⭑ The insurance lobby was so effective nonetheless that it created a new and special protection for large insurance companies not found in any other commercial context--not even in the Bankruptcy Courts.

* This new protection, while allowing anyone else to bring claims under D&O policies and bonds after a bank or thrift failure is read by the insurance companies--and now by most federal courts--as precluding recovery on claims by the FDIC and

RTC.

So the taxpayer loses instead. The less the FDIC and RTC recover from D&O and Bond policies, the more the taxpayer must bear the losses caused by individual directors and officers. And total recoveries lost because of the protection Congress has granted the insurance companies could total almost ši billion dollars over the next several years.

⭑ Why is that? Because the FDIC and RTC combined, and not taking into account future failed bank and thrift D&O policies and bonds, have claims or potential claims against individual directors and officers involving almost $700 million in D&O policies and bonds that purport to exclude FDIC and RTC claims. And because the federal courts have generally enforced these exclusions against FDIC and RTC since Congress created a special exemption for insurance companies that is given to no other commercial sector--the exemption found in 12 USC 1821(e) (12) (A).

The Taxpayer Savings Amendment: D&O Insurance and Bonds repeals this special treatment for insurance companies and allows the FDIC and RTC to pursue those responsible for bank and thrift failures and the insurance policies they bought with bank and thrift money.

Source: Fadel Ayunt Insuume Corpusten,

1991

ATTACHMENT DIRECTORS AND OFFICERS--BONDS

DRAFT LEGISLATIVE HISTORY

As receiver or conservato: of failed or insolvent depository Institutions, Congress has charged the FDIC with the duty to realize exitum value from all assets including accual or potential claies`against former directors and officers of such Institutions for losses resulting from their negligence, rismanagement or worse conduct. The FDIC frequently looks to director's and officer's liability (D&D) Insurance and financial Institution (fidelity) bonds as primary recovery sources where auch zeritorious claims exist.

Since the mid-eighties most underwriters of DEO Insurance policies and fidelity bonds have included clauses or endorsezantu purporting to terminate the policy or bonding period upon the appointment of a receiver or conservator or to exclude outright any claims brought by the FDIC or other regulatory agencies. Although the FDIC initially had success, frequently on public policy grounds, in arguing against the application of endorsements excluding or purporting to exclude coverage for PDIC claims, a recent string of adverse decisions has reversed this favorable trend.

In reic v detno focualty & Surety, 903 F.2d 1073 (5th Cir. 1990), the Sixth Circuit Court of Appeals reversed a lover court's ruling that two provisions in a fidelity bond -- one which purported to terminate coverage of a financial institution upon the "taking over of the institution by a receiver or 1iquidator and the other which allowed an extra "discovery" period after termination yaless there was a "takeover" by a receiver or liquidator -- vere unenforceable against the PDIC. Although the sixth Circuit reversed on two grounds, the court xelied heavily on the exception for Dio insurance and fidelity bonds contained in 12 USC Section 1821(e) (12) (A), the FDIC's general authority to enforce contracts notwithstanding termination upon insolvency provisions, in finding no publio policy to support the FDIC's position. Indeed, the detra court tated that FIRRZA's rendrent to include the exception for fidelity bond and DEO Insurance policies indirectly support[s] the validity of (the termination provisions described above).. The Court in deine decided that Congress, which in its view must deterrine public policy in the first instance, had failed to anunciate a "dominant public policy" sufficient to void the terzination provisions in the fidelity bond at issue through its enactment of Section 1821(e) (A). In reaching this conclusion the Court igncred subsection (B) which Congress had intended as "neutrality provision in order to allow case law to develop in the D&D and Bond area without reférence to subsection (A)

This is clear from the plain meaning of subsection (B) of 12 USC 1821 (a) which states:

No provision of this paragraph may be construed as
izpairing or effecting any xỉght of the conservator or
receiver to enforce or recover under a director's or
officer's liability insurance contract or depository
Insurance bond under other applicable law.

