St. Paul Fire and Marine Ins. Co. v. F.D.I.C.

• Decision Date: 18 August 1992
• Docket Number: No. 91-2656,91-2656
• Citation: 968 F.2d 695
• Parties: ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Appellee, v. FEDERAL DEPOSIT INSURANCE CORPORATION, as receiver of the State Bank of Greenwald, Minnesota, Appellant. v. Douglas A. WINTER; Bernadine Winter; Robert J. Osendorf, Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 695

968 F.2d 695

61 USLW 2046

ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Appellee, v. FEDERAL DEPOSIT INSURANCE CORPORATION, as receiver of the

State Bank of Greenwald, Minnesota, Appellant. v. Douglas A. WINTER; Bernadine Winter; Robert J. Osendorf, Appellants.

No. 91-2656.

United States Court of Appeals,

Eighth Circuit.

Submitted March 11, 1992.

Decided July 2, 1992.

Rehearing Denied Aug. 18, 1992.

Edward J. Pluimer, Minneapolis, Minn., argued (Brian E. Palmer, John A. Cooney and Charles R. Shreffler, Minneapolis, Minn. and Robert A. Patrick, Washington, D.C., on the brief), for appellant.

Norman R. Carpenter, Minneapolis, Minn., argued, for appellee.

Before McMILLIAN, Circuit Judge, HEANEY, Senior Circuit Judge, and JOHN R. GIBSON, Circuit Judge.

McMILLIAN, Circuit Judge.

The Federal Deposit Insurance Corp. (FDIC), as receiver for the State Bank of Greenwald (bank), appeals from a final order entered in the District Court ¹ for the District of Minnesota granting summary judgment in favor of St. Paul Fire & Marine Insurance Co. (St. Paul). St. Paul Fire & Marine Insurance Co. v. FDIC, 765 F.Supp. 538 (D.Minn.1991) (St. Paul ). For reversal the FDIC argues the district court erred in granting summary judgment because (1) there are disputed issues of material fact about the adequacy of the notice of certain exclusions from coverage, (2) the regulatory exclusion is ambiguous, and (3) the regulatory exclusion violates public policy. For the reasons discussed below, we adopt the district court's well-reasoned analysis and affirm the order of the district court.

The following statement of facts is taken in large part from the memorandum opinion of the district court. The bank was established in 1910. In 1965 Clarence "C.P." Winter, a long-time bank officer, and Lyle Olmscheid acquired the bank. C.P. Winter apparently bought out Olmscheid's interest in the bank in 1972. In 1978 C.P. Winter formed a bank holding company. C.P. Winter and his wife, Bernadine Winter, owned 96% of the stock of the bank holding company. The bank holding company owned 84% of the stock in the bank. The Winters also acquired an insurance agency located at the bank. St. Paul was one of the insurance carriers represented by the insurance agency.

The bank's board of directors and officers consisted of C.P. Winter as president, Bernadine Winter as executive vice-president, and Robert J. Osendorf as vice-president. Osendorf was also the manager of the insurance agency. After C.P. Winter's death in 1983, Bernadine Winter became president and Osendorf became executive vice-president. Douglas C. Winter, the son of C.P. and Bernadine Winter, became vice-president and was also elected to the bank's board of directors. Douglas Winter, who had been a loan officer at the bank, apparently assumed the principal responsibility for managing the bank. Bernadine Winter handled personnel matters and teller duties. Osendorf spent little time on bank affairs and continued to manage the insurance agency.

In March 1984 Osendorf obtained director's and officer's (D & O) liability insurance for the bank from St. Paul. The policy provided coverage through July 1, 1986. In March 1985 St. Paul decided to add several new endorsements, including a regulatory exclusion, to all of its bank D & O liability policies. St. Paul also increased premiums and shifted from multiple-year to annual policy periods. In August 1985 St.

                Paul filed the exclusions with Minnesota authorities.   The exclusions significantly reduced the coverage provided by St. Paul's D & O liability policies.   St. Paul established internal procedures to notify its insured banks of these changes in coverage.   St. Paul instructed its agents to quote all new and renewal D & O business with the stipulation that the exclusions would be attached to the D & O liability policies as soon as St. Paul received regulatory approval and to obtain written acknowledgement of the policy changes
                

On May 5, 1986, St. Paul sent Osendorf an application to renew the bank's D & O liability policy. The renewal letter stated that St. Paul had decided to add several exclusions, explained the effects of the exclusions on coverage ² and noted that the exclusions would be added at renewal. Douglas Winter and Bernadine Winter completed and executed the renewal application and returned it to St. Paul. St. Paul then sent the bank a letter quoting a much higher premium for D & O coverage for one year and a higher deductible. The quote letter did not include any information about the exclusions or seek written acknowledgement of the exclusions by the bank. The bank accepted the new premium and St. Paul issued the bank a new D & O liability policy, which included the regulatory and insured v. insured exclusions, for coverage as of July 1, 1986.

