FDIC Warns Bank Boards of Gaps in Liability Coverage

WASHINGTON — The Federal Deposit Insurance Corp. told banks Thursday to be wary of liability insurance policies that could still force directors and officers to have to pay civil damages.

The FDIC, which as receiver of failed banks can sue former managers for negligence, is uniquely familiar with issues related to D&O insurance. In some cases following the crisis, the amount that a D&O carrier must or is willing to pay the agency has been a matter of dispute.

But rather than mention the agency's role as plaintiff, the agency's advisory statement sent to banks it supervises Thursday instead focuses on the liability risk that directors and officers face from an insurer not covering damages.

"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 agency said. "In recent years, the FDIC has noted an increase in exclusionary terms or provisions contained in depository institutions' D&O insurance policies that may adversely affect the recruitment and retention of well-qualified individuals."

The FDIC did not cite specific exclusions. A typical clause in some policies, for example, absolves the insurer's responsibility if a defendant is accused of fraud or other illegal conduct.

When there is an exclusion, "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 statement said. "In some cases, directors and officers may not be fully aware of the addition or significance of such exclusionary language."

The statement recommended that boards, their members and executives consider four questions when considering renewals or changes to insurance policies, including what protections do they want from their policy, what exclusions exist, how will new exclusions change the coverage and what personal financial exposure could be the result of an exclusion.

"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 said.

The statement also reminded banks that they are barred from using their own D&O policies to reimburse institution-affiliated parties for the costs of civil money penalties.