FDIC Notes Increase in Exclusionary Terms of Director and Officer Liability Insurance Policies
Oct 11 - The FDIC has recently noted an increase in exclusionary terms or provisions in director and officer liability insurance policies purchased by financial institutions. These exclusions may limit insurance coverage under certain circumstances, thereby increasing the potential personal exposure of board members and bank officers in civil lawsuits. The advisory discusses the importance of thoroughly reviewing and understanding the risks associated with coverage exclusions contained in director and officer liability insurance policies.
Additionally, the FDIC is issuing a reminder that an insured depository institution or depository institution holding company may not purchase an insurance policy that would indemnify institution-affiliated parties for civil money penalties assessed against them. Even if the IAP agrees to reimburse the depository institution for the cost of such coverage, the purchase of the insurance policy by the depository institution is prohibited.
- The purchase of liability insurance is a legitimate business activity that protects directors and officers who prudently discharge their duties. Liability insurance also helps financial institutions attract and retain qualified personnel.
- Insurers are increasingly adding exclusionary language to insurance policies that directors and officers should clearly understand, as it has the potential to limit coverage and leave officers and directors personally responsible for claims not covered by those policies.
- Also, as such policies are considered, directors and officers should keep in mind that FDIC regulations prohibit an insured depository institution or depository institution holding company from purchasing insurance that would be used to pay or reimburse an IAP for the cost of any CMP assessed against such person in an administrative proceeding or civil action commenced by any federal banking agency. See 12 U.S.C. § 1828(k)(6) and 12 C.F.R. § 359.1(l)(2)(i).
- The regulations do not include an exception for cases in which the IAP reimburses the depository institution for the designated cost of the CMP coverage.
Click here for the advisory.