Policyholders celebrated a win from Idaho's federal courts in IDAHO TRUST BANK v. BancINSURE, INC., involving a conflict between an exclusion and the coverage grant. Here's a brief factual set up: a bank agreed to loan money to its customer to buy steel to build a new building. The bank failed to come through with the loan and company sued. The bank's insurer (under an Errors-and-Omissions type policy) defended the bank under the "lender liability" coverage portion. This is a common provision in bank policies, covering errors committed in making a loan, failing to make a loan, or connected with making a loan. The bank and the company settled round 1 of the litigation, but the bank somehow failed to live up to its end of the bargain, resulting in the litigation being revived, and the company adding claims against the insured bank for breach of the settlement agreement.
After some procedural maneuvering in the underlying case the insurer pulled its defense, whereupon coverage litigation began. The bank and its insurer filed cross-motions for summary judgment. The insurer first asserted that the claim relating to the settlement agreement was not interrelated with the original claim, and since it had stopped insuring the bank after that original claim came in, there was no coverage (these policies are of course "claims made" policies). The court rejected that argument, relying on the abundant case law interpreting the standard related-claims language to be very, very broad, and the somewhat muddy factual record about whether the insured had admitted that the claims were independent.
The insurer also relied on its policy's "contractual liability" exclusion as precluding the claim for breach of the settlement agreement. However, the court noted that the coverage part that had clearly applied to the original complaint - coverage for "lending liability" - defined lending in terms of an "agreement" with someone to make a loan. Therefore, there was a conflict between the coverage grant for "lending liability" and the contractual liability exclusion. The court held that an insurer cannot enforce an exclusion that eats so directly into the promised coverage, and refused to interpret the contractual liability exclusion so broadly that it would exclude a breach of contract claim that arose out of a failure to make a promised loan.
Thanks to two other bloggers: D&O Diary and Jones Lemon Graham's D&O Digest, for tipping me off to this Northwest case.
