On October 10, 2013, the FDIC provided guidance via Financial Institution Letter FIL-47-2013 to all FDIC-supervised banks regarding directors & officers ("D&O") liability insurance. In that letter, the FDIC has re-asserted its position that FDIC regulations under 12 C.F.R. Part 359 prohibit any FDIC-Supervised bank or holding company from purchasing insurance that would indemnify civil money penalties ("CMP") assessed against a bank's or holding company's officers and directors by any federal banking agency. The FDIC noted that this prohibition does "not include an exception for cases in which the [officers and directors] reimburse the depository institution the designated cost of the CMP coverage."
Traditionally, D&O insurance has not covered "taxes, fines, or penalties" assessed against insureds. Coverage for CMP has become available in the D&O liability insurance market over the last few years, however. Such coverage often is limited to "Side A," where the bank does not indemnify the officers and directors, usually is sublimited, and occasionally requires the individual officers and directors to purchase the coverage or to reimburse the bank for the premiums.
The FDIC's position is based on its interpretation of 12 C.F.R. § 359.1(l), which prohibits "any payment (or any agreement or arrangement to make any payment) by any insured depository institution or an affiliated depository institution holding company for the benefit of any person who is or was an [officer or director] of such insured depository institution or holding company, to pay or reimburse such person for any civil money penalty or judgment resulting from any administrative or civil action instituted by any federal banking agency . . . ."
The regulation does not explicitly prohibit the purchase of CMP insurance. However, in 2011, the FDIC cited two Louisiana banks under Part 359 for buying CMP insurance. In 2012, the American Association of Bank Directors ("AABD") criticized the FDIC's interpretation of the regulation, particularly when such coverage is purchased by the individual officers and directors. In response, in a February 27, 2012 letter to the AABD, the FDIC disagreed with this interpretation, citing the "public policy" underlying Part 359, as stated in the preamble, "making sure that [officers and directors] are held accountable for substantive violations of law or regulation."
The FDIC's re-assertion of this prohibition in FIL-47-2013 is troubling in light of the numerous enforcement actions that the FDIC has instituted over the last several years. In addition, because the FDIC regulations apply to financial institutions regulated by other agencies, such as the Federal Reserve Board or the Office of the Comptroller of the Currency, this interpretation may affect numerous banks and their holding companies that have purchased such insurance or intend to do so.
We therefore advise our clients to review their policies and determine if they currently are paying premiums for insurance that the FDIC contends is prohibited. If you are paying for such insurance, the institution or its holding company could be subject to regulatory criticism and, in addition, would be paying for coverage that the FDIC contends is prohibited. We are happy to review your D&O policies and advise you with regard to your individual circumstances, including options for handling this coverage issue.
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