Ambiguous Exclusion Unenforceable

Unrepaid, Unrecoverable, or Outstanding Credit Exclusion Unenforceable

Post 4731

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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:

  1. Huntington’s claim for insurance coverage was uninsurable under Ohio law,
  2. Huntington’s claim was independently excluded under the insurance contract’s exclusion for “unrepaid, unrecoverable, or outstanding credit” and
  3. the larger settlement rule did not apply to Huntington’s settlement.

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.


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.

The policy covers any actual or alleged Wrongful Act of any Insured in the rendering or failure to render Professional Services. Relevant to the dispute are exclusions specific to Huntington’s performance of “Lending Acts.” The relevant exclusion clarifies that “[t]he Insurer shall not be liable to make any payment for Loss in connection with any Claim or Claims made against any Insured: for the principal and/or interest of any unrepaid, unrecoverable, or outstanding credit.”

The policy was implicated when Huntington unwittingly became the bank for a fraudulent company, Cyberco Holdings, Inc. Cyberco represented that it purchased computer equipment from a vendor, Teleservices. In reality, Teleservices was a paper company that Watson created to perpetuate his fraud.

Huntington’s security department discovered that the FBI was investigating Cyberco, that Watson had been permanently blacklisted by the National Association of Securities Dealers, and that he had confessed to and served time for fraud-related crimes. But the Huntington security department did not share any of this with the team responsible for Cyberco. From May 2004 to October 2004, Cyberco gradually repaid its entire loan, a relief for the Huntington team.  Later in 2004, the FBI raided Cyberco’s offices, and Watson committed suicide shortly thereafter.

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. On the other hand, the trustee argued that Huntington had knowledge of the voidability of the transfers it received after November 16, 2003, making $35,968,475, plus interest, the proper recoverable amount. In March 2018, Huntington settled with the trustee for $32,000,000.


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 on the grounds that Huntington’s claim was uninsurable under Ohio law. The district court also granted summary judgment for AIG on the grounds that Huntington’s claim was independently excluded by Endorsement 7, which bars recovery for “unrepaid, unrecoverable, or outstanding credit.”


Under Ohio law, an insurance policy is a contract between the insurer and the insured. It is “well-settled” in Ohio law that, where provisions of a contract of insurance are reasonably susceptible of more than one interpretation, they will be construed strictly against the insurer and liberally in favor of the insured.

Exclusions of coverage must be clear and unambiguous to be enforceable. Where exceptions, qualifications, or exemptions have been added to an insurance contract, there is a general presumption that anything not clearly excluded by such provisions is included in the insured’s coverage.

Under the insurance policy, the definition of “Loss” excludes “civil or criminal fines or penalties imposed by law, punitive or exemplary damages . . . or matters that may be deemed uninsurable under the law pursuant to which this policy shall be construed.”

Huntington’s claim was for $15,000,000 of a $32,000,000 settlement of a bankruptcy fraudulent transfer proceeding. Huntington correctly asserted that there was no showing of intentional malice by the transferee that is required under the fraudulent transfer provisions of the bankruptcy code, meaning that an order to return funds is not a punishment in any sense. Liability under the fraudulent conveyance statutes is not tantamount to the type of culpable conduct that Ohio courts have held precludes insurance recovery. Fraudulent transfer laws are remedial not punitive

The Sixth Circuit concluded that Huntington had no ill will or malice when it made the loan or sought its repayment, obviating any deterrent effect of denying coverage.

AIG’s arguments to the contrary were unavailing. On appeal, AIG cites several authorities in support of its argument that there is a “well-established principle in insurance law that when an insured returns property that it was never legally entitled to acquire, the insured has not sustained a ‘loss’ within the meaning of an insurance policy.”

AIG and the district court made a form-over-substance argument for exclusion. AIG’s interpretation is not unreasonable. However, that its position is one of multiple reasonable interpretations of the text and  because the application of the contra proferentem rule in this context conclusively resolves the interpretation of “unrepaid, unrecoverable, or outstanding credit.

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.


Bankruptcy litigation, banking, and fraud upon a bank by a Ponzi schemer who, when caught by the FBI committed suicide, Huntington Ban 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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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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