Unpublished Disposition, 885 F.2d 875 (9th Cir. 1980)

MEMORANDUM^* 

The former directors of Sunwest Bank, the insureds under an expired Director and Officers Insurance policy, appeal a summary judgment in favor of National Union Fire Insurance Company declaring the directors not covered by the policy for certain claims against them. The directors also appeal summary judgment against them on their counterclaim against National Union for bad faith. We affirm.

The policy in question was issued on April 11, 1984, by National Union to Sunwest Bank and its officers and directors. The policy is a "claims made" policy, which insures only with regard to claims "first made" during the period when the policy was in force.

In early 1984, Centennial Beneficial Corporation entered into an Acquisition Agreement with Sunwest under which it was to acquire 100% of the shares of Sunwest. After a year and a half of negotiations, the transaction was closed on June 18, 1985. On that date, National Union terminated its policy.

During the negotiation period, both the FDIC and the state banking department examined Sunwest Bank and issued unfavorable reports. The directors allege that these reports claimed that they had failed to perform their duties, had inadequately supervised Sunwest, had approved loans without adequate collateral, and had failed to maintain proper loan reserves.¹  The FDIC demanded that the directors execute a Memorandum of Understanding to require corrective action. Centennial received copies of these reports, and used them in their negotiations to purchase Sunwest. Centennial took the position that the directors had misrepresented the condition of Sunwest, and negotiated the purchase price from $16,000,000 to $10,750,250.

On June 17, 1986, Centennial brought an action against the directors for fraud and negligent misrepresentation. In the same action, Sunwest asserted claims against its former directors for negligence and breach of fiduciary duties. The directors tendered their defense to National Union. National Union responded that it was not liable under the policy because no claim had been made during the term of the policy.

National Union subsequently filed this action seeking a declaration of non-coverage. The directors counterclaimed for bad faith. National Union moved for summary judgment, and the district court granted judgment in its favor on the declaratory claim and the counterclaim. The directors now appeal.

The directors argue that Centennial's and Sunwest's claims were "first made" during the policy period. One way they reach this position is by interpreting "claim" to mean "a statement of something as a fact; an assertion of truth," quoting the American Heritage Dictionary, New College Edition (1981). But "claim" as it is used in a liability or indemnity policy refers to more than a mere assertion; it "imports the assertion, demand or challenge of something as a right; the assertion of liability to the party making it to do some service or pay a sum of money." Williamson & Vollmer Engineering, Inc. v. Sequoia Ins. Co., 64 Cal. App. 3d 261, 269, 134 Cal. Rptr. 427, 431 (1976). Neither Centennial nor Sunwest made any such claim during the policy period.

Centennial may have asserted that the directors had misstated the condition of Sunwest, but Centennial certainly never asserted liability of the directors during the negotiation period. It simply negotiated a lower purchase price of Sunwest in light of its discovery of Sunwest's financial condition. No legal claim was made against the directors prior to the termination of the policy, nor was notice of any such claim transmitted to National Union.

The directors attempt to rely on paragraph 7(c) of the policy, which provides coverage under some circumstances for potential claims made known during the policy period. That clause, however, requires the directors to "give notice of the circumstances and the reasons for anticipating a claim, with full particulars as to dates and persons involved" to National Union. There is no suggestion in the record that this requirement was met. The record does not clearly establish that any relevant information was timely presented to National Union, but even if National Union was sent a copy of the Acquisition Agreement, and knew that the closing date had been deferred, those facts would not constitute sufficient notice of potential claims under Sec. 7(c) of the policy.

Equally unavailing is the directors' attempt to rely on the asserted allegations of the FDIC and the state banking examiner. In the first place, neither of these sources made an assertion of liability of the directors or a demand for payment by them. In the second place, any assertion or allegations made by the FDIC or the examiner were not made on behalf of Centennial or Sunwest.

Mount Hawley Ins. Co. v. Federal Sav. & Loan Ins. Corp., 695 F. Supp. 469 (C.D. Cal. 1987), relied on by the directors, is an entirely different case. In Mount Hawley, the FSLIC took over the savings and loan association, and subsequently sued the directors. In this case, the criticisms of the FDIC, or the state banking examiner, never amounted to a claim that would be covered by the policy. Again, even if Sunwest or the directors sent a copy of the Memorandum of Understanding between Sunwest and the FDIC to National Union, it would not constitute sufficient notice of the claims here at issue; that is, claims made by Sunwest against its own former directors, or claims made against them by Centennial as purchaser of the bank.

In any event, all of the claims made by Sunwest Bank are excluded under the "insured v. insured" exclusion of the policy. Sunwest Bank is an entity separate from Centennial, currently in operation, and it sued the directors in its own right, for breach of fiduciary duties. The policy, in Sec. 4(i) and endorsement # 8, excludes coverage for these claims.

The directors presented no evidence to show that National improperly handled the claim, or did anything unreasonable to support the directors' counterclaim for bad faith.

AFFIRMED.