St. Paul sent two copies of the renewal policy to Osendorf, one copy for the insurance agency and the other copy for the bank. The policy contained a typed page stating that liability was subject to several new endorsements and listed the endorsements. The regulatory exclusion was one of the listed endorsements. Another page of the policy entitled "Notice" stated that the policy contained one or more of the new endorsements and briefly described each endorsement, including the regulatory exclusion. Subsequent pages of the policy set forth the new endorsements in full, including the regulatory exclusion, which provided:

In consideration of the premium charged, it is agreed that there is no coverage for any claims made against the Directors or Officers of the [bank] based upon or attributable to any claim, action or proceeding brought by or on behalf of the Federal Deposit Insurance Corporation, Federal Savings and Loan Insurance Corporation, any other similar depository insurance organization, or by any other Federal or State Regulatory Agency; whether such claim, action or proceeding is brought in the name of such Regulatory Agency or by or on behalf of such Regulatory Agency in the name of any other entity.

The 1986 D & O liability policy was renewed in 1987 and provided D & O coverage through June 30, 1988.

In the meantime, in 1986, Douglas Winter began to trade in large denomination government bonds on behalf of the bank. He did not properly record most of these transactions and did not maintain complete records on the bonds. He mistakenly believed that his trading activities through 1986 had generated a profit for the bank of $50,000.00 to $60,000.00. In March 1987 Minnesota banking authorities examined the bank. In May 1987 the bank's outside auditor began the yearly director's audit. The outside auditor discovered balance sheet problems and traced them to the bank's margin account, the account which Douglas Winter had used for his trading. The auditor requested trading confirmations from various securities brokers. By July 1987, the auditor had enough information to conclude that the bank had serious In August 1987 the FDIC began its examination of the bank. The FDIC examination was not completed because in October 1987 the state banking commissioner determined the bank was insolvent and ordered the bank closed. The FDIC was appointed as receiver. The FDIC made a claim against the bank's officers and directors to recover the $4.5 million in losses suffered by the bank. St. Paul denied the claim on the ground that coverage was excluded by the restrictive endorsements in the D & O liability policy issued to the bank. In May 1989, anticipating litigation, St. Paul filed this action against the FDIC in federal district court seeking a declaratory judgment that it had no obligation to insure either the bank or its former directors and officers against claims asserted by the FDIC.

financial problems and notified the state banking authorities.

In August 1989, as St. Paul had anticipated, the FDIC filed a third-party action against the bank's former directors and officers, seeking damages of $4.5 million for losses suffered by the bank as a result of improper securities trading, breaches of fiduciary, statutory and common law duties, and breach of contract. In March 1991 the FDIC and the bank's former directors and officers settled the third-party action. Pursuant to a stipulation, the third-party defendants confessed judgment in the amount of $4,481,123.71 in return for the FDIC's agreement that its recovery, if any, would come only from the proceeds of any applicable insurance policies, primarily the $1 million D & O liability policy issued to the bank by St. Paul.

In the meantime, St. Paul and the FDIC filed cross-motions for summary judgment in the declaratory judgment action. St. Paul argued that the regulatory endorsement in the D & O liability policy issued to the bank excluded coverage for claims against the bank's former directors and officers asserted by the FDIC. The FDIC argued that the D & O liability policy covered the losses caused by the bank's former directors and officers. The FDIC argued that St. Paul could not rely on the regulatory exclusion because it had failed as a matter of law to provide adequate notice to the bank of the reduction in coverage. The FDIC also argued that the regulatory endorsement was ambiguous and contrary to public policy and violated the reasonable expectations of the bank and its former directors and officers about the scope of coverage.

The district court found that the May 1986 renewal letter, in conjunction with the notice contained in the policy itself, was sufficiently conspicuous to satisfy the notice requirement. 765 F.Supp. at 544, citing Canadian Universal Insurance Co. v. Fire Watch, Inc., 258 N.W.2d 570, 575 (Minn.1977). The district court also found that Osendorf was an agent of the bank, Bernadine Winter and Douglas Winter for purposes of obtaining D & O liability insurance and accepting notice about changes in coverage. 765 F.Supp. at 546. The district court also concluded that the regulatory exclusion was not...