Washington Mutual Sues Its D&O Insurers

Washington Mutual Inc. recently filed a lawsuit against a dozen insurance companies that had provided directors’ and officers’ coverage. The troubled bank holding company that just completed its Chapter 11 restructuring process says its insurers improperly denied D&O claims.

Insurers named in the lawsuit include: XL Specialty; National Union Fire Insurance; AIG Casualty; Columbia Casualty; AXIS Insurance; ACE American Insurance; Arch Insurance; RSUI Indemnity; Houston Casualty; Lloyd’s of London; Allied World Assurance; and Scottsdale Indemnity.

These insurers provided D&O liability coverage for Washington Mutual in 2008 and 2009. Washington Mutual is looking to recoup up to $250 million.

According to the lawsuit, filed on March 15, a number of directors and officers at Washington Mutual ordered downstream capital reallocation of $500 million to its troubled banking unit in 2008, just days before the company was seized by the Office of Thrift Supervision.

In 2009, unsecured creditors of Washington Mutual sent a notice of circumstances resulting in potential claims to the company and its directors and officers. The notice was followed by an intent to sue directors and officers for the $500 million capital reallocation unless a resolution is reached.

Some of these directors and officers filed D&O claims but insurers denied claims and pointed to policy exclusions including a prior notice exclusion, an interrelated wrongful acts exclusion and a specified claims exclusion.

Washintgon Mutual stated that “Rather than honor their obligations, the 2008-09 insurers have insisted that the D&Os seek payment from some other source, including nearly exhausted insurance polices for the 2007-08 period.” The case is Washington Mutual Inc. v. XL Specialty Insurance Co. et al., U.S. Bankruptcy Court, District of Delaware.