Motherhood and Apple Pie but Who’s Cooking?

A basic principle underlying the use of director and officer (D&O) liability insurance is that financial institutions (as well as depositors and shareholders) are best served by knowledgeable directors and officers who make carefully considered strategic risk decisions on behalf of the institution. 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.

As a rationale for the purchase of D&O  insurance this statement is as unimpeachable as it is unremarkable. What makes it more interesting is where it comes from. It is taken from an recent Advisory Statement issued by the Federal Insurance Deposit Corporation in the USA.   The FDIC is an independent agency of the United States government that protects depositors against the loss of their deposits if an FDIC-insured bank or savings association fails.

Its proud claim is that since its creation in 1933  ( the same year as when the US Securities Laws were enacted )  “no depositor has ever lost even one penny of FDIC-insured deposits.” Perhaps it’s less of a surprise that the FDIC takes more than a passing interest in the subject of D&O insurance when one reflects that D&O insurance is one of the best means by which it can replenish its coffers after it has compensated depositors.

FDIC Advisory Statement

With that in mind we read on in the Advisory Statement:

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. 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. In some cases, directors and officers may not be fully aware of the addition or significance of such exclusionary language.

Again a cynical reader might conclude that this is code for saying “Check the policies you dummies otherwise you (and we) will lose out when it comes to settlement time.” In case you think that this surely isn’t what’s on the FDIC’s mind, the next bit might persuade you otherwise:

The board of directors’ choice of coverage in a D&O policy should be based on a well-informed analysis of costs and benefits, and an important consideration is the potential impact to directors and officers that could result from exclusions. The FDIC urges each board member and executive officer to fully understand the answers to the following questions regarding D&O insurance coverage, especially when considering renewals and amendments of existing policies:

  • 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?

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.

As a shopping list of questions which any good financial institutions insurance broker should discuss with their clients this is hard to beat. I would go further and suggest that the questions would apply not just in the USA and not just with respect to financial institutions either.

Sending a Strong Message

What is fascinating to me is that the FDIC is clearly looking here at financial recoveries as well as the need to “send a strong message”. To some extent and in some jurisdictions this  may lead to an increasing tension between these two outcomes.

On the one hand there is the “strong message” public policy imperative of the type in operation here in the UK under which the Financial Conduct Authority prohibits the insurance of any form of fine or penalty imposed by it. On the other hand there is an equally pressing public policy imperative of replenishing Treasury coffers. To some extent this circle can be closed by separating out civil recoveries by the authorities which may be insurable and regulatory or criminal recoveries which are generally not.

Blurred Lines

Often the lines are blurred here especially in situations where one set of facts may give rise to many different forms of proceedings in different countries with different legal systems. When one throws into the mix the natural desire of insurers to seek to protect their own balance sheets and the sheer extent to the potential liabilities faced by the individual directors, it’s not hard to see why good professional advice as to the scope of cover might be regarded as money well spent.

About Francis Kean

Francis is an Executive Director in Willis Towers Watson's FINEX Global, where he specializes in insurance for Dir…
Categories: Directors & Officers, Executive Risk | Tags: ,

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