Common And New Pitfalls In Exclusions In Directors And Officers Insurance Policies For Banks And Bank Holding Companies

All directors and officers (D&O) insurance policies contain exclusions whereby an insurance carrier can refuse to provide coverage for claims made against insured entities and persons when other coverage would be available. Many of these are common and appear in nearly every D&O policy, while others may appear because of specific claim history or to respond to new trends in the industry.

Common exclusions include:

• Prior acts exclusions, which exclude coverage for claims made outside the policy period. This would include claims the insured made outside the policy period against a prior policy.
  
  
• Entity versus insured exclusions, which exclude coverage for claims made by the company against another person or entity that is defined as an insured by the policy. So if one insured brings a claim against another insured, as defined by the policy, there will be no coverage for this claim.
  
  
• Breach of contract exclusions, which encompass any claim made against an insured entity for breach of contract. Carriers exclude coverage for these claims because they view a breach of contract as an intentional act by the insured to breach an agreement to which the insured voluntarily agreed.
  
  
• Bodily injury or property damage exclusions, which exclude coverage for claims that involve bodily injury or property damage. This may also exclude coverage for libel, slander, defamation, or similar types of claims.
  
  
• Conduct exclusions, which include claims involving deliberate fraud or a deliberate criminal act by an insured or a claim where an insured gains any profit or financial advantage to which they are not entitled — so in other words, claims that are similar to unjust enrichment. This exclusion typically applies after a final unappealable judgment is entered in the proceeding finding that the insured established that the conduct occurred. While the requirement of a judgment entered should protect an insured that settles a case before judgment, some carriers have pushed back to have an insured contribute some of their own money toward settlement when there is the risk that this conduct exclusion would work to deny any coverage toward damages awarded on final judgment.

This is not an exhaustive list, but these are examples of exclusions any insured, including banks and bank holding companies, should expect to see in their policies. They are exclusions that are difficult to negotiate out of a policy.

There are other exclusions, however, that carriers may seek to include in a policy in reaction to some type of situation an insured may be facing or some type of claim the insured has faced in the past. This could include exclusions for claims that the insured has faced in the past for which the carrier does not want to provide coverage if that kind of claim recurs.

Another recent and troubling trend is seeing exclusions included that exclude coverage for any type of claim brought by an activist shareholder against an insured bank holding company where the activist has a known stake in the holding company. This can present problems for a holding company because it may then be forced to cover the legal expenses and any potential damages in connection with claims brought against the company or any of its officers and directors. This could come at significant expense because activists may bring direct or derivative claims against the company or members of its board of directors that may be pending for years and serve as a significant burden in their fight with an activist shareholder. Companies should seek to avoid exclusions like these, or indeed exclusions that are more broadly intended to exclude coverage for claims that the specific company is likely to face. If they cannot, then the company will be left footing the bill for significant legal expenses that it will likely never be able to recover.