Product Puts FDIC Powers in New Light

Article excerpt

Byline: Joe Adler

WASHINGTON - Although doubts persist about whether federal banking regulators will ever really employ new powers to seize a large nonbank financial company, a new insurance product may signal the market's belief that such authority will one day be used.

The insurance broker Marsh USA Inc. recently unveiled protection for the prospect that the Federal Deposit Insurance Corp. - authorized by the Dodd-Frank Act to resolve firms too big for bankruptcy - could someday try to punish officers of a failed company by reclaiming their salaries.

Observers said the coverage, offered by two carriers, reflects market views that the FDIC's powers are more than just abstract, and that directors and officers of systemically important holding companies, equity funds and other firms could face similar risks of FDIC action that already haunt scores of failed banks.

"The bottom line is any insurance company that sees a need and sees a void is going to come up with a product to deal with that eventuality," said Kirby Behre, a partner at Paul, Hastings, Janofsky & Walker LLP. "This is speculating, but it very well could be that they're predicting some sort of uptick in these types of takeovers."

Under Dodd-Frank, the FDIC is responsible for resolving certain failed companies deemed systemically risky. When it takes over failed banks, the agency can now pursue civil damages against those accused of having a role in the failure, and in some cases it has sought compensation. Since the recent crisis, the FDIC board has authorized lawsuits against more than 180 defendants - although only six suits have been filed - seeking $3.8 billion in claims.

The new law makes such lawsuits possible for directors and officers at seized nonbanks as well. It also expressly allows the FDIC to cancel compensation agreements for managers at such firms or claw back their compensation earned over a prior two-year span.

While a nonbank's general D&O policy - meant now for proceedings such as shareholder lawsuits - could likely be used to cover future FDIC litigation, the products that Marsh is marketing target the risk of lost compensation, which are not typically covered. The new products also enhance coverage for defense costs.

"This is something that is meant to be a supplement to a professional liability policy," said Mark Cuoco, a managing director at Marsh.

Nevertheless, he said, the new resolution system may force companies that never considered D&O insurance of any kind to change course, even those not sure they would be big enough to be considered systemically risky.

"What we might see is more hedge funds and other financial companies purchasing professional liability that never purchased it before," Cuoco said. In an April 21 press release announcing the new coverage, Cuoco said the FDIC's "dramatically expanded authority" poses "significant personal risks to executives, directors and partners of financial companies."

Kevin LaCroix, an attorney and executive vice president for OakBridge Insurance Services, a D&O provider in Beachwood, Ohio, said boards and officers at nonbanks are likely not as familiar as they should be about the risks from FDIC actions. "Chances are they're not fully informed about these concerns. Dodd-Frank is such a monster, and" the sections on potential FDIC claims are "buried pretty deeply," he said. "They probably need to pay more attention to the liability provisions in the statute."

Yet many said companies could be taking a risk of purchasing a policy if they do not ultimately need it. …