United States Court of Appeals,

Fifth Circuit.

Nos. 93-3730, 93-3732.

RESOLUTION TRUST CORPORATION, in its Capacity as Receiver of Peoples Federal Savings

and Loan Association, Plaintiff-Appellant Cross Appellee,

v.

Donald J. AYO, Donovan J. Barker, George H. Diedrick, Jr., Ambrose H. Landry, Succession of

John F. Pugh, Sr., and Troy W. Thompson, Jr., Defendants.

Fidelity and Deposit Company of Maryland, Defendant-Appellee Cross Appellant.

RESOLUTION TRUST CORPORATION, Plaintiff-Appellant,

v.

Louis A. MIRAMON, Jr., et al. Defendants,

Louis A. Miramon, Jr., et al., Defendants-Appellants,

Fidelity & Deposit Company of Maryland, Defendant-Appellee.

Sept. 9, 1994.

Appeals from the United States District Courts for the Eastern District of Louisiana.

Before REYNALDO G. GARZA, SMITH, and PARKER, Circuit Judges.

REYNALDO G. GARZA, Circuit Judge:

The above consolidated cases were brought by the RTC against former officers and directors

of banks who carried Director & Officer Liabilit y Policies with Fidelity & Deposit Co. of Maryland

("F & D"). In both cases, the district judges found that no genuine issue of material fact existed, and

granted summary judgment in favor of F & D on the grounds that the insureds failed to comply with

the notice requirements of the F & D policy. The relevant portions of the policies for each case are

identical. The issues of law presented for appeal are also substantially the same for both cases. For

the following reasons, we affirm the district courts decisions.

FACTS

RTC V. MIRAMON

The individual defendants in this case are former directors and officers of the federally insured1 The district court's order points out that on May 31, 1986, South Savings obtained coverage

from CNA Insurance Company, thereby precluding South Savings from exercising the option of

the "Discovery Clause" for extending the coverage period provided for in clause 2 of the 1985

policy.

2 The eight transactions involve the purchase of South Savings' Mandeville branch site; the

purchase and construction of South Savings' main office; the St. James Partnership loans; the

Lake Hills Village and Madison Street/Golden Shores loans; the Westwood Estate loans; the

Garret workout loans; the Atrium loan; and the Three S. Enterprises loan. thrift South Savings and Loan Association ("South"). In 1982, F & D issued an insurance policy on

behalf of South Savings and its officers and direc t ors providing coverage for director and officer

liabilit y. This policy was effective between May 3, 1982 and May 31, 1985. In 1985, F & D issued

a second director and officer liabilit y policy in favor of South Savings which became effective on May

31, 1985. South Savings' insurance coverage with F & D terminated on May 31, 1986. 1

On August 7, 1992, the Resolution Trust Corporati on ("RTC"), as receiver of South Savings,

instituted this litigation against t he director defendants. The RTC alleged that the directors were

liable under theories of gross negli gence and breach of fiduciary duty resulting from the directors'

alleged misdealing in eight different transactions. 2 Additionally, RTC filed a third party action against

F & D under Louisiana' direct action statute, La.R.S. 22:655. In this action, the RTC contends F &

D is liable for the losses sustained as a result of the directors' alleged misconduct by virtue of the 1982

and 1985 insurance policies. The directors filed cross-claims against F & D in which they assert that,

under the director and officer liabilit y policy, F & D has a duty to defend, including a duty to advance

defense costs, and a duty to provide liability coverage.

The district judge concluded that b oth the RTC and the di rectors fai l ed to poi nt to any

evidence which suggested that South Savings or the directors complied with the notice requirements

of the policy, or that they even at t empted to put F & D on notice for the claims and alleged

misconduct asserted in this case. "To the contrary, the undisputed evidence, including South Savings'

and the defendant directors' repeated denials that they had knowledge of any conduct that might lead

to the filing of a claim in renewal application forms, establishes that no notice was provided to F &

D as a matter of law." The judge noted that since the underlying facts in the case were undisputed,

and these facts were insufficient to satisfy the notice requirements of the policy, summary judgment3 The major difference between the two policies is that the second policy contained

endorsements for an insured-versus-insured exclusion and a regulatory exclusion. Neither of

these exclusions were involved in the district court's decision. was proper.

RTC V. AYO

This suit was brought by the RTC, as receiver for Peoples Federal Savings & Loan

Association, Thibodaux, Louisiana ("Peoples"), against certain directors and officers of Peoples and

against its directors and officers liability insurance carrier, F & D, pursuant to the Louisiana Direct

Action Statute, La.R.S. 22:655.

