Magazine article American Banker

Insurance Issue May Lead FDIC to Quit Suing

Magazine article American Banker

Insurance Issue May Lead FDIC to Quit Suing

Article excerpt

WASHINGTON - The deluge of Federal Deposit Insurance Corp. lawsuits against directors and officers of failed banks may be drying up.

Insurance companies are refusing to cover bankers sued by the government, and the FDIC has been unable to convince the courts to force the insurers to pay up.

Alfred J.T. Byrne, the FDIC's general counsel, acknowledged that the unavailability of insurance companies' deep pockets meant fewer so-called D&O suits would be filed.

Unless, of course, the director or officer in question is rich. "It just may be that the source of recovery will shift in an important and maybe a dramatic way from insurance companies to the net worth of individuals," he said in an interview.

A good example of the FDIC's dilemma is the agency's case against 67 directors and officers of the failed First RepublicBank Corp. of Dallas. The FDIC hammered out a $32 million settlement last year, $14 million of which was to be paid by First RepublicBank's insurer, National Union First Insurance Co. of Pittsburgh.

Court Backs Insurer

But National went to court and persuaded a judge that First Republic's policy allowed the insurer to deny claims if bankers were sued by a regulatory agency. Directors-and-officers insurance costs substantially less with such a "regulatory exclusion." Hence many policies contain the clause.

With National off the hook, the FDIC had to rework the settlement. That deal, reported by The Dallas Morning News on Wednesday, is expected to yield the FDIC only $23 million.

The government and the officers and directors all lose: The FDIC gets $9 million less and the defendants pay $8 million more than in the original settlement. (A secondary insurance company is paying $1 million.)

$3.4 Billion Collapse

The 1988 failure of First RepublicBank is the most expensive ever, expected to cost the FDIC $3. …

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