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FDIC Cautions Financial Institutions About D&O Insurance

By: Harold P. Reichwald

Financial institutions purchase directors and officers liability insurance to cover officer and director decisionmaking. “Appropriately structured D&O coverage can protect directors and officers that discharge their duties in a prudent manner and enable financial institutions to attract and retain qualified individuals to manage and oversee the operations of the institution,” the FDIC explained in FIL-47-2013, which applies to all FDIC-supervised banks and savings associations with total assets under $1 billion.

But in recent years, the agency has noted a rise in the use of exclusionary terms and provisions in D&O policies. These provisions result in less coverage for executives, which could have a negative impact on the recruitment and retention of well-qualified individuals, the FDIC said. “When such exclusions apply, directors and officers may not have insurance coverage and may be personally liable for damages arising out of civil suits relating to their decisions and actions,” the agency cautioned. “In some cases, directors and officers may not be fully aware of the addition or significance of such exclusionary language.”

In addition to increasing awareness about the issue and the importance of receiving expert insurance coverage advice, the financial institution letter offered several considerations for executive officers and boards of directors considering the purchase or renewal of a D&O policy, including specific questions like:

“D&O liability insurance is an important risk mitigation tool for financial institutions, and it is vital for directors and senior executives to fully understand the protections and limitations provided by such policies,” the agency advised.

The FIL also reminded insured depository institutions and depository institution holding companies that they are prohibited from purchasing insurance policies that would pay or reimburse institution-affiliated parties for civil money penalties in either an administrative proceeding or civil action commenced by any federal banking agency. The regulations – 12 U.S.C. § 1828(k)(6) and 12 C.F.R. § 359.1(1)(2)(i) – do not contain an exception for cases where the affiliated party reimburses the depository institution for the cost of the civil money penalty coverage, the letter added.

Why It Matters

The FDIC’s letter may not have been issued purely out of the goodness of the government’s heart. The proper amount of insurance coverage protects not just bank executives but the FDIC as well. Of particular concern to the FDIC is the use of “regulatory exclusions” which preclude coverage when an insured is facing an action taken by the FDIC or other regulatory agency. The exclusions caught the attention of the agency as it has increasingly filed suit over the last few years against the executives at failed banks. When the agency brings an action against a director or officer at a financial institution that does not have appropriate coverage – and the FDIC has brought 37 suits against directors and officers so far in 2013 – the executives involved have to bear the cost of defending the case, but the government faces an unlikely recovery as well. So D&O insurance coverage can benefit not only the insured but the FDIC also.

Harold P. Reichwald is a partner at law firm Manatt, Phelps & Phillips, LLP in Los Angeles. Contat him at hreichwald(at)