The RTC sought to recover losses in excess of $2.2 millio n sustained by Peoples as a result

of the alleged acts and omissions of the individual directors. The claims aro se fro m a number of

different deficiencies relating to loan underwriting, collection, and management practices on

approximately fift

y (50) loan transactions. RTC alleges that claims covered under the policies issued

to the directors were made against the directors by federal banking regulators during the policy period

and/or that F & D received actual or constructive notice of such claims or potential claims during the

policy period. The D & O policies at issue were in effect from June 25, 1983 through June 25, 1985,

and from June 25, 1985 through June 25, 1986. 3 Similarly, the district court ent ered summary

judgment in favor of F & D.

The Insurance Policies

The F & D policies are entitled "Directors and Officers Liabilit y Insurance Policy Including

Association Reimbursement." The policies in question are "claims made" policies, as opposed to the

customary " o ccurrence" policy. Under claims made policies, the mere fact that an "act, error, or

omission" occurs during the policy period is not sufficient to trigger insurance coverage. FDIC v.

Mijalis, 15 F.3d 1314, 1330 (5th Cir.1994). In o rder to trigger coverage, such policies usually

require that a claim be made against the insured during the policy period. The F & D policies also

provide coverage for potential claims provided F & D receives, within the policy period, notice of the

occurrence of a specified wrongful act. The controversy in the case before us stems primarily from

the notice provisions which dictate that for potential future claims to be treated as a "claim" madeduring the policy year, the insured must notify F & D, within the policy period, of any occurrences

that may subsequently result in a claim. The policy provides in pertinent part:

6. NOTICE OF CLAIMS

(a) If during the policy period, or during the extended discovery period if the right is

exercised by the Association or the Directors and Officers in accordance with Clause

2, the Association or the Directors and Officers shall:

(1) receive written or oral notice from any party that it is the intention of such

party to hold the Directors and Officers, or any of them, res ponsible for a

specified Wrongful Act; or

(2) become aware of any act, error or omission which may subsequently give

rise to a claim being made against the Directors and Officers, or any of them,

for a specified Wrongful Act;

and shall during such period give written notice thereof to the Company as soon as practicable and prior to the date of t ermination of the policy, then any claim which

may subsequently be made against the Dir ectors and Officers arising out of such

Wrongful Act shall, for the purpose of this policy, be treated as a claim made during

the Policy Year or the extended discovery period in which such notice was first given.

(b) The Association or the Directors and Officers shall, as a condition precedent to

their rights under this po licy, give to the Company notice in writing as soon as

practicable of any claims made and shall give the Co mpany such information and

cooperation as it may reasonably require.

The notice requirements in claims made policies allow the insurer to "close its books" on a

policy at its expiration and therefore "attain a level of predictability unattainable under standard

occurrence policies." F

DIC v. Mijalis, 15 F.3d 1314, 1330 (5th Cir.1994). Insurance companies may

limit their liabilit

y through clear and unambiguous notice provisions, and impose any reasonable

conditions they wish upon the insureds under the contract. L ivingston Parish School Bd. v.

Fireman's Fund Am. Ins. Co., 282 So.2d 478, 481 (La.1973). S ee also, FDIC v. Barham, 995 F.2d

600, 604, n. 9 (5th Cir.1993). The purpo se o f the reporting requirement is to define the scope of

coverage by providing a certain date after which an insurer knows it is no longer liable under the

policy, and for this reason such reporting requirements are strictly construed.

Despite the enormous volume of briefs involved in this consolidated case, and the myriad of

parties involved, the crux of the both cases lies in two specific issues:

1. Did the insureds provide F & D with sufficient notice of "acts, errors, or omissions which

may subsequently give rise to a claim such that the claims eventually made should be treated

as claims made during the policy year?"2. If not, is the failure of the insured to provide the requisite notice serve as a defense against

the RTC's claim under Louisiana's Direct Action Statute?

STANDARD OF REVIEW

We review the district court's grant of summary judgment de novo. FDIC v. Selaiden

Builders, Inc., 973 F.2d 1249, 1253 (5th Cir.1992), cert. denied,

--- U.S.

----, 113 S.Ct. 1944, 123

L.Ed.2d 650 (1993). Summary judgment is appropriate if the movant demonstrates that there are no

genuine issues of material fact. F ED .R.C IV .P. 56(c).

Further, the standard of review requires t he co urt t o read all evidence in the light most

favorable to the non-moving party and make all reasonable inferences in favor of the non-moving

party. A nderson v. Liberty Lobby, 477 U.S. 242, 249, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986).

