Pub. 11 2014 Issue 2

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G N E W M E X I C O R E A L I Z E D R E A M S 10 Directors and Officers Insurance Coverage–Important Developments By Marshall G. Martin Tinnin Law Firm T he FDIC has suddenly become active about issues inDirectors andOfficer Insurance coverage. The FDIC’s sudden interest in this boring subject caught a wide spectrum of the banking associations, insurance industry and bank legal experts by surprise. But this is important stuff for bank officers and directors. On February 12, 2012, the American Association of Bank Di- rectors wrote the General Counsel of the FDIC to complain “ F.D.I.C. examiners cited at least two nonmember banks in Lou- isiana for violations of 12 C.F.R. § 359 for having an endorse- ment in their D&O policy that would indemnify directors for Civil Money Penalties (“CMP”) assessed against them. The pol- icies were issued to the banks, but the banks did not pay for the coverage; the directors did.” The AABD stated that it had been a practice since 1996—the year 12 C.F.R. § 359 was ad- opted-- for insurance carriers to issue D&O policies with an endorsement that covered Civil Money Penalties as long as the director paid or reimbursed the bank for the endorsement cost. The reimbursement was minimal. On February 27, 2012, the FDIC General Counsel replied. He rejected AABD’s CMP re- imbursement argument. He stated that allowing CMP cover- age endorsements of directors, even if repaid by the directors, would damage the deterrent effect of the regulation. He did not explain why the FDIC had waited 16 years to make this deter- mination. For reasons that may be clearer in the following D&O cover- age statement by the FDIC, the CMP is a wholly different form of regulatory legal action than the agency’s legal actions against former directors or officers of failed banks for alleged losses borne by the FDIC as insurer and receiver for failed institutions. Such actions can be covered by D&O liability insurance. CMPs may be assessed by a variety of federal regulatory agen- cies, including the FDIC, OCC, Federal Reserve, FinCEN and others. One cannot easily determine the total number of CMPs issued by the agencies although CMPs are public records. However, the regulatory agencies have a potent enforcement action if they seek such relief—made far more potent if it can- not be covered by D&O insurance. The type of director or of- ficer conduct that may bring a CMP action is beyond the scope of this article. However, one of the common grounds for the FDIC’s seeking a CMP is a violation of a cease and desist order, violation of law or similar circumstance. In CMP proceedings there are various levels of alleged wrongdoing and there are three tiers of penalty ranging from $5000 per day to over $ 1 million per day. A survey of recent CMPs shows one for $3,500 against a North Dakota bank director (Cease and Desist Or- der), 37.5 million against TD Bank of Wilmington, Delaware (failure to file SARs in Ponzi scheme and other misconduct)