The Federal Deposit Insurance Corporation (FDIC) recently warned financial institutions that it has observed an increase in exclusionary terms contained in the director and officer (D&O) insurance policies of depository institutions. The FDIC emphasized the importance of ‘‘appropriately structured’’ D&O insurance coverage to the safety and soundness of depository institutions and encouraged directors and executive officers to understand the answers to several key questions regarding their institution’s D&O insurance coverage. Translation: directors must be proactive in ensuring that they are properly advised about the scope of their insurance coverage, and that they then provide appropriate oversight to ensure that the bank secures a strong coverage program in light of what currently is available in the D&O insurance marketplace. As institutions gear up for another examination cycle, directors and executive officers would be well served to examine not only their bank’s D&O insurance coverage, but also the bank’s corporate governance documents in light of the FDIC guidance and several recent court decisions.

II. FDIC Guidance -

On Oct. 10, 2013, the FDIC issued an ‘‘Advisory Statement on Director and Officer Liability Insurance Policies, Exclusions and Indemnification for Civil Money Penalties’’ (the Advisory Statement). In the Advisory Statement, the FDIC acknowledged the importance of D&O insurance to financial institutions both as a risk mitigation tool and as a means to attract and retain qualified directors and officers. The FDIC stated that ‘‘[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.’’

Originally published in BNA’s Banking Report.