Federal Reserve Building, Washington, D.C.

The Federal Reserve wants bank directors and senior executives  to know that while their D&O insurance policies are “an important risk mitigation tool,” their policies could contain exclusions that could “potentially limit coverage” and leave them without insurance in the event of a claim. In a July 23, 2019 letter (here), the Fed informed banks and other financial institutions of the risks associated with exclusionary provisions in D&O insurance policies and urged board members and senior executives to “understand fully the protections and limitations” that the D&O insurance policies provide. As discussed below, the Fed’s guidance is good advice for directors and senior executives of any organization, not just for banks. An August 3, 2019 post on the Willis Towers Watson blog about the Fed letter can be found here.
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georgiaSuppose a troubled bank went to renew its D&O insurance in the throes of the financial crisis. Suppose further that the bank’s D&O insurer refused to renew its primary policy without a regulatory exclusion. Suppose that the primary insurer’s renewal binder specified that the renewal was subject to a regulatory exclusion. However, suppose further that when the insurer issued the policy, the insurer omitted the regulatory exclusion. Suppose the insurer noticed the omission of the exclusion a month later – coincidentally, the same day regulators closed the bank and the FDIC was appointed the bank’s receiver – and sent the bank’s insurance agency an endorsement intended to add the omitted exclusion to the policy.

As you might well imagine given these circumstances, when the D&O insurer later denied coverage for the FDIC’s claims against the failed bank’s former directors and officers based on the regulatory exclusion, coverage litigation ensued.

On March 18, 2016, in an interesting opinion that is both very fact-intense and highly dependent on a federal statute specifying what kinds of agreements can be enforced against the FDIC as receiver of a failed bank, Northern District of Georgia Judge Thomas W. Thrash, Jr. denied the insurers’ motions for summary judgment and granted the summary judgment motions of the FDIC, holding that the regulatory exclusion could not be enforced. A copy of Judge Thrash’s March 18, 2016 opinion and order granting the FDIC’s motion can be found here. His separate March 18, 2016 opinion and order granting the individual directors’ and officers’ motion for partial summary judgment can be found here.
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In an unusual step, the FDIC, the federal regulator responsible for insuring and supervising depositary institutions, has weighed in on financial institutions’ purchase of D&O insurance. The FDIC’s October 10, 2013 Financial Institutions Letter, which includes an “Advisory Statement on Director and Officer Liability Insurance Policies, Exclusions and Indemnification for Civil Money Penalties” (here

After the close of business on Friday, October 10, 2008, the FDIC announced (here and here) that state regulators had closed two banks, Meridian Bank of Eldred, Illinois, and Main Street Bank of Northville, Michigan. The closure of these two banks brings the 2008 total number of bank closures to 15.

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The recent news (here) that federal regulators had seized IndyMac Bank in one of the largest bank failures in history brought back memories from the late 80’s and early 90’s, when numerous financial institutions around the country met a similar fate. The litigation surrounding the financial institutions’ collapse kept legions of lawyers profitably