The FDIC issued a Financial Institution Letter (FIL) this month
advising banks of the recently noted increase in exclusionary
provisions in director and officer (D&O) liability insurance
policies being purchased by banks. (See FIL-47-2013.) The FIL further notes that these
exclusionary provisions may adversely affect the ability of banks
to attract and retain knowledgeable and well-qualified individuals
as directors and officers.
Without stating those exclusions that have come to the FDIC's
attention, the exclusion that is of obvious and paramount
importance to the FDIC is the so-called regulatory exclusion. One
of the most common exclusions in a bank D&O policy is an
exclusion from coverage for any regulatory action taken against
directors and officers. As the FDIC and the other bank regulators
have increased their actions against directors and officers in
recent years, insurers have taken notice and increasingly are
inserting a regulatory exclusion in renewal policies.
The FDIC advises that the choice of D&O coverage should be
based on a well-informed analysis of the costs and benefits, with
particular emphasis on any policy exclusions. Now, and certainly at
renewal, would be a good time to review your D&O coverage and
policy exclusions.
In its guidance, the FDIC "urges" each board member and
executive officer to fully understand the following issues related
to their D&O coverage:
- What protections do we want in our D&O coverage?
- What exclusions exist in our policy?
- If any new exclusions are included or proposed, how do they limit coverage?
- What is my personal financial exposure arising from policy exclusions?
For those banks and bank holding companies that are publicly
traded, D&O coverage takes on added importance. The greatest
potential exposure that directors and executive officers face is
from shareholders, and more particularly, plaintiffs' law firms
purporting to represent shareholders in shareholder derivative
claims and class actions. For example, for banks engaging in merger
and acquisition transactions, it is typical in recent years for a
shareholder claim to be asserted alleging breach of fiduciary
duties by directors. D&O policies should be reviewed to ensure
that such claims, including associated defense costs, are fully
covered and in amounts sufficient to fully protect directors and
officers.
As a final note, the FDIC also points out in its guidance that
banks and bank holding companies are prohibited from purchasing
coverage that would pay or reimburse an officer or director for the
cost of any civil money penalty assessed in an action brought
against such an individual by any federal banking agencies.
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.