Opinion ID: 681620
Heading Depth: 1
Heading Rank: 3

Heading: Validity of the Regulatory Exclusion

Text: 36 Recognizing the weight of case law upholding the theoretical validity of regulatory exclusions in D & O liability policies, the FDIC seeks to invalidate such a provision in this case by arguing that the 1987 policy containing the regulatory exclusion was invalid to the extent that it provided for reductions in coverage that were not specifically brought to the insured's attention at the time of renewals, and that under well-settled Michigan law, the earlier provisions providing greater protection remained in effect. The defendants also claim that American Casualty's March 1987 quotation of significantly different terms constituted a refusal to renew, which in turn should have triggered the discovery option in the 1984 policy and allowed the directors and officers of First State Bank to seek coverage for any liability in the Crisman lawsuit.
37 Under general principles of Michigan insurance law, [a]n insured is obligated to read the insurance policy and raise questions concerning coverage within a reasonable time after the issuance of the policy. Parmet Homes, Inc. v. Republic Ins. Co., 111 Mich.App. 140, 145, 314 N.W.2d 453, 455 (1981). That rule does not apply, however, when a renewal policy is issued without calling the insured's attention to a reduction in coverage, as the insurer in those circumstances is bound by the greater coverage in the earlier policy. J.C. Wyckoff & Assocs., Inc. v. Standard Fire Ins. Co., 936 F.2d 1474, 1494 (6th Cir.1991). See also Industro Motive Corp. v. Morris Agency, Inc., 76 Mich.App. 390, 396, 256 N.W.2d 607, 610 (1977). The relevant questions in this appeal by the FDIC thus become whether the bank received notice of relevant changes in policy provisions and, if so, whether that notice was sufficient under applicable Michigan law to permit the insurance company to avoid liability. 38 The FDIC contends that there is a genuine issue of material fact in this case as to whether the bank officials were properly informed that the renewal policy would contain differing terms from the policy that had been in force between 1984 and 1987. American Casualty submits, however, that it is undisputed that the appropriate bank officials were informed of the policy changes proposed in the 1987 quotation. 39 The parties do not contest the fact that Eric Rudert represented the Rudert Agency in that entity's dealings with First State Bank. It is also undisputed that Rudert routinely discussed the bank's insurance business with Gerald Martin, the president and CEO of First State Bank. Unfortunately, Martin was involved in a serious automobile accident in November 1987 and has no recollection of any discussions of events surrounding the March 1987 renewal of the bank's D & O policy. Consequently, the only testimony regarding the notice transmitted to the bank regarding proposed changes in the renewal policy was provided by Eric Rudert during two depositions given by him in 1991. 40 During the first such discovery proceeding on May 31, 1991, Rudert repeatedly testified, in response to questions from the FDIC's counsel, that he could not recall the specific content of discussions he had with Martin regarding the renewal policy. However, Rudert did remember discussing the drastic increase in premium prices due to hardening of market conditions, and he further testified, We didn't sit down and read the whole policy, but we went through the major portions of the policy, which would have been those endorsements shown. Although Rudert could not recall exactly when he had discussed the 1987 endorsements with Martin, he testified, I can say for most of them, to the best of my knowledge and belief, yes, I have talked to him about these endorsements on these policies. 41 During his November 21, 1991, deposition, Rudert attempted to clarify his earlier May testimony. He stated unequivocally in the second deposition that he and Martin looked at the text of each policy exclusion at some point prior to acceptance of the renewal quote. Rudert also claimed that Martin was given an opportunity to ask questions about the new policy endorsements at that time, but said he could not recall specifically whether any questions were actually propounded. Rudert described Martin at this point as being bullish on the bank, meaning, as he explained it, that Martin seemed unconcerned about negative aspects, exclusions to the policies ... [and] he said that we don't have to worry about these things. Asked specifically if he and Martin had discussed the regulatory exclusion endorsement, Rudert replied, I do have to believe that I talked to him about it, because when we mentioned the FDIC, ... he said this is something we don't have to worry about. 42 Finally, Rudert testified that, to the best of his knowledge, he reviewed all the new endorsements with Martin prior to the issuance of the 1987 policy, prior to the acceptance of this quotation by Mr. Martin. Any hesitancy or uncertainty on Rudert's part during the depositions was, he testified, the result of his inability to pinpoint exact time frames, rather than doubt as to whether conversations regarding the new endorsements actually took place. 