I. Fact: (1) Fidelity and Deposit Company of Maryland(F D, Appellee) issued four directors’ and officers’ liability policies to four affiliate banks including Harris Country Bankshares. The policy covers the claims against the directors and officers if the required written or oral notice is given to the F D during the policy period. (2) The banks provided the information that the banks are experiencing increasing loan losses and delinquencies as well as an annual report. In the report, F D found the cease and desist order from the Office of the Comptroller of the Currency(OCC). Yet, the bank did not send the order itself. (3) In September 1985, in response to the increasing loan losses, F D informed the banks that it intended to cancel their policies effective October 9. After a merger of the subsidiary banks, the OCC declared the bank insolvent in February 1988 and declared the FDIC as Receiver. FDIC sued the bank’s directors and officers. F D denied coverage.(4) The district court found that FDIC had failed to show that F D received written notice of a potential claim under § 6(a)(2) of the policy.
II. Issue: Whether the insured received the proper notice of a potential claim.
III. Reasoning:
a) Rules
i) Notice of an institution's worsening financial condition is not notice of an officer's or director's act, error, or omission. See American Casualty Co. v. FDIC, 944 F.2d 455, 460 (8th Cir. 1991) and California Union Ins. Co. v. American Diversified Savings Bank, 914 F.2d 1271, 1277-78 (9th Cir. 1990), cert. denied, 498 U.S. 1088,111 S.Ct. 966, 112 L.Ed.2d 1052 (1991).
b) Application
i) The court first examined the type of notice the policy required. The policy requires the bank to notify F D of “specified Wrongful Acts” of directors and officers having claim potential. The court found that the plain language supports F D’s argument because “specified” modifies “Wrongful Act” and not “claim. Then, the court cannot accept the FDIC’s argument that the notice can be in the broader form of any act, error or omission. Thus, the court concluded that the policy requires the insured to give the insurer notice of specified wrongful acts to trigger coverage. Then, the court examined if the insureds gave adequate notice of specified wrongful act. The court found that the banks did not provide F D a copy of the cease and desist order by the OCC. The court also argued that even if they provided, the issuance of such an order does not identify the specified wrongful act. Thus, the court concluded and agreed with the district court that the insureds failed to give F D adequate notice of specific wrongful acts to trigger coverage.
IV. Holdings: Affirmed.