The judge is not to we igh the evidence on summary judgment, but accept the facts pled by the

non-movant as true, making a determination based on that evidence as to whether a genuine issue of

material fact exists. Id. at 249, 106 S.Ct. at 2510.

"Applying Louisiana rules of construction, we are mindful that "[ a]n insurance policy is a

contract and, as with all

o t her contracts, it constitutes the law between the parties.' " F DIC v.

Barham, 995 F.2d 600, 603 (5th Cir.1993). If the terms of the policy are ambiguous, they will be

construed in favor of the insured. I d. None of the recent decisions from t his court construing

substantially identical policy provisions have held them to be ambiguous. Therefore, we have no

authority to alter the terms of the policies under the guise of contractual interpretation. Id.

Was There Notice of Potential Future Claims?

The parties contest the precise "type" of notice the policy requires the banks to give to F &

D regarding potential future claims before they are considered claims made within the policy's period

of coverage. F & D contends that the policy requires the bank to notify it of "specified Wrongful

Acts" of directors and officers having claim potential. RTC argues that the notice can be i n the

broader form of "any act, error or omission" which may give rise to a claim for specified wrongful

acts. They contend that the district court erred in failing to find sufficient notice of the specific

wrongful acts that gave rise to the RTC's claims in the liability action, or at the very least, in failing

to find genuine issues of material fact to exist.Neither the RTC nor the di rectors contend the F & D received written notice within the

policy period of a third party's intention to hold the directors and officers responsible for a specified

wrongful act. However, the RTC and the directors argue that F & D received written notice, within

the policy period, of specific acts, errors, and omissions that could give rise to a claim. In support

of their position, the RTC and directors of South Savings point to F & D's r eceipt of regul atory

reports (immediately forwarded by the appellants) issued by the Federal Home Loan Bank Board in

1984, management reports prepared by an independent auditing agency in 1982, 1984, and 1985,

South Savings' 1983 and 1985 audited financial statements, South Savings' financial reports which

were provided to the Federal Home Loan & Bank Board, and copies of the complaints and other

materials associated with two lawsuits filed against South Savings and Director Englande.

Th e lower court in the R TC v. Miramon case found that such evidence reveals that F & D

possessed general information of South Savings' improper lending practices and financial difficult ies

and that this information contributed, in part, to t he eventual termination of the contractual

relationship between F & D and South Savings. The district court concluded, however, that this was

legally insufficient to prove that "South Savings or the o fficers and directors attempted to comply

with the literal terms of Section 6(a) by providing F & D with "written notice of any specific wrongful

acts they believed to have claim potential.' "

Likewise, the appellants contend that the notices forwarded in the RTC v. Ayo case also

constituted notice of specific instances of acts, errors, or omissions that may subsequently give rise

to a claim. However, the focus of appellant's brief in this case centers around the fact that the

insured, Peoples' Savings, recei ved and was made aware of the acts, errors, or omissions that

occurred during the policy period. The brief's position relies heavily on the premise that the failure

of the insured to notify F & G as per the contract cannot be asserted as a bar to the third party action

under the Louisiana Direct Action Statute. As discussed in the second section of this memo, we do

not feel this position is supported by the law. Therefore, we will continue with appellant's argument

that F & D did in fact receive notice of potential future claims during the policy period.

RTC contends that Peoples' independent auditor provided the directors with a management4 The management letter was found in the files of Sternfels Insurance, Inc., the local insurance

agency who serviced the account with Peoples. Although it is arguable whether such a

"discovery" would comply with the specific directive to "give written notice thereof to the

Company as soon as practicable," this concern need not be addressed in view of the conclusion

that the letter does not meet this court's threshold for providing objective notice of specific

wrongful acts. letter, dated February 14, 1984, reviewing the operations of Peoples for the previous year. This letter

was later discovered by F & D. 4 They claim that the letter discusses numerous deficiencies o f

Peoples' operations and sets forth how those operations should be undertaken. RTC urges that this

letter apprised F & G that if Peoples failed to heed the auditor's detailed guidelines, such action would

constitute deficiencies on future loans. RTC also claims that F & D requested a copy of the results

of the 1986 Regulatory Examination, though it is not clear whether F & D actually was sent a copy.

This letter, the RTC alleges, is replete with details of specific wrongful acts which have become the

basis of the RTC's current claim.

RTC argues that the provision contained in 6(a) of the policy does not require that notice of

"specific wrongful acts" be given. Nor does it require that the insured transmit notice that a specific

act possessed significant claim potential. Instead, the section insures against liability arising from any

act or omission of which t he insured is aware that may subsequently give rise to a claim. This

language, appellants contend, is considerably broader than the provision at issue in prior cases cited

by the district court and appellee. Moreover, the clause is, at worst, ambiguo us and must be

construed in favor of the insured.

