Towards the end of 2013: the FDIC provided suggestions regarding D&O liability insurance for bank failures and other losses to financial institutions; the FDIC reported that the trend in bank failures continues to improve; and governmental investigations and securities suits continued to evolve.
FDIC Provides Suggestions Regarding D&O Liability Insurance
The apparent reductions in bank failure losses should be reflected in improvements in D&O and E&O losses or other losses to financial institutions. The FDIC also issued a Financial Institutions Letter (FIL) on October 10, 2013, which unusually suggested that directors and officers of financial institutions “clearly understand” the recent additions of “exclusionary language” in D&O policies, since the changes may “limit coverage.”
The October 10 FIL notes that, “D&O” liability insurance is an important risk mitigation tool for financial institutions…” The FDIC may well be protecting its interests as a receiver in situations when it may make claims against directors and officers of failed banks, as liability insurance often forms an important asset in such recovery efforts.
Trend In Bank Failures Continues To Improve
During the third quarter of 2013 the trend in bank failures of FDIC insured institutions continued to improve. The number of banks on the FDIC’s “Problem List” declined for the 10th consecutive quarter from 553 to 515, and total assets at the “problem” institutions fell from $192.5 billion to $174.2 billion. Also during the third quarter, forty-three banks were absorbed in mergers, and six institutions failed.
D&O Issues–Investigations and Securities Suits
Increased regulatory scrutiny has led during 2013 to classic securities lawsuits. Traditionally, an SEC investigation might lead to a securities suit, and that tradition continued in 2013. Further Foreign Corrupt Practices Act (FCPA) investigations also led to class action lawsuits, for example involving Walmart of Mexico.
Similarly, such suits followed investigations by U.S. Department of Health and Human Services, State Medicare Fraud Limits, and the U.S. Department of Agriculture. It may well be that such recent losses following diverse governmental investigations will continue the upward trend in 2014.
No claw-back from the acquitted
In August 2013, a Delaware Superior Court dismissed an attempt by an AIG subsidiary to recoup defense costs advanced on behalf of directors and officers who were eventually acquitted of charges or had all charges dropped. The court-ordered dismissal of the insurance company’s attempt at recoupment of defense costs expended in the successful defense took place after the insurance company agreed to withdraw its claims to recouping defense costs previously advanced. The dismissal confirmed the finality of advancement of defense costs in this significant D&O liability insurance matter.