United States: FDIC Recovery Efforts Highlight D&O Insurance Issues

The Federal Deposit Insurance Corporation's recovery efforts against the directors and officers of failed financial institutions raise numerous insurance issues that highlight the importance of negotiating favorable coverage terms before a serious claim arises.

The financial crisis that began in 2008 has resulted in an unprecedented number of failed financial institutions. As the receiver for those institutions, the Federal Deposit Insurance Corporation (FDIC) may sue professionals, including directors and officers, alleged to have played a role in the failure. In addition to these civil lawsuits, the FDIC has other recovery tools at its disposal, including the potential "clawback" of compensation from the directors and officers of the failed institutions.

Together, these recovery efforts raise numerous directors and officers (D&O) liability insurance issues that will determine the insurance protection available to individuals pursued by the FDIC. More generally, these issues highlight the importance of negotiating terms favorable to directors and officers, whether in the financial industry or elsewhere, at the time of policy placement or renewal, before a serious claim arises. D&O insurance policy forms, perhaps more than any other line of insurance, vary by insurer and usually are subject to negotiation.

Professional Liability Lawsuits on the Rise

As of August 2011, the FDIC had initiated suits in connection with 11 failed institutions against 77 individuals. Other suits have been authorized but not yet filed, involving a total of 30 failed institutions against 266 individuals. The FDIC decides whether to pursue litigation upon completing an investigation into the causes of the institution's failure; these investigations can take up to 18 months from the time the FDIC closes the institution. Consequently, it appears likely that the FDIC will authorize even more suits against the directors and officers of institutions that failed during the recent financial crisis.

The FDIC's suits typically allege negligence, gross negligence, breach of fiduciary duty and failure to supervise. In particular, the FDIC often alleges that directors and officers failed to exercise appropriate business judgment in approving risky strategies, ignoring underwriting and investment guidelines, and generally being "asleep at the wheel" as their institution lurched toward insolvency.

New Compensation Clawback Rules

In addition to civil litigation, the FDIC can pursue through other channels directors and officers allegedly involved in the failure of a financial institution. Pursuant to the Dodd-Frank Act, the FDIC recently adopted final rules allowing the FDIC to "claw back" compensation earned by directors and officers during the two years preceding the FDIC's appointment as the receiver of the failed institution. "Compensation" is defined broadly to include salary, bonus, severance pay, benefits and stock options, among other items.

The clawback is warranted if directors and officers deemed "substantially responsible" for the failure did not conduct their responsibilities with the degree of skill and care an ordinarily prudent person in a like position would exercise under similar circumstances—a negligence standard. The FDIC need not prove more culpable conduct, such as gross negligence or fraud, in order to recover. When added to the exposure from civil lawsuits, these clawback rules create a significant financial risk to officers and directors.

D&O Insurance Coverage Issues

D&O insurance coverage for the individual defendants at failed institutions likely will turn on a small number of key issues. In particular, two policy exclusions may come into play.

The "insured v. insured" exclusion is found in virtually all D&O policies that cover both the individuals and the financial institution (commonly referred to as a Side A/B/C policy). The insurance industry developed this exclusion in the aftermath of the savings and loan (S&L) crisis of the 1980s, when numerous S&Ls attempted to convert their policies into cash by suing their own directors and officers. The exclusion bars coverage for most claims brought by one insured (either the company or an individual director or officer) against another. Many courts have applied the exclusion where a trustee or receiver sues an individual director or officer on behalf of the institution. Unless the policy "carves out" claims by receivers such as the FDIC from the exclusion, or deletes the exclusion altogether—both options that can be obtained in the insurance markets—coverage for the FDIC's claim may be barred.

A less common, but potentially relevant exclusion is the "regulatory exclusion." The exclusion may bar coverage generally for claims brought by any governmental, quasi-governmental or regulatory entity, or it may be worded to target particular agencies such as the FDIC. This exclusion also came into wide use in the aftermath of the S&L crisis, but as the insurance industry's memory of that crisis faded it became less common. Several commentators have suggested that since the beginning of the financial crisis in 2008 this trend has reversed, however, as insurers are seeking to insert the exclusion into D&O policies sold to financial institutions. If the exclusion is at the center of coverage disputes going forward, insureds will face an uphill battle, as the vast majority of courts to consider the regulatory exclusion found it enforceable and applied it to bar coverage for claims brought by government agencies. Only a small number of courts rejected the exclusion on grounds of public policy or ambiguity of a particular policy form.

Finally, the FDIC's clawback rules raise other insurance coverage questions. Most significant is whether the return of compensation can be characterized as restitution, such that it does not constitute insurable "loss" under basis insurance principles. Moreover, if the compensation clawback is considered "profit, remuneration or advantage to which the Insured was not legally entitled," then it would be excluded from coverage under the typical D&O policy.

Obtain Favorable Policy Terms

For those directors and officers already facing FDIC recovery efforts, it may be too late to obtain more favorable D&O policy terms that will preserve the insurance protection they need. But for many others, the opportunity to review and improve their D&O coverage still exists. According to the FDIC, 865 banks (more than 11 percent of ongoing institutions) are identified as "problem institutions" as a result of "financial, operational, or managerial weaknesses that threaten their continued financial viability." These institutions are not yet the subject of FDIC action, and their directors and officers should check the terms and conditions of their D&O insurance to mitigate the risk that any of the coverage issues discussed herein could threaten their coverage.

If the coverage is less than adequate, directors and officers should attempt to negotiate more favorable terms. In particular, most insurers will "carve out" from the insured v. insured exclusion claims by receivers such as the FDIC, thereby eliminating this key obstacle to coverage. While the language of the regulatory exclusion may not be subject to negotiation, it may be possible to omit it from the policy altogether. Perhaps the most effective way to ensure coverage exists for an FDIC claim is to obtain a separate Side A or personal director's liability policy. Both of these policies cover only the individual, not the institution, and afford broad coverage compared to the typical Side A/B/C policy. Among their many positive attributes is the omission of the insured v. insured and regulatory exclusions.

Finally, the insurance industry's response to the Dodd-Frank Act generally, and the FDIC clawback rules specifically, continues to evolve, affording new coverage options. A new endorsement is now available that indemnifies an individual officer or director for compensation returned pursuant to the clawback rules. Other endorsements cover the cost of defending against an FDIC action, but do not indemnify for returned compensation. Because all of these products are relatively new and not yet incorporated in standard D&O policy forms, directors and officers should inquire specifically about them to their company's risk manager or insurance broker.

These measures—reviewing existing policy forms with an insurance broker and insurance counsel, negotiating more favorable terms and conditions where possible and exploring a separate Side A or personal director's liability policy—should afford officers and directors of financial institutions with the best available D&O insurance protection should an FDIC claim arise. They also may benefit directors and officers at companies outside the financial industry who are looking to confirm that D&O insurance will be there when they need it.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions