FDIC Issues Guidance Regarding Exclusions from, and Limits on Indemnification for CMPs under, Director and Officer Liability Insurance Policies

The FDIC issued a financial institution letter (“FIL-47-2013”) concerning exclusions from, and limits on indemnification for civil money penalties (“CMPs”) under, banks’ director and officer liability insurance policies  (“D&O Policies” and each a “D&O Policy”).  In FIL-47-2013 the FDIC states that in recent years it has noted an increase in the exclusionary terms and provisions in banks’ D&O Policies that may make it more difficult for banks to hire and retain qualified directors and officers because those individuals are (as a result of the exclusions) more likely to be personally liable for damages “arising out of civil suits relating to their decisions and actions.”

In FIL-47-2013 the FDIC urges bank directors and executive officers to understand the answers to the following four questions regarding their bank’s D&O Policy.

  • What protections do I want from my institution’s D&O Policy?
  • What exclusions exist in my institutions’ 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 FDIC-insured banks and their holding companies that under 12 U.S.C. §1828(k) they may not purchase a D&O Policy that would be used to pay or reimburse an institution-affiliated-party (“IAP”) for the cost of CMPs assessed against him or her by a federal banking agency.  The FDIC further noted that 12 U.S.C. §1828(k) and its implementing regulations “do not include an exemption for cases in which the IAP reimburses the depository institution for the designated cost of the CMP coverage.”

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