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From Banking and Finance Law Daily, October 10, 2013

FDIC warns of exclusions in D&O liability policies

By Richard A. Roth, J.D.

The Federal Deposit Insurance Corporation has warned banks, and their directors and managers, to be aware of precisely what coverage is provided by their director and officer liability insurance. The FDIC says that it has noted an increase in insurers’ use of exclusionary terms and provisions in these policies, which could result in directors and officers being required personally to pay damages in civil suits (FIL-47-2013).

It is appropriate for banks to provide D&O coverage to officers and directors, and doing so may be necessary if a bank is to recruit qualified individuals for bank positions, the FDIC observes. Policy exclusions might make recruitment more difficult. Senior officers and directors must be particularly alert for changes when D&O policies are being renewed or amended, the agency says, and they should consider the effect of exclusions on their own personal exposure.

Prohibited coverage. On the other hand, certain coverage remains prohibited. The FDIC is reminding banks that its regulations prohibit the purchase of any insurance policy that would pay civil money penalties imposed on any institution-affiliated party as a result of a banking agency enforcement action (see 12 U.S.C. §1828(k)(6) and 12 C.F.R. §395.1(l)(2)(i)). Reimbursing an institution-affiliated party also is prohibited.

The purchase of this coverage is prohibited even if the institution-affiliated party reimburses the bank for the cost.

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