RISK & INSURANCE®
SPECIAL REPORT: LIABILITY
APRIL 2012
Rates Harden a
Community
Financial Services Department in New York.
As of Feb. 14, the FDIC has authorized suits in
connection with 49 failed institutions against 427
individuals for directors’ and officers’ liability with
damage claims of at least $7.8 billion, according to
the agency’s website.
This includes 22 filed directors’ and officers’
lawsuits (two of which have been dismissed after
settlement with the named directors and officers)
naming 182 former directors and officers
Considering the statute of limitations is three years
from the date of failure or when the FDIC takes over
as receiver for the bank, the agency has sufficient
time to file lawsuits based on the 140 failures in 2009
and the 157 failures in 2010, Psaki said.
“These were the peak years of bank failures
associated with the recent credit crisis and could
result in significant insurance payouts in the years
to come,” he said.
Some insurance carriers have refrained from
offering coverage to any bank under a regulatory
enforcement action, Psaki said. Other carriers,
such as Arch Insurance, seek to differentiate these
banks by examining the nature and severity of the
enforcement action.
For those banks under a severe cease-and-desist
order or prompt corrective action, the insurance
available is very limited, he said. The options may
be for limits of $3 million or less with restrictive
terms, such as prior acts exclusion, regulatory
exclusion, major shareholder exclusion, and/
or no entity coverage.;Alternatively, the scope of
regulatory coverage might be subject to a sublimit
of coverage or apply only to defense costs, with no
indemnity coverage.
John Kerns, managing director at Beecher Carlson
in New York, said that his brokerage has been able
to find specialty markets that provide directors’
and officers’ coverage for banks under a regulatory
enforcement action. Initially capitalized in Bermuda,
these carriers are now starting to deploy capital
toward community banks that have “a good story.”
“We found some carriers willing to sit down with
a bank CEO, who can explain that for the next two
years the bank will produce enough core earnings,
and while they don’t have the level capital that a
bank wants, they are not going to fail,” Kerns said.
The premiums on these policies don’t come
cheap. Premiums are now five to 12 times higher
than the prior average premium of $10,000 per $1
million in coverage, for a typical community bank
before the financial crisis, he said.
IronPro, the New York professional liability and
management division of Bermuda-based Ironshore
Inc., has provided insurance to a few dozen of
those banks that find themselves in that “trying to
increase my pulse” stage, said Greg Flood, IronPro’s
president.
“We’re pricing in risk of failure,” Flood said.
Some of the new entrants to this marketplace
are also unbundling the “A-side” of directors’ and
officers’ coverage, to provide dedicated protection
for individual directors and officers, said Michael
O’Connell, managing director of Aon Risk
Solutions’;Financial Institutions Practice in New York.
On bundled policies, fidelity or errors and
omissions claims can dilute or eliminate potential
directors’ and officers’ coverage altogether,
O’Connell said. But now banks can have the limits
they need.;
AP PHOTO/SE TH PERLMAN
THE FIRST National Bank in Staunton, Ill. The mortgage crisis has raised directors’ and officers’ rates for community
banks, but banks can still get reasonable coverage if they “have a good story to tell,” according to one professional
liability expert.
Small banks can still get the coverage they need if they are willing to
explain how they have lowered their risk profiles. By Katie Kuehner-Hebert
Before the financial crisis, community banks
enjoyed a soft market for directors’ and officers’
insurance, as loan losses, bank failures and lawsuits
from shareholders and regulators were relatively low
in the go-go years when housing development raged
and the economy hummed.
But the soft market changed drastically in 2008
after the subprime meltdown caused residential
construction across the country to halt, resulting in
heavy losses for community banks that had made a
lot of loans to developers.
Carriers became concerned with the rapid rise
in bank failures—426 since the beginning of 2008—
and the subsequent threats of lawsuits on banks and
their principals from shareholders and the Federal
Deposit Insurance Corp.
As a result, the terms and conditions of directors’
and officers’ policies have been substantially
restricted for much of the industry and prices have
hardened for nearly all.
The good news for community banks is that
most can still get the coverage they need if they
are willing to explain to carriers just how they have
lowered their risk profile so that they’ll not only
survive, but perhaps even thrive once the economy
fully recovers, insurers and brokers said.
Summary
• The rise in the number of bank failures has raised
concerns among underwriters of directors’ and
officers’ coverage.
