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AIG unit must pay D&O liability defense costs in Puerto Rican bank case: Court


An American International Group Inc. unit is obligated to pay defense costs for directors and officers of a now-defunct Puerto Rican bank under terms of its directors and officers liability insurance policy, in litigation filed by the Federal Deposit Insurance Corp., says an appeals court.

Monday's ruling by the 1st U.S. District Court of Appeals in Boston in W. Holding Company et al. v. AIG Insurance Co. is the latest ruling in litigation stemming from the 2010 closing of Mayaguez, Puerto Rico-based Westernbank Puerto Rico's 46 branches.

The FDIC, which has become the bank's receiver, has filed suit against certain of the bank's former officers and directors, claiming their breaches of fiduciary liability have caused more than $176 million in losses to the bank. The defendants have sought coverage from AIG under terms of the bank's D&O liability insurance policy.

AIG, operating at the time as Chartis Inc., has denied coverage, stating that because the FDIC, as the bank's receiver “has stepped squarely into” the bank's shoes, any claims the FDIC had against its directors and officers on behalf of the bank triggers an “insured-versus-insured exclusion” in the policy, according to the ruling.

The directors and officers have claimed they are entitled to coverage and that a majority of courts have refused to stretch the insured-versus-insured exclusion to include the FDIC, says the ruling.

“Puerto Rico law holds that an insurance company must advance defense costs if a complaint against an insured alleges claims that create even a 'remote possibility' of coverage,” said a unanimous three-judge panel, in affirming a ruling by the District Court in Puerto Rico.


“Think about that for a second,” states the ruling. “Not an 'actuality' of coverage. Not even a 'probability' of coverage. No, a mere 'possibility' of coverage will do — regardless of how 'remote' it may be. A pretty low standard indeed. On top of that, courts must read the complaint's allegations 'liberal(ly)' when doing a remote-possibility check,” says the ruling.

“Chartis's suggestion that there is zero likelihood of a remote possibility of coverage falls flat,” said the panel, in affirming defense coverage for the directors and officers, and awarding them their costs on appeal.