committed prior to the termination of this policy arising from any claim made (i) within the policy period or (ii) within the discovery period if the right is exercised . . . in accordance with Clause 2(B). . . . Any claim made subsequent to the policy period as to which notice was given to the Insurer within the policy period . . . shall be treated as a claim made during the policy period.
A notice of claims provision detailed the requirements for giving notice and made written notice a condition precedent to the insureds' rights under the policy. It required that the insureds give written notice to the insurer at a specified address of any claims or occurrences that might give rise to claims after the policy expired. The Assumption Endorsement added by CNA changed the address and directed claims to its Manager of Professional Liability Claims.
The 1981 policy also contained two relevant provisions on nonrenewal of the insurance contract. First, the cancellation clause required the insurer to provide 30 days notice of nonrenewal. Second, an endorsement allowed First Federal to purchase a one-year extension of the coverage provided by the 1981 policy for any claims made with respect to a "Wrongful Act" committed prior to the nonrenewal. Upon nonrenewal, this endorsement required CNA to provide notice to First Federal of the availability of this extended coverage, commonly called a "discovery period."
As the end of the 1981 policy period neared, First Federal responded to CNA's renewal notice with an application attaching copies of three of its most recent reports to the Federal Home Loan Bank Board ("FHLBB Reports") and the most recent auditor's report. The reports contained troubling information about First Federal's financial condition, including a warning on a volume of recently acquired loans that
lack of proper documentation, and, in the case of one major accommodation, questionable business practices in the origination and servicing of [some of these loan] obligations make it impossible to evaluate the collectibility of a significant portion of the aggregate outstanding balances of these loans.
On the day the 1981 policy expired, the insurance agent advised First Federal that it would be temporarily covered by a binder with the same policy form. The next month, CNA offered to renew the policy with an endorsement excluding suits by regulatory agencies.*fn1 After determining that it could not obtain coverage without a regulatory exclusion from another carrier before the expiration of the binder, First Federal accepted CNA's new terms. The terms of this 1984 policy were retroactive to the date the 1981 policy expired.
Four months after issuing the 1984 policy, CNA mailed a notice of cancellation. Following cancellation, First Federal purchased a one-year discovery period effective March 22, 1985 through March 22, 1986.
During the 1981 and 1984 policy periods, First Federal sent no formal notices of claims or potential claims against the directors and officers to CNA. During the discovery period following the 1984 policy, however, First Federal filed several formal notices of claims and potential claims by third parties. None of these notices directly discussed the potential for claims brought by the FDIC.
First Federal underwent a supervisory merger approved by the FHLBB in 1988. Under this arrangement, the FDIC in its capacity as receiver assumed substantially all of First Federal's assets and liabilities. In 1991, the FDIC in its corporate capacity sued 14 former directors and officers of First Federal seeking $60 million in damages.
The claims for which the FDIC seeks insurance coverage arose from the directors' and officers' handling of the problem loans identified by the auditor's report filed with the renewal application. CNA brought ...