A U.S. magistrate judge seemed skeptical of an insurer's bid to exclude a witness proffered as a policy expert on financial institution bonds, repeatedly asking Berkley Regional Insurance Co.'s counsel in a Monday hearing why the expert's experience — or lack thereof — should disqualify him.

During a North Carolina federal court hearing in Raleigh, Judge Robert T. Numbers II pressed counsel for Chubb unit Federal Insurance Co. and excess insurer Berkley for why a report offered by Ty Sagalow, an expert for SVB Financial Group and the Federal Deposit Insurance Corp., should be stricken from the record, when court filings and Sagalow's deposition suggests he has experience with financial institution bonds, or FIBs — a type of insurance policy that protect banks from criminal acts like employee dishonesty, robbery and forgery.

"I'm somewhat struggling with the claim that he lacks any experience with financial institution bonds. I don't think that's supported by the record at all," Judge Numbers said in a hearing on Berkley's motion to strike Sagalow.

Judge Numbers was responding to Berkley's counsel, Michael Keeley of Clark Hill PLC, who said that though Sagalow purports to offer knowledge of industrywide customs and practices on FIBs, he faltered when pressed in deposition, failing to recall major trends in the fidelity industry or name individual insurers who've taken positions on FIBs in the way he described.

"He wasn't able to produce any coherent responses," Keeley told the judge.

Sagalow offered expert opinions for SVB Financial, Silicon Valley Bank's former parent, and the FDIC, now acting as receiver for SVB after its high-profile collapse in early 2023, in the $73 million insurance coverage battle. The issue stems from private equity fund manager Elliot Smerling's use of forged documents to defraud the bank into a $150 million line of credit. Smerling pled guilty to charges in connection with the loan in early 2022, and was later sentenced to eight years in prison.

Sagalow's opinions interpreted language in the FIB that Financial issued SVB that would extend coverage under the bond's "extended forgery" agreement. For example, he opined that electronically transmitted documents, like a PDF, satisfy the "original" and "actual physical possession" requirements of the FIB because those terms are not defined.

SVB Financial argued that PDF copies constitute "originals" in a bid to satisfy a coverage requirement in the FIB's extended forgery agreement, according to court filings.

Federal disputed the claim, saying the bond only applies if the insured obtained the "original" loan documents before extending credit, which it says SVB didn't do. Now, SVB Financial and the FDIC are trying to use Sagalow to circumvent the plain language of the bond and have him paint a copy as an original document, according to the insurer's court filings.

However, Judge Numbers said there seems to be instances in which Sagalow has experience with FIBs across a near 40-year career in the insurance industry, noting executive roles with American International Group Inc. or working as head of National Union's underwriting department.

"Why is that not the kind of experience that would allow him to opine on … whether an electronic document can qualify as an original?" Judge Numbers asked.

Stepping in for the FDIC, Joseph M. Saka of Nossaman LLP said Sagalow satisfies experience, education, knowledge and other requirements of Rule 702 of the Federal Rules of Evidence.

"There's nothing unique about FIBs that makes all of his other experiences irrelevant," Saka said.

Keeley countered, arguing that Sagalow admitted in his deposition that while he oversaw underwriters and drafted endorsements, he never underwrote a single FIB himself, instead working at the "50,000 foot" level.

Zeroing in on Sagalow's deposition, Keeley said the expert couldn't offer evidence for his opinions or answer basic questions on standard industry forms. Sagalow also said he was unsure if he had heard of the Fidelity Law Association, described by Berkley in court filings as a "leading" industry association dealing with claims against FIBs and commercial crime insurance.

"He has no clue what the custom is in the FIB industry," Keeley said.

In a bid to show why Sagalow's report is inadequate, Keeley said FIBs are "unlike any other insurance product out there," as insurers are covering losses from criminal acts and having to underwrite by evaluating the risk of loss from social engineering crimes or fraudulent loans.

Judge Numbers asked for evidence that shows how not knowing about certain things, like the Fidelity Law Association's scholarly journal, should disqualify Sagalow; in other words, how the judge should assess the materiality of what Sagalow doesn't know.

Federal Insurance Co. counsel Scott L. Schmookler of Gordon Rees Scully Mansukhani LLP stepped in to say it's incumbent on SVB Financial and the FDIC to lay the foundations for Sagalow's expertise, not on the insurers to show why the report is insufficient.

When one looks at Sagalow's deposition as a whole, it's clear these are his personal views rather than an assessment of industry standard, Schmookler said. Sagalow also couldn't point to a single insurer who treated a PDF as an "original" in FIB policy language.

But Saka said Sagalow isn't there to offer an opinion on every single insurer, rather industry custom as a whole. He pointed out that though Berkley and Federal spent a lot of time poking holes in Sagalow's deposition, their own experts had similar shortcomings in deposition.

"The criticisms they're offering collapse under the weight of their own record," Saka said.

The parties also briefly touched on the FDIC's motion to substitute Sagalow for another expert, Lazarus Goanos, citing the former's health conditions. Judge Numbers noted expert disclosure deadlines have passed, but added the substitution motion depends in part on how he rules on the motion to strike.

SVB Financial Group is represented by Amy E. Richardson of HWG LLP and by Keith McKenna, Orrie A. Levy, Nicholas R. Maxwell and Justin V. Javier of Cohen Ziffer Frenchman & McKenna LLP.

The FDIC is represented by Kelly Margolis Dagger of Ellis & Winters LLP and by Andrew M. Reidy and Joseph M. Saka of Nossaman LLP.

Federal Insurance Company is represented by Scott L. Schmookler, Angela Sullivan and Suzanne R. Walker of Gordon Rees Scully Mansukhani LLP.

Berkley is represented by Michael Keeley and Holly Naehritz of Clark Hill PLC and by Heather G. Connor of McAngus Goudelock and Courie LLC.

The case is SVB Financial Group et al. v. Federal Insurance Co. et al., case number 5:23-cv-00095, in the U.S. District Court for the Eastern District of North Carolina.