United States: Claims: Government Investigations, Enforcement And Triggering Insurance Coverage Under D And O Insurance

Last Updated: January 31 2014
Article by Frank A. Mayer, III and Charles E.. Leasure, III


Definition of "Claim" in a D&O Policy

  • A D&O policy is triggered when there is a "claim" made during the policy period for a "wrongful act"
  • A typical definition of "claim" can be found in most bank D&O policies and one issued by Travelers reads as follows:

    1. a written demand against any Insured for monetary damages or non-monetary relief;
    2. a civil proceeding against any Insured commenced by the service of a complaint or similar proceeding;
    3. a criminal proceeding against any Insured commenced by a return of an indictment or information;
    4. an arbitration proceeding against any Insured, or a formal administrative or regulatory proceeding against any Insured Person . . . which shall be deemed commenced by such Insured's receipt of an arbitration petition, a notice of filed charges, a formal investigative order or a similar legal document. . . .

So, what constitutes a "claim"

  • The actual definition is crucial for determining if, and when, insurance is available
  • In the FDIC context –

    • informal investigations
    • internal referrals
    • interviews or document requests
    • review periods
    • formal investigation/lawsuit
    • enforcement

"Claim" definition Denials and Cases

  • 11th Circuit – Office Depot Case (unreported)

    • no coverage for investigation until subpoenas and Wells Notices issued
    • rejected argument that "proceedings" were the same as "investigation"
  • MBIA Case – 2d Circuit

    • Held that Special Litigation Committee, investigative expense and independent consultant costs covered
    • held that a sensible businessperson would equate a subpoena as a "formal or informal investigative order"
    • rejected insurer's argument that because the documents were produced voluntarily by an oral request and not by subpoena or other formal means that it did not constitute a "claim"

Timing of a "claim"

  • notice issues come into play – when is a claim a claim
  • interrelated wrongful acts?
  • merging and comparing of policy timing, limits and language to determine whether and when a "claim" is covered and under which policy
  • nature of the claims made and reported policy

Market Response

  • AIG Investigation Edge and other carriers matched the broader coverage grants

    • specifically covers informal investigations
    • can contain sublimits

FDIC Letter on D&O Issues

  • The FDIC published advisory letter FIL-47-2013 dated October 10, 2013 confirming the importance of reviewing Directors & Officers Liability Insurance Polices (D&O)
  • In the letter, the FDIC advised banks to review the terms and conditions of their policies and to pay special attention to exclusions for regulatory actions and to remind banks that insurance to pay for Civil Money Penalties (CMPs) is not allowed

Regulatory Exclusion

  • Regulatory Exclusion: A typical regulatory exclusion contained in a bank policy might read as follows:
  • [no coverage] "based upon or attributable to any action or proceeding brought by or on behalf of the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation, any other depository insurance organization, the Comptroller of the Currency, the Federal Home Loan Bank Board, or any other national or state regulatory agency."

Insured v Insured

  • The insured v insured exclusion can apply when the FDIC acts as the receiver of a failed institution and then sues former directors because the FDIC "steps into the shoes" of the failed bank
  • Georgia Federal case involving Community Bank & Trust said no coverage


  • Insurance is not permitted to pay for the imposition of Civil Money Penalties on individuals
  • This includes a prohibition even when the individual promises to repay the institution
  • Risk and regulated enterprises
  • Examination by Federal and State banking agencies
  • When a regulator through examination determines that a bank warrants higher levels of scrutiny and oversight it can establish that through a formal and informal enforcement action
  • Regulator discretion (Delegations of Authority):

    • State
    • FDIC
    • OCC

      • Informal "progressive" discipline
      • Formal
  • Formal

    1. It can serve as the basis for further administrative penalties, such as civil money penalties, removal of officers and directors
    2. Types

      1. Prompt corrective action directives
      2. Capital directives
      3. Cease and desist orders
      4. Written agreements
  • Disclosure to third parties

    1. Confidential non-public supervisory information
    2. Applications to disclose: Part 309 request
    3. Securities law: disclosure
    4. Disclosure of formal order vs. informal orders
    5. Disclosure of examination report of federal and state examiners

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Frank A. Mayer, III
Charles E.. Leasure, III
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