This issue was recently addressed by this court in F DIC v. Mijalis, 15 F.3d 1314 (5th

Cir.1994). In M ijalis, the language in t he Lo ss Provision was substantially identical to the policy

before us, where the policy required written notice to the insurer of acts or occurrences amounting

to potential claims. Id. at 1329. The FDIC claimed that insurance coverage was triggered because

the insureds gave written notice to the carrier, International, in the form of letters, communications,

bank renewal applications which disclosed the existence of a cease and desist order, and other

financial information, each supposedly provided International with notice of "occurrences which may

subsequently give rise t o a claim." I d. at 1334. This court held that the financial informationconveyed to International by the Bank did not objectiv ely rise t o the level of notice of specific

wrongful acts. I

d. at 1336. Judge King states that "[t]he question is whet her the information

supplied to [the insurer] by the insureds objectively gave "written notice of specified wrongful acts

[by the] officers and directors.' " I d. Subjective inferences drawn from general information provided

to the insurer are irrelevant to the notice inquiry. i d. Since these factual determinations were made

following a jury trial, this court found it unnecessary to remand the case. Id. at 1337.

The exact policy provision before us was interpreted in M cCullough v. Fidelity & Deposit

Co., 2 F.3d 110, 112 (5th Cir.1993). This court, applying Texas substantive law, agreed with F &

D that the policy language makes sense only if it is read to require notice of "specified wrongful acts,

errors, or omissions that may give rise to a claim." I d. The bank, during the policy renewal process,

revealed to F & D that the OCC had issued a cease and desist order to one of its subsidiaries and that

the bank was generally experiencing increased loan losses and delinquencies. I d. at 111. We affirmed

summary judgment in favor of F & D, holding that "[n]otice of an institution's worsening financial

condition is not notice of an officer's or director's act, error , or omission." I d. at 113. This court

emphasized that "the proper focus of the district court's inquiry is whether the insured had objectively

complied with such a notice provision, and not whether the insurer has subjectively drawn inferences

that potential claims exist from the materials submitted by the insured." M cCullough, 2 F.3d at 113.

See Mijalis, 15 F.3d at 1336 (stating that subjective in f erences drawn from general information

provided to the insurer are irrelevant to notice inquiry).

Even though the policies in McCullough defined "wrongful act" to include a breach of duty,

this court conclu ded that a cease and desist order was insufficient to constitute notice that the

insureds breached their duty to properly supervise the banks' lending operations. I d. at 113. This

Court then set forth the degree of specificity required in the n o t ice, including such detail as the

particular subsidiary involved, the particular agents, officers, or directors involved, the relevant time

periods, the identity of potential claimants, and the specific unsound practices. Id. at 113.

We believe this prec edent under Texas law is an accurate description of Louisiana law as

well, mandating the insured to "objectively' comply with this provision. M cCullough, 2 F.3d at 113.The subjective inferences the insurer's representatives draw fro m the notice it receives are not

relevant.

Because all communications between F & D and the insureds have already been produced,

and these do not show that the insureds gave notice of a specified wrongful act that might give rise

to a claim according to t he parameters mandated by M cCullough, we find these correspondences

deficient to trigger policy coverage. This point is

AFFIRMED.

Can Lack of Notice Bar RTC's Direct Action Claim?

Appellants argue alternatively that even if t he memorandum, letters, and communications

forwarded to F & D do not meet the requisite "no t ice of any act, error, or omission which may

subsequently give rise to a claim," such notice failure cannot be asserted as a defense to coverage in

this cas e unless F & D can demonstrate that it has been irreparably prejudiced. This action was

brought pursuant to Louisiana's Direct Action Statute, and this court had declared that Louisiana law

provides that an injured party asserting a direct action is not barred by the insured's non-prejudicial

failure to comply with the notice provision of a liabilit y policy. A uster Oil & Gas, Inc. v. Stream, 891

F.2d 570, 578 (5th Cir.1990). The RTC claims it is a "third party" to the liability policies at issue,

as it not only represents the failed institution, but also any stockholder, member, account holder,

depositor, officer, or director of the bank. As such, RTC alleges that it is insulated from the lack of

notice defense.

This argument was touched on in Mijalis, but because the FDIC conceded to the court that

insurance coverage existed under the "potential claims" clauses only if the insurer was given notice

of those potential claims, this court did not address the district court's proclamation that the notice

provision was void as against the FDIC unless the insurer could demonstrate prejudice resulting from

the lack of notice. Mijalis, 15 F.3d at 1334-35, & n. 5. We now must confront this concern.

The RTC has asserted claims against the directors and officers of the banks in its corporate

capacity. The RTC represents the failed bank's shareholders, itself as a creditor, and all previous

creditors of the banks. This court has held that the policy terms do not control the scope and natureof the injured third party's rights. The third party's rights under the statute vest at the time of injury,

where the rights of the insured remain subject to conditions in the policy that arise subsequent to the

injury, such as the requirement of notice. A uster Oil & Gas, Inc. v. Stream, 891 F.2d 570, 578 (5th

Cir.1990). "An insurer may not raise the nonprejudicial failure o f its insured to give notice of

accident or suit as a vali d defense to claims of injured third parties." S ee Gulf Island, IV v. Blue

Streak Marine, Inc., 940 F.2d 948 (5th Cir.1991); J ackson v. Transportation Leasing Co., 893 F.2d

794 (5th Cir.1990); Chennault v. Dupree, 398 So.2d 169 (La.App. 3d Cir.1981).

It is important not to confuse the distinct "notice requirements" with which we are dealing

in the present case. Ours is the notice that turns potential future claims, which could be made outside

the policy's coverage, into actual claims made during the policy's term. This claim-triggering notice,

i.e., the notice provision in 6(a), serves a very different function than the prejudice-preventing notice

required under clause 6(b) that was central to the Auster opinion. The prejudice-preventing notice

clause is for the benefit of the insurance company, allowing it to t imely intercede and protect its own

interest. On the other hand, the claim-triggering notice provision serves t he insured by allowing

coverage for claims made o ut side the policy period, provided F & D was notified of the potential

claim. If the policy requirement for notice of specified wrongful acts is relaxed, then policy coverage

actually expands. This constitutes prejudice as a matter o f law, since it circumvents the contract

mutually entered into by the parties and creates insurance protecti on where none existed before. The

court provides the following example:

[I]f notice that an insured attorney has a poor docket control system is accepted as coverage triggering notice of the attorney's wrongful act, the attorney's malpractice coverage would be

triggered for any number of suits predicated on missed deadlines. S ee Hirsch v. Texas

Lawyers Ins. Exchange, 808 S.W.2d 561, 565 (Tex.Ct.App.1991) (court reluctant to permit

expansion of "claims made" cov erage t hrough relaxation of coverage-triggering notice

requirements).... [W]e are persuaded that the policy requires the insured to give the insurer

notice of specified wrongful acts to trigger coverage.

McCullough, 2 F.3d at 112. The policy laid out in A uster was designed to protect inju red third

parties from the harsh consequences that would result if, after filing a claim against the insured, the

insured fails to comply with the notice requirements—which are outside of the injured third party's

control. Auster, 891 F.2d at 578. A uster, which dealt with an occurrence policy, is not controlling5 Had a claim been made against either of the insureds during the applicable policy periods, then

the rule articulated in Auster might apply. for our set of circumstances, where it was within the injured third party's control to file a claim or not

once the act, error, or omission caused injury. The rights of the injured party under claims-made

policies, unlike the occurrence policy in Auster, do not vest at the time of the injury, but at the time

a claim is made. 5 "Potential claims" are not covered by the D & O policies unless F & D had in fact

received objective notice of those potential claims. Notice to F & D is a s ine qua non of any potential

claim known to the i nsured during the policy period. S ee Bank of Louisiana v. Mmahat, Duffy,

Opotowsky & Walker, 608 So.2d 218 (La.Ct.App.1992), cert. denied, 613 So.2d 994 (La.1993);

Bank of the South v. New England Life Ins. Co., 601 So.2d 364 (La.Ct.App.1992). Therefore, both

the district courts are AFFIRMED.

SUBORDINATE ISSUES

Duty to Defend or Contemporaneously Advance Defense Costs

Appellants complain that the district court erred in failing to find F & D has a duty to advance

or pay for the defense costs. Under Louisiana law, it is established that an insurer's duty to defend

is determined by the allegations set forth in the pleadings. J ensen v. Snellings, 841 F.2d 600, 612

( 5th Cir.1988). Only if the allegations preclude a ny possibility of coverage will the insurer b e

relieved of its duty to defend the insured. Id. As the first two issues discussed demonstrate, this is

the case here. The claims made by the RTC fall outside the policy's period, and F & D should not be

called to foot the bill for ex-policyholders in their attempt to extend coverage.

The motion to certify the questions on appeal to the Louisiana Supreme Court is DENIED,

since application of existing law disposes of the issues.

AFFIRMED.