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March 30, 1993

NICHOLAS CONTINISIO, et al., Defendants.

The opinion of the court was delivered by: JOHN F. GERRY

 GERRY, Chief Judge

 This is a declaratory judgment action brought by two insurance companies against the former directors and officers of a failed Savings and Loan Association, seeking a declaration that directors' and officers' liability insurance written by the insurance companies does not cover a suit brought by the Federal Deposit Insurance Corporation against the former directors and officers.


 In May 1991, the Federal Deposit Insurance Corporation ("FDIC") filed suit against fourteen former directors and officers ("the directors") of First Federal Savings and Loan of Hammonton ("First Federal" or "the bank"). The complaint in the FDIC action alleged breach of fiduciary duty, gross negligence, and negligence. First Federal failed during 1988. The FDIC action seeks over $ 60 million in damages from the directors.

 Prior to its failure, the bank held directors' and officers' liability insurance written by American Casualty Company of Reading, Pennsylvania and its subsidiary, Continental Casualty Company (collectively, "the insurers" or "CNA"). The directors contend that these policies cover their defense costs for the FDIC action, as well as any damages the FDIC might recover in that action. The insurers vigorously dispute this position.

 On November 22, 1991, the insurers filed this action against all the directors, seeking a declaration that two of the policies, written in 1981 and 1984, do not cover either defense costs or damages arising from the FDIC action. The FDIC has aligned itself with the directors on the coverage issue and has argued it on their behalf. The underlying FDIC action has been stayed pending resolution of the coverage issue.


 First Federal first purchased directors' and officers' ("D&O") liability insurance written by MGIC Indemnity Corporation ("MGIC") in the mid-1970s. First Federal obtained the insurance through the Association Benefits Agency ("the Agency" or "ABA"), First Federal's insurance broker and MGIC's agent. Continental Casualty Company, plaintiff in this case, acquired MGIC's casualty insurance business in the 1980s and assumed all obligations under First Federal's D&O policy. First Federal's D&O policies were renewable every three years. There are two policy periods relevant to this action -- the 1981 Policy and the 1984 Policy. The two policies are identical in all terms relevant to this action with one exception: the 1984 Policy contains an added provision -- a "Regulatory Exclusion" -- that bars coverage for suits brought by regulatory agencies, including the FDIC.

 A. The 1981 Policy

 The 1981 Policy was in force from June 26, 1981 to June 26, 1984. The policy provides the following coverage:

This policy shall cover Loss in respect of any Wrongful Act committed prior to the termination of this policy arising from any claim made (i) within the policy period or (ii) within the discovery period if the right is exercised by the Association in accordance with Clause 2(B). For purposes of this Clause 2(A), any claim made subsequent to the policy period as to which notice was given to the Insurer within the policy period . . . shall be treated as a claim made during the policy period.

 1981 Policy § 2(A) ("Coverage Clause") (emphasis added).

 This is a "claims-made" policy, because it provides coverage for events which may have occurred prior to the policy period if a claim is made during the policy period. *fn1" The policy does not define the term "claim."

 The coverage of the policy is expanded by the "Notice of Claims" provision which provides:

If during the policy period the Association or the Directors or Officers shall: (i) receive written or oral notice from any party that it is the intention of such party to hold the Directors or Officers, or any of them, responsible for a Wrongful Act; or (ii) become aware of any occurrence which may subsequently give rise to a claim being made against the Directors and Officers, or any of them, for a Wrongful Act; and shall, during such period, give written notice thereof to the Insurer as soon as practicable and prior to the date of termination of the policy, then any claim which may subsequently be made against the Directors or Officers arising out of such Wrongful Act shall, for the purpose of this policy, be treated as a claim made during the policy year in which such notice was given.

 1981 Policy § 6(A) ("Notice of Claims" provision) (emphasis added).

 Under this provision, if the insured gives written notice to the insurer of "any occurrence which may subsequently give rise to a claim," against the D&Os, then a claim arising out of such an act is covered by the policy, even if the claim is made after the policy has expired.

 The policy also provides that either party to the insurance contract can terminate the contract on thirty days' notice. Furthermore, an endorsement to the contract provides added protection to the bank in case of cancellation or non-renewal:

If the Insurer shall cancel or refuse to renew this Policy, the [bank] shall have the right to an extension of the cover granted by this Policy in respect of any claim or claims which may be made against the Directors or Officers during a period of twelve calendar months after the date of such termination but only in respect of any Wrongful Act committed before the date of such cancellation or nonrenewal. The Insurer shall give written notice informing the [bank] of its option to purchase this extension at a rate of 25 percent of the current annual installment. Application for this extension must be made within thirty (30) days after the effective date of cancellation or nonrenewal of the Policy.

 B. The 1984 Policy

 The 1984 Policy was intended to be in force from June 26, 1984 through June 26, 1987. *fn2" Events leading up to the 1984 renewal are relevant to some of defendants' arguments concerning coverage, so we will recount them here.