As a result of this misinterpretation of congressional intent,
detra has had a great impact on courts at both the District and
circuit levels. In the DEO area especially, the most troublesona
endorsements and clauses are those which purport to exclude
claims brought by or on behalf of the FDIC the "regulatory
agency exclusions. A major argurent against enforcebent of such
exclusions is the public policy expressed in federal statutes and
regulations enunciating FDIC powers. In early decisions

involving the FSLIC in several District Courts, such exclusions were held to be unenforceable based on public policy

considerations. For example, in FSLIC v. Oldenburg, 671 7. Supp. 720 (D. Utah 1987) the court held public policy precluded the savings institution from "bargaining avay the rights of the PBLIC to carry out its statutory function." similar analyses of public policy were followed in Branning y. CNA Insurance Co., 721 7. Supp. 1180 (W.D. Wash. 1969) and FSLIC v. Krahet, No. 86-5160 (E.D. La. March 3, 1988), decisions which also refused to enforce regulatory agency" exclusions.

Until the summer of 1990 only two decisions enforced the "regulatory agency" exclusion. Since then, the FDIC has lost ten of the last eleven decisions, including an Eighth Circuit case, brexican Casualty Co. l. EDIC, fiv. Nos. 90-2402NI, 90

445NI (8th Cir., September 18, 1991).

• BeCven Y. International Insurance Co., Civ. No. 87-54-D-1 (S.D. Iowa, September 28, 1988) Continental CAE, CO. Y. Allen, 701 F. Supp. 1088 (N.D. Tox. 1989).

,2 The other cases are Gaxy Y. Bracican Casualty Co., 753 P. Supp 1547 (W.D. Okla. 1990) (appeal pending); Rovell v. Azerican Casualty Co., No. CIV-90-897-W (W.D. Okla. Feb 26, 1991); Kort Y SIES. NO. SA-CV-89-260-JSL (C.D. Cal. July 23, 1990) (bench ruling) Arerican Caevalty so ye baker, 758 7. Bupp. 1340 (C.D. Cal. 1991); St. Paul Fire & Yaring IDE. SO, Y. DIG, 1991 ML 90875 (D. Minn. Kay 20, 1991) (appeal pending); Eidelity & Deposit Co. v. Conner, No. E-89-0872 (S.D. Tax. June 4, 1991) (appeal pending); EDIC v brezican Casual Co. of Reading, PA., No.90-CV-0265-J (D. Wyo. July 3, 1991); EDIC Y. Zaborac, No. 881140 (C.D. III. Aug 27, 1991).

3

Many if not most of these unfavorable decisions rely on the reasoning in detng to interpret the exception found in 12 0.8.0. Section 1821(e) (12) (A) as evidencing a lack of public policy against enforcement of exclusionary clauses and endorsements to claims brought by the FDIC.

This issue was addressed in the insurance study conducted jointly by the FDIC, and the Departments of Justice and Treasury, pursuant to section 220 (b)(3) of FIRREA.. The "Report on Directors and officers Liability Insurance and Financial Institution Bonds" contains various recommendations on issues concerning DEO insurance coverage and availability, in particular the issue of the enforceability of the "regulatory agency" exclusion. As discussed in the study, public policy arguments against application of endorsements purporting to bar FDIC clains upon bank failure have been vitiated and ignored by the courts following the enactment of section 1821(e)(12)(A) and (B) which the courts have misinterpreted as evidencing Congress' rejection of public policy support for the FDIC's position.

Section

of the Bill corrects this misinterpretation of congressional intent by asending section 1821(e) (12) (A) to delete the exception for Dio policies and depository Institution bonds from the FDIC's power to anforoe contracts and by deleting in its entirety Section 1821 (m) (12) (8). These acendments to section 1821(e) (12) are intended to, among other things, reiterate Congress Intent to confer the broadest powers possible to the FDIC in ite capacity as receiver or conservator of failed depository institutions to realize maximum value from failed financial institution assets including Insurance proceeds in the professional liability and fidelity

areas.

'This figure includes internal fees, outside counsel and expert fees and expenses. Due to limitations of an earlier accounting system, in some Instances, Internal costs for certain institutions cannot be segregated, and are thus not included in this total.

2Ratio reflects verdict amount, not recovery to date.