On October 10, the FDIC issued Financial Institution Letter 47-2013, urging directors and officers (D&O) of financial institutions to examine their institutions' D&O insurance coverage to ensure adequate protection for themselves as well as for depositors and shareholders. The FDIC cited insurers' increased use of exclusionary provisions as a cause for concern, warning that "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 FDIC urged directors and officers to fully understand the answers to four questions that are critical to coverage:
- What protections do I want from my institution's D&O policy?
- What exclusions exist in my institution's D&O policy?
- Are any of the exclusions new, and if so, how do they change my coverage?
- What is my potential personal financial exposure arising from each policy exclusion?
The FDIC also reminded institutions that an insured depository institution or depository institution holding company may not purchase insurance coverage that indemnifies institution-affiliated parties for civil money penalties assessed against them. See 12 U.S.C. § 1828(k). Although many insurance policies exclude monetary penalties from covered damages, covered financial institutions should confirm that their D&O policies comply with this regulatory requirement.
This FDIC advisory is a reminder of the importance of careful scrutiny of an institution's D&O coverage. D&O policies are important sources of funding the defense and resolution of litigation against directors and officers as well as the institution if it purchased entity coverage. Covered litigation could include actions brought by the FDIC against directors and officers of a failed or struggling institution.
Financial institutions should examine their current policies to ensure adequate coverage and carefully review any coverage changes at renewal. Experienced insurance coverage counsel can review current policies and advise on proposed renewal terms. With the assistance of coverage counsel working with an insured's broker, insureds often can obtain more favorable terms and conditions. At the very least, they gain a better understanding of the coverage provided and are alerted to any potential coverage gaps or weaknesses.
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