Advisory Statement on Director and Officer Liability Insurance Policies, Exclusions, and Indemnification

December 2, 2013 at 4:39 pm Leave a comment

Written by: Tanner Weigel

In response to the substantial increase in the existence and use of exclusionary terms and provisions included within bank director and officer liability insurance policies, the FDIC recently issued Financial Institution Letter 47-2013 (“FDIC Letter”) to reemphasize the importance of thoroughly reviewing and understanding the risks associated with such coverage exclusions. Notably, the FDIC Letter is relevant to directors and officers of all FDIC-supervised banks and savings associations, including community banks.

When liability exclusions apply, directors and officers may be personally liable for civil damages relating to their decisions and actions on behalf of the financial institution. Unfortunately, however, directors and officers may not be fully aware of the significance of exclusionary language in their insurance policies and the corresponding impact the exclusionary language may have on their potential for personal liability.

As noted in the FDIC Letter, the financial institution’s choice of insurance coverage “should be based on a well-informed analysis of costs and benefits.” Naturally, insurance policies purchased at a discount may not have the protection coverage that directors and officers may expect. As such, the FDIC Letter encourages directors and executive officers to independently identify and understand these exclusions. This separate analysis by each director, independent of the analysis conducted by the financial institution itself, is vital to ensuring that both the director and the financial institution are adequately protected from liability.

To aid in this understanding, the FDIC Letter advises directors and officers to evaluate the following issues regarding the scope of their insurance 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?

This four step analysis practically ensures that directors review and understand each exclusionary provision. Notably, directors should never make assumptions regarding the scope of their liability coverage and are encouraged to seek independent legal advice to determine the significance of any exclusionary language and its impact on potential personal financial exposure.

Finally, the FDIC letter reminds financial institutions that the institution may not purchase insurance coverage that would be used to pay or reimburse a director or officer from paying the cost of any civil money penalty assessed against them in an administrative proceeding or civil action commenced by a federal banking agency. This prohibition remains applicable even if the director or officer attempts to reimburse the financial institution for the cost of the civil money penalty coverage.

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