Unrepaid, Unrecoverable, or Outstanding Credit Exclusion Unrepaid, Unrecoverable, or Outstanding Credit Exclusion Unenforceable

Post 4731

Huntington National Bank ("Huntington") sued AIG Specialty Insurance
Company and National Union Fire Insurance Company of Pittsburgh,
Pennsylvania (together, "AIG") alleging breach of contract and bad faith
stemming from AIG's denial of insurance coverage for Huntington's
settlement of a bankruptcy fraudulent transfer proceeding brought by the
trustee of a bankrupt company. In granting summary judgment for AIG,
the district court held that:

In Huntington National Bank v. AIG Specialty Insurance Co., et al., No.
23-3039, United States Court of Appeals, Sixth Circuit (February 1,
2024) the Sixth Circuit resolved the dispute.

FACTS

AIG issued to Huntington a bankers professional liability insurance
(BPL) policy for that provided coverage up to $15 million, after a $10
million retention. Any liability exceeding the primary policy was
covered by an excess policy issued by National Union for the same
coverage period, which provided $10 million in excess coverage. The
parties do not dispute that these policies apply to Huntington's claim.

Following the FBI raid, creditors of Cyberco and Teleservices, both
entirely fraudulent companies, discovered that the companies were
bankrupt. The trustees of Cyberco and Teleservices filed adversary
proceedings against Huntington, claiming that Huntington put its desire
to be repaid ahead of its concerns that Watson was committing fraud and,
by doing so, perpetuated the Ponzi scheme to its benefit and other
lenders' detriment.

The bankruptcy proceedings were long and complex, including two trials
and multiple opinions.  Huntington argued it was not liable for any
repayments before April 30, 2004, and that its liability was thus
limited to the $12,821,897.07 in loan repayments for which the Sixth
Circuit had already found Huntington liable.

THE INSURANCE CLAIM

Throughout the bankruptcy litigation, Huntington sent AIG several
requests for coverage. AIG disclaimed coverage, acknowledging that there
was "potential coverage" under the policy because the Wrongful Acts
alleged arose from Huntington's performance of banking services to
Cyberco, but citing  exclusions. AIG refused Huntington's claims.

Huntington subsequently sued AIG. AIG also moved for summary judgment,
asserting that Huntington's settlement payment was not a "Loss" under
the policy and, even if it was, Endorsements 5, 7, and 10 precluded
coverage.

The district court granted AIG's motion for summary judgment.

ANALYSIS

The Sixth Circuit reversed the district court's grant of summary
judgment for AIG on the insurability of Huntington's claim under Ohio
law and the exclusion of Huntington's claim under Endorsement 7.

ZALMA OPINION

Bankruptcy litigation, banking, and fraud upon a bank by a Ponzi schemer
who, when caught by the FBI committed suicide, was sued by creditors of
the Ponzi scheme because the bank had its loan repaid and they did not.
After lengthy litigation the bank settled the bankruptcy suits only to
have its insurer refuse to pay based upon an exclusion that was not
sufficiently clear to be enforced. AIG will need to pay its limits to
its insured and the excess - that followed form with AIG - will probably
find it must pay its limits as well. The Sixth Circuit read the full
policy and interpreted it in line with Ohio law as should AIG before it
rejected coverage.

(c) 2024 Barry Zalma & ClaimSchool, Inc.

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