 1. 1984 Renewal

 First Federal submitted its application for renewal to the Agency on June 5, 1984. The Agency forwarded it to the insurers three days later. On June 26, 1984, the Agency stated to First Federal's insurance manager that coverage had been "bound and continues . . . . The same policy forms as MGIC apply. " Munson Aff. at P 15. Six days later, on July 2, 1984, First Federal received a letter from the Agency stating that the new policy would exclude suits from regulatory agencies. The Agency sent the binder and sample policy, including the regulatory exclusion, to First Federal on July 18. The binder expired August 20. First Federal accepted the new policy on August 24, 1984, with coverage bound effective June 26. The policy was formally issued on October 12, 1984. *fn3"

 2. The Regulatory Exclusion

 The only substantive change in the 1984 Policy relevant to this action is the inclusion of a "Regulatory Exclusion":

It is understood and agreed that the Insurer shall not be liable to make any payment for Loss in connection with any claim made against the Directors or Officers based upon or attributable to any action or proceeding brought by or on behalf of the Federal Deposit Insurance Corporation . . . .

 1984 Policy, Endorsement #6. On September 11, 1992, this court held that the Regulatory Exclusion unambiguously bars coverage for suits brought by regulatory agencies, including the FDIC. Therefore, if the exclusion is effective (i.e., not void on public policy grounds or otherwise), then it would operate to bar any coverage under the 1984 Policy for the underlying suit, regardless of whether the insurer received adequate notice of the suit to otherwise trigger coverage. In that case, the FDIC's only argument would be that this suit (brought by the FDIC on May 2, 1991) is covered by the 1981 Policy, which by its terms expired in June of 1984.

 3. Cancellation of the 1984 Policy

 On January 7, 1985, the insurers received a request from First Federal to add additional subsidiaries to the 1984 Policy. On January 22, the First Federal Board of Directors entered into a Consent Resolution with the Federal Home Loan Bank Board (FHLBB), in which it acknowledged that the bank was in danger of default and that grounds existed for the appointment of a receiver. On February 14, 1985, the insurers mailed notice of cancellation to First Federal. The insurers maintain that they had no knowledge of the Consent Resolution at the time. There is no record of the reason for cancellation in the insurers' files, and First Federal was never informed of the reason for cancellation.

 Following cancellation, First Federal purchased a one year discovery period effective March 22, 1985 through March 22, 1986.

 C. Notices Sent During 1981 and 1984 Policy Periods

 It is uncontested that no documents purporting to be notices of either claims or potential claims were sent by First Federal or received by the insurers during the period from June 26, 1981 through March 22, 1985. The bank did send the insurers notices of both claims and potential claims by third parties against First Federal directors and officers during the discovery period running from March 22, 1985 through March 22, 1986. However, none of these notices directly discuss the potential for claims brought by the FDIC or any other regulatory agency.


 There are five motions before this court: 1) a motion for summary judgment by the insurance companies; 2) a cross-motion for partial summary judgment by the FDIC, joined by the directors; 3) a motion for partial summary judgment by four of the directors on the issue of advancement of fees; 4) a motion by one director to stay this action pending decision of a parallel state action; and 5) a motion by the insurance companies to impose sanctions on the director seeking the stay.


 Continisio filed his motion to stay this action on September 29, 1992, over six months after the cross-motions for summary judgment were filed. However, since a decision to grant a stay would moot the other motions before this court, we will reach that question first.

 A. Procedural History

 In order to decide this motion, it is necessary to understand some procedural history. The first action filed relating to this dispute was the underlying action by the FDIC against fourteen individual directors and officers, FDIC v. Continisio, No. 91-2098 (D.N.J. filed May 24, 1991). The insurers were not parties. Subsequently, a dispute arose between the directors and the insurance companies over coverage. On September 30 and October 9, 1991, eight of the director and officer defendants filed third-party complaints against the insurers in Continisio seeking a declaratory judgment concerning coverage. *fn4" On November 19, 1991, Nicholas Continisio, a former director of First Federal, filed a declaratory judgment suit in New Jersey Superior Court in Atlantic County, seeking a declaration that the FDIC suit was covered by the insurance policies written by the plaintiffs in this action. *fn5" The defendants in the state court action were the insurers and ABA, the insurance broker, a New Jersey corporation. The FDIC was not joined in the state action. Three days later, on November 22, 1991, the insurers brought this action in federal court, seeking a declaration that they were not liable for the FDIC action. At that point, there were two nearly identical actions proceeding in state and federal court.

 The state court action could not be removed to this court because it lacked complete diversity. The insurers, however, moved to have that case stayed or dismissed, or, in the alternative, to have the claim against them severed from the claim against the New Jersey corporate defendant. The state court granted the latter motion and severed the case for the purpose of having the portion of the case against the insurance companies removed to federal court. The insurers subsequently removed that portion of the case to this court.

 In an opinion and order dated September 11, 1992, this court held that an involuntary severance by the state court did not create complete diversity for the purposes of removal jurisdiction. American Casualty Co. v. Continisio, Nos. 91-5107, 92-1720 (Sept. 11, 1992). We held that the state court declaratory judgment action had been improperly removed, and we remanded that case back to state court. Once again, there were two parallel, nearly identical actions pending in state and federal court.

 Since we remanded that case, the insurers have again moved in state court to stay or dismiss that case pending resolution of this action. The state court, in an oral opinion issued by Judge Previti on October 26, 1992, granted a six-month stay of that action ...

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