Banks Should Beware the Regulatory Exclusion in D&O Insurance PoliciesAdded by Hawley Troxell in Articles & Blogs, Banking Law on January 7, 2014
A recent Federal Deposit Insurance Corporation bulletin warns banking institutions about exclusions in directors and officers insurance (D&O) policies that can significantly reduce the value of the policies. Although phrased generally, the FDIC’s guidance is targeted at the re-emergence of the so-called regulatory exclusion.
The regulatory exclusion in a D&O policy excludes coverage for lawsuits by federal and state banking regulators against bank directors and officers. D&O insurers introduced the regulatory exclusion during the savings and loan crisis of the late 1980s, when it was commonly included in bank D&O policies. Between then and the aftermath of the financial crisis of 2008, D&O insurers backed away from this provision, and it ceased to be a common feature of bank D&O policies.
Since 2008, however, the regulatory exclusion has found new momentum in the marketplace, particularly when a troubled institution renews its policy. Although the wave of bank failures following the 2008 crisis has largely abated, (i) many banks, particularly community banks, remain in a weakened state and could be viewed by their D&O insurer as bad risks and (ii) the FDIC is still working through the backlog and is actively pursuing litigation related to banks that failed several years ago in some cases.
Although some cases in the 1990s cast doubt on whether courts would enforce the regulatory exclusion, more recent case law suggests that the regulatory exclusion is enforceable. In particular, the US federal district court for the Central District of California upheld the enforceability of the regulatory exclusion against an action by the FDIC in a case decided in July 2013.
The FDIC has recognized the newfound currency of the regulatory exclusion and on October 10, 2013, issued a statement that warned insured institutions to carefully scrutinize policies on renewal for new exclusionary language.
The FDIC’s bulletin also clarifies that insured institutions cannot purchase insurance that will indemnify directors and officers against civil monetary penalties–even if the directors and officers reimburse the institution for the cost of this coverage. This information has been in the marketplace for several years now and the recent bulletin simply confirms the FDIC position.
For more information, please contact our Banking Group or call 208.344.6000.
More Banking Law Blog Posts
- 10/27/21—Exceptions to Discharge Apply only to Individuals Even in a “Cramdown” Subchapter V, Chapter 11 Case
- 02/02/21—Why am I hearing LIBOR in the news?
- 09/08/20—The Justices are Set to Answer a Question that has Divided the Circuit Courts of Appeal: Do Creditors Violate the Automatic Stay by Passively Retaining a Debtor’s Property?
- 06/19/20—Recent Changes to the Payroll Protections Program
- 04/10/20—Federal Reserve Releases Term Sheets for Main Street Lending New Loan Facility and Main Street Expanded Loan Facility programs
- No upcoming events.