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.