In Wagner v. United National Insurance Co. et al. (click here to read the decision), the Supreme Court of Nebraska affirmed a district ruling that a regulatory exclusion in a D&O policy excluded coverage for the underlying action brought by the Director of Insurance of the State of Nebraska in his capacity as the bankruptcy liquidator of the insured, an insolvent insurance company.  In the underlying action, the Director of Insurance alleged that the insured became insolvent because of its officers’ and directors’ wrongful conduct.  The insurers for the insolvent insured denied coverage for the underlying action based on the regulatory exclusion in the D&O policy.  The Director of Insurance brought a coverage action against the insurers of the insolvent insured, arguing that the regulatory exclusion in the D&O policy was invalid.

The regulatory exclusion at issue stated that the D&O policy did not apply to any claims brought by or on behalf of any insurance regulatory agency or supervisory authority.  The insurer of the insolvent insured argued that because the Director of Insurance was acting as a liquidator in the underlying action, and the liquidator is a “supervisory authority, ” the regulatory exclusion barred coverage for the underlying action. The Director of Insurance asserted that his role as a liquidator is legally separate from his role of Director of Insurance, and that a liquidator is an officer of the court that is not acting as a “supervisory authority.”

The district court held that while the roles of liquidator and Director of Insurance are not identical, “the Director while serving as Liquidator still carries out regulatory and supervisory functions in an effort to oversee the business of insurance in Nebraska.”  Accordingly, the district court held that the language of the regulatory exclusion clearly applied to exclude coverage for the underlying action.  The Supreme Court agreed and held that the regulatory exclusion: (1) applied to the Director of Insurance, acting as liquidator of the insolvent insured; (2) was not in direct conflict with provisions of the Insurers Supervision, Rehabilitation, and Liquidation Act; and (3) was not void as against public policy.  In his appeal of the coverage decision, the Director of Insurance also argued unsuccessfully that a wide interpretation of the regulatory exclusion would make it virtually impossible for him to do his job in recovering the assets of bankrupt companies because it would hamper his efforts to access the assets of the failed firms’ D&O insurance.  The Supreme Court disagreed and held that the regulatory exclusion does not conflict with the public policy that empowers the state insurance director to recover the assets of people who worked for failed firms and  “[u]nder the terms of the policy, the liquidator may still have a claim against the personal assets of the directors and officers.”