Bank Safety & Soundness Advisor Covers Manatt’s D&O Insurance Webinar

"3 D&O Coverage Traps"
Bank Safety & Soundness Advisor

May 7, 2012 – Bank Safety & Soundness Advisor published an article that recapped the Directors and Officers (D&O) liability insurance tips that were provided by Manatt partners Harold P. Reichwald, Amy B. Briggs and Phillip R. Kaplan in their webinar titled "Bank On It: D&O Insurance Counts."

The Manatt-hosted webinar was held on May 1, 2012, and examined the issues associated with D&O insurance that a board of directors should consider when faced with a new or renewing policy. Reichwald, co-chair of the firm’s Financial Services & Banking Practice, moderated the webinar and warned banks to know their coverage, since Federal Deposit Insurance Corporation (FDIC) lawsuits are on the rise.

"The regulatory exclusion isn’t the only way an unwary bank can lose coverage. FDIC lawsuits are expected to increase throughout 2012 and into 2013 as the FDIC is running out of time to file suits against banks that failed towards the beginning of the financial crisis," said Reichwald. He suggests banks understand their coverage if they want to avoid "a two-front war, where the directors and officers are funding their own litigation defense against the FDIC from their own pockets while, at the same time, suing their carrier for coverage."

Kaplan and Briggs, both of whom are in the firm’s Litigation Division, spoke about the key “traps” surrounding D&O insurance, including the notice provision, the insured v. insured exclusion, and the fraud/personal profits exclusion.

Briggs noted that even the most sophisticated entities with risk management departments and sophisticated brokers have trouble with the notice provision. "They’ll end up providing notices that don’t comply [with the coverage terms] or fail to send the required notice at all." The trick is to understand what, exactly, the rules are that govern the notice.

The insured v. insured exclusion was originally designed to protect carriers against collusive and/or internecine lawsuits, and some insurance companies have applied the exclusion to bank failures. When the FDIC steps in as conservator of a failed bank, it becomes an insured party and any suit between the regulator and the failed bank officers and directors will trigger the exclusion. Briggs said that even though the stronger arguments support the failed bank officers’ position, the legal record for claiming exclusions like this in the wake of bank failures is “mixed.” Banks need to understand how a policy defines each kind of claim and how such claims should be reported.

There are rules that govern when and under what circumstances the fraud/personal profits exclusion can be triggered. According to Kaplan, there are three types of triggers coverage can include: ‘final adjudication’ language, ‘in fact’ language or a hybrid of the two. ‘Final adjudication’ is the "gold standard for coverage," said Kaplan, because the insurance company can’t sever coverage until the final adjudication of a case. With the other two types of language, carriers can try to sever coverage at points prior to that, which means that banks may have to sue to get coverage back. Kaplan recommends that banks insist ‘final adjudication’ language be included in coverage.