(Article from Insurance Law Alert, February 2024)
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Holding
The Sixth Circuit ruled that a bank’s settlement payment in connection with a bankruptcy fraudulent transfer proceeding was not an uninsurable loss under Ohio law and was not otherwise excluded by a policy provision. Huntington Nat’l Bank v. AIG Specialty Ins. Co., 2024 U.S. App. LEXIS 2369 (6th Cir. Feb. 1, 2024).
Background
AIG issued a professional liability policy to Huntington National Bank. The policy defined “Loss” as “damages, judgments, settlements and Defense Costs,” but an endorsement (“Endorsement 8”) modified that definition to exclude various fines, penalties, punitive damages or “matters that may be deemed uninsurable under the law.” Another endorsement (“Endorsement 7”), which related to Huntington’s “Lending Acts,” stated that AIG “shall not be liable to make any payment for Loss in connection with any Claim or Claims made against any Insured: for the principal and/or interest of any unrepaid, unrecoverable, or outstanding credit.”
The policy became implicated when Huntington unwittingly became the bank for a company involved in a Ponzi scheme. After the fraud was discovered and the company declared bankruptcy, the trustees of the company filed adversary proceedings against Huntington, alleging fraudulent transfers in connection with its banking services. Huntington argued that the transfers were not recoverable because it accepted them in good faith. Those proceedings resulted in several findings, including that Huntington was a “transferee” of certain loan repayments and that Huntington’s affirmative defense of good faith ended on a certain date, after which the trustee was entitled to recover loan repayments. As to loan repayments during another time period, which remained in dispute and turned on Huntington’s knowledge or lack thereof of the voidability of the transfers, the parties reached a settlement without any admission of liability or wrongdoing on the part of Huntington.
AIG disclaimed coverage on the basis of Endorsements 7 and 8. Huntington sued, alleging breach of contract and bad faith. An Ohio district court granted AIG’s summary judgment motion, ruling that Huntington’s claim was uninsurable under Ohio law and that in any event, coverage was barred by Endorsement 7. The Sixth Circuit reversed.
Decision
The Sixth Circuit ruled that Huntington’s claim was insurable under Ohio law. The court noted the absence of controlling Ohio precedent as to whether a claim for settlement of a bankruptcy fraudulent transfer action is uninsurable, but noted that appellate court decisions indicated that what is uninsurable under Ohio law “is quite narrow” and limited to two categories: punitive damages and intentional torts.
Applying this framework, the Sixth Circuit concluded that Huntington’s settlement payment was not akin to punitive damages and was not in response to an intentional act. Rather, the claims against Huntington turned on whether the bank was a “transferee” under federal bankruptcy law. Further, the court emphasized that “no showing of intentional malice by the transferee is required under the fraudulent transfer provisions of the bankruptcy code, meaning that an order to return funds is not a ‘punishment in any traditional sense.’” In short, the court held that liability under fraudulent conveyance statutes “is not tantamount to the type of culpable conduct that Ohio courts have held precludes insurance recovery.”
Additionally, the court ruled that Endorsement 7 was ambiguous and must be resolved in favor of coverage. Huntington argued that under a plain meaning interpretation, the endorsement did not apply because the settlement payment was not for credit unrepaid, unrecoverable, or outstanding, but rather “for a settlement based on wrongful acts as understood within the policy.” In contrast, AIG argued that Huntington’s insurance claim was essentially an attempt to obtain recovery for loan payments it had been forced to return as a result of the bankruptcy proceeding settlement. The Sixth Circuit deemed both interpretations reasonable and construed the endorsement in favor of coverage.
Comments
The decision is notable in several respects. First, the Sixth Circuit ruled that AIG bore the burden of proving that Huntington’s claims were “uninsurable under the law” because that phrase was contained in an endorsement that constituted an exclusion. The court rejected AIG’s contention that the endorsement modified the coverage provision defining “Loss” and was thus part of the initial grant of coverage, for which Huntington would bear the burden of proof.
Second, the court deemed the phrase “uninsurable as a matter of law” unambiguous and declined to consider extrinsic evidence in this context. The court expressly rejected Sixth Circuit cases that have allowed the consideration of extrinsic evidence to interpret policy terms absent ambiguity.
Finally, in holding that Huntington’s claims were not uninsurable under the law, the court emphasized the distinction between claims arising out of intentional and malicious conduct (which would be uninsurable) and claims arising as a result of Huntington’s failure to establish good faith as an affirmative defense in the bankruptcy proceedings. The court stated that whether Huntington genuinely continued to believe that the transfers were legitimate receivables “is not tantamount to an intent to injure, malice, ill will, or other similar culpability.” The court went a step further, noting that even if Huntington suspected or had a reasonable basis to know that the loan repayments would harm future creditors, it “did not desire that result,” and thus did not possess the level of intent necessary to establish uninsurability.