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 Summer • 2014 11 “ Insurance is the only product that both the seller and buyer hope is never actually used. ” – Unknown and a rare CMP against a credit union by NCUA (no money penalty). All was quiet on the insurance front for a time, but on October 13, 2013 the FDIC issued a “Financial Institutions Letter” which contained a strange mix of guidance on D&O insurance cover- age. Firstly, the Letter advises banks to carefully examine their D&O policies for exclusions of coverage. The Letter stated “[t] hese exclusions may limit insurance coverage under certain cir- cumstances, thereby increasing the potential personal exposure of board members and bank officers in civil lawsuits.” And sec- ondly, the Letter went further. It reminded banks that a bank could not purchase an endorsement covering CMP for directors and officers, even if the director or officer paid the cost of the CMP endorsement. FDIC voiced no similar concern about po- tential personal exposure of board members and bank officers about the CMP exposure. The FDIC’s advice concerning D&O coverage exclusions is not disinterested. D&O insurance for directors and officers is a major source of recovery by settlement in the FDIC ‘s ac- tions as receiver of failed banking institutions. The FDIC is concerned that insurance companies will insert a “regulatory” exclusion in a bank’s D&O policy—usually on renewal. The exclusion will block or impede FDIC, as receiver for failed banks, in recovery in its lawsuits against former directors. On the other hand, CMPs are used as punishment for the wayward director or officer. The FDIC’s prohibition of a CMP endorsement appeared on my radar when I learned of the OCC’s citation of a New Mexi- co community bank for its D&O coverage for CMP by endorse- ment. Unfortunately, for now, the law on directors and officers bearing the cost of a separate CMP endorsement is clear. A bank may not purchase CMP endorsement coverage, even if the director or officer reimburses the cost. One insurance blog sug- gests that director and officers could purchase stand-alone CMP coverage or add CMP coverage to homeowner policies. Frank Carroll, of the Dallas law firm Cox Smith, is an expert in FDIC litigation. He observes “we know of no insurer in this market that offers standalone CMP policies to Ds or Os – the pricing for such coverage would be prohibitively high…” Carroll added that such policies would require state insurance regu- lator’s approval, which might be unlikely in view of the FDIC position that such coverage is contrary to public policy. Given the size of the New Mexico market the odds of such standalone coverage are even more remote. One bright spot: the FDIC regulation clearly allows a bank to purchase insurance for the cost of the defense of director and officer CMP claims (12 CFR s 359.1(l)(2)(i)) Directors and offi- cers do not have to reimburse the bank for such coverage. Car- roll warns that some OCC and FDIC examiners do not know the rule and may cite the bank. Joe Lujan and Jim Rhodes of Hub International (formerly the Lujan Agency) confirm that the cost of defense coverage is avail- able in NewMexico. CMP coverage is not available--standalone or as an endorsement. In some policies cost of defense may already be included in the general cost of defense for all D&O coverage. However, that is not true of all D&O policies. Rhodes reported one insurance broker termed the cost of defense mar- ket as “evolving”. The subject of D&O insurance is critical to your bank, its offi- cers and directors. Critical steps to take: • You should carefully review your D&O policy for exclusions with an attorney who knows D&O insurance coverage for banks. No matter how healthy your bank is, this review should occur yearly--preferably at renewal. • You should insure that your policy does not have the forbid- den CMP endorsement. • If so, replace it with cost of defense coverage (for which the bank can pay). This cost of defense coverage is essential to your directors since expert legal assistance in CMP proceed- ings may save them money. It may be included in your pres- ent D&O policy but make sure it is. n Marshall G. Martin, Tinnin Law Firm, (505)768-1500 (office), (505) 228-8506 (cell) mgm@marshallgmartin, mmartin@tinninlawfirm.com