The Federal Reserve Board ("FRB") highlighted risks related to certain insurance policy indemnifications for the directors and officers ("D&Os") of bank holding companies, savings and loan holding companies, and state member banks.
In a supervisory letter, the FRB warned of the potential limited coverage from such exclusionary provisions, which could limit directors and officers' ability to recover. While financial firms are required by the FDIC to use D&O policies that exclude from coverage a prohibited indemnification payment, the FRB noted, there has been an increase in policies that exclude other director and officer liabilities. In particular, the FRB noted that expansive exclusionary terms could adversely affect the recruitment and retention of well-qualified individuals.
The FRB urged each board member and executive officer, when considering renewals and amendments of existing D&O policies, to consider (i) what kind of protection the policy should offer, (ii) what exclusions already exist, (iii) new exclusions and how they change the D&O policy's coverage, and (iv) potential personal financial exposure that could arise from each policy exclusion.
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