In the wake of the savings and loan crisis of the 1980s, insurers and bankers feuded over directors and officers' liability policies. At issue: whether D&O policies covered claims brought by the Federal Deposit Insurance Corporation against a failed bank's officers. Years of messy litigation failed to settle the question conclusively, and insurers responded by tightening their policies with ironclad exclusions of future FDIC claims.
But with few bank failures in the decade and a half that followed, insurers began loosening their terms in an effort to attract new business.
Now, with hundreds of banks having been seized, bankers, insurers, and the FDIC are on the verge of picking up coverage disputes where they left off. Only a few examples of such disputes have landed in court so far, but there are potentially billions of dollars of insurance claims on the line.
"The FDIC has been proceeding so gradually with filing [director and officer liability] suits that the truth-telling about this problem has been kicked down the road," says Kevin LaCroix of Oakbridge Insurance Services, which acts as an intermediary between specialty insurers and purchasers. "There's going to be a point when there are enough of these cases to have an impact."
The parties involved are already seeking to test the limits of the policies' coverage. Directors of Puerto Rico's WesternBank are seeking a determination in Puerto Rican court that would require Chartis Insurance, a subsidiary of AIG, to indemnify them against at least $50 million in yet un-filed FDIC claims.
In the case of Michigan's Heritage Bank, Progressive Casualty Insurance Company is asking for a declaratory judgment absolving it from responsibility for the FDIC's claim against a loan officer who allegedly "routinely ignored the Bank's Lending Policy and prudent lending practices."
With the failed Silverton Bank, the FDIC itself is seeking a court's blessing to tap two Chubb insurance policies in a $71 million suit alleging that Silverton's leadership behaved recklessly and plowed the struggling bank's money into private jets.
In all of these filed cases, the debate boils down to whether the policies protect bank directors from suits brought by a bank's receiver or another regulator.
In most cases, such insurance relieves an insurer of having to pay claims brought by one insured party against another. A bank could not, for example, seek to recoup losses due to mistakes made by its own management. Many policies also include some level of "regulatory exclusion," protecting the insurer from government claims.
Whether the FDIC counts as an outside party has been a thorny question. Because the FDIC is the receiver of a bank at the time of its failure, some courts have found that the agency becomes the bank and is thus ineligible to make an insurance claim. Others have ruled that this "insured versus insured" exclusion doesn't apply to the FDIC, as long as the agency can prove it is acting on a third-party's behalf.
The basis for determining whether an insurer is responsible can get even more muddled still. Some policies contain "carve outs" and "carve backs" in their exclusions of regulatory claims. According to LaCroix and others, some polices even make exclusions to the exclusions. The FDIC might not be allowed to file a claim as an agency, for example, but might have the right to do so under a provision that allows a bankruptcy trustee or a liquidator to bring a similar action.
The insurance industry played a part in bringing about this situation, said LaCroix. If it had left a simple regulatory exclusion in the contracts, the FDIC and bank directors would have no case at all in such cases. But the wording of the insurers' policies became more generous-or at more least vague-as time went on.
"Underwriting discipline is an oxymoron," LaCroix says. "The industry is very competitive."
