By Kessinger, Carolyn C.; Ardis, Patrick M.
American Banker , Vol. 156, No. 188
Directors, Officers Can't Risk Banking Without Insurance
Directors and officers of financial institutions are particularly vulnerable to professional liability suits.
They must protect both depositors and stockholders. And, technically, they may be held liable for any losses sustained by the institution, its depositors, or its shareholders.
One might think that if the directors and officers of a financial institution exercise reasonable care and diligence in performing their duties, they would not be subject to liability suits. Unfortunately, this is not the case.
In recent years, regulatory agencies such as the Federal Deposit Insurance Corp. or the Resolution Trust Corp., and/or shareholders, have seldom failed to sue all of the directors and many of the officers of an institution that has closed - or almost closed - because of excessive bad loans, insider dishonesty, or both.
Purpose of Liability Insurance
Not all employees are covered by D&O insurance, although some carriers - by endorsement - may provide this additional protection. With the exception of the corporate reimbursement section, the corporate institution itself is not insured.
D&O insurance indemnifies past and present directors and officers of an insured corporation and its subsidiaries against claims arising from their alleged wrongful acts, including "errors, misstatements, misleading statements, acts or omissions, neglect, or breach of duty."
A clear distinction has to be drawn between claims and suits against a corporation for its alleged wrongful acts and those taken against directors and officers personally. D&O insurance does not help the corporate institution with its direct liabilities. It does protect the directors and officers personally, and the corporate institution insofar as it may indemnify or reimburse the directors and officers.
As indicated by court papers, shareholders or liquidators have commonly alleged that directors and officers of financial institutions and/or companies have assented to, or failed to prevent:
* Repeated violations of the company's written lending policy.
* Numerous improvident lending transactions.
* Numerous loans to individuals and/or entities that were not creditworthy or not within the normal lending territory.
* Numerous improvident concentrations of credit.
* Loans made without adequate collateral.
* Loans made without a current credit check on the borrower.
* Loans made without properly perfecting the company's security interest in the collateral.
* Excessive and/or improvident overdrafts.
* Improvident borrowing practices by the company.
* Improvident internal control and audit practices.
According to the Wyatt Co.'s 1989 report, 24% of the financial institution D&O suits were brought by stockholders and 13.4% by governmental agencies. Protection from stockholder derivative suits is limited or eliminated under many of the D&O policies marketed today. The regulatory exclusion eliminates suits for all governmental agencies.
D&O policies, unlike blanket bonds, are not written in a standard form. Coverage is based on a blending of the most common clauses.
Each policy must be carefully reviewed to determine its precise coverage. Policies are usually issued on a blanket basis (without the need to schedule directors and/or officers by name or position) with the premium paid by the insured organization.
D&O policies are generally written on a "claims made" basis, providing protection for wrongful acts committed before or during the policy period but discovered during the policy period. D&O insurance may be a financial institution's broadest safety net, covering risks that are not covered or adequately protected by its fidelity, computer crime, and other policies. …