4 43 The FDIC was unable to offer any evidence to rebut Rudert's testimony that Martin was given notice of the changes in the 1987 renewal quotation. The FDIC, therefore, argues that the notice given to the bank was legally insufficient. In support of its claim, the FDIC cites Gristock v. Royal Ins. Co., 87 Mich. 428, 49 N.W. 634 (1891), and contends that specific reference to each change in the policy is required under Michigan insurance law. The FDIC also cites cases from other jurisdictions requiring more specific, or even explicit written, notification of changes made in renewal policies. 44 Regardless of the standard imposed in other jurisdictions, the applicable law in Michigan requires only that there be actual notice to the insured that the policy has been altered, Parmet Homes, Inc. v. Republic Ins. Co., 111 Mich.App. at 145, 314 N.W.2d at 455, or that the insurer call to the insured's attention a reduction in policy coverage. Industro Motive Corp. v. Morris Agency, Inc., 76 Mich.App. at 396, 256 N.W.2d at 610; J.C. Wyckoff & Assocs., Inc. v. Standard Fire Ins. Co., 936 F.2d at 1494. In this context, the FDIC would have us apply Gristock more broadly than a careful reading would allow. The Gristock case involved changes in the written terms of an initial insurance policy following oral assurances of coverage, not changes in a successive policy. The Michigan Supreme Court's requirement that, under such circumstances, an insurer must call attention to those clauses which differed from the oral application is not fundamentally different from the requirement noted in later cases such as Parmet Homes, Industro Motive, and J.C. Wyckoff & Assocs. involving renewal policies. Nevertheless, the two situations are clearly distinguishable. 45 In any event, there is no genuine dispute in this case that Eric Rudert had given actual notice of the changes in the D & O policy to Gerald Martin prior to the acceptance of the renewal quote; the only dispute was the exact date that such notice was given. Consequently, no genuine issue concerning a material fact was before the district court. Summary judgment in favor of American Casualty was, therefore, proper. As noted in the district court's opinion on this issue, any factual issues regarding the extent to which Rudert and Martin discussed the renewal quotation are immaterial. The district judge concluded, It is clear that actual notice was given to Martin that the renewal policy had been altered. The minor factual differences do not raise any triable issue of fact. The record fully supports this conclusion. 46
47 One further contention by the FDIC deserves mention but not detailed explication. The FDIC argues that American Casualty's failure to offer a policy on the very same terms as were contained in the 1984 policy amounted to a refusal to renew the policy that should have allowed First State Bank to exercise the discovery option in the 1984 policy and thus extend the coverage offered by that earlier contract. The FDIC also insists that the refusal to renew was part of a nationwide scheme by American Casualty to defraud insureds. The district court appropriately determined that there was no merit to either of these contentions. 48 In the first place, the record establishes without dispute that First State Bank voluntarily agreed to the terms of the renewal policy and expressly waived its rights under the discovery option clause of the 1984 contract. Moreover, the extended period available under the 1984 discovery option had expired by the time the claims in this case were made. Finally, and most significantly, the bank and its officers and directors were experienced participants in business affairs, who were given adequate notice of the changes in premium and coverage under the new policy. The FDIC has thus failed to provide any evidence that the officers and directors were placed in an unfair position or were misled into accepting unconscionable policy terms. On the contrary, the evidence before the district court indicated that the change in terms in the 1987 renewal policy was dictated by hard market conditions in a banking industry that was afflicted with numerous cases of mismanagement at that time. As another circuit court has noted when faced with virtually the identical contention made here, involving some of the same players as in this case: 49 It is true that American Casualty increased its premium and decreased its coverage for the officers and directors when it discovered the state of the Bank's loan portfolio. That strikes us, however, as a reasonable business decision rather than bad faith. The parties are sophisticated business people who dealt at arm's length. This transaction could have ended in several different ways. But the fact remains that the parties agreed to the terms of the 1984 [renewal] policy. We will not discard their agreement and remake their business relationship. 50 American Casualty Co. v. FDIC, 944 F.2d 455, 459 (8th Cir.1991). 51 For the reasons set out above, we AFFIRM the district court's order of summary judgment in favor of the plaintiff. 52