Pub. 2 2013 Issue 6

l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s 24 T he regulatory exclusion removes cov- erage for lawsuits filed by the FDIC against bank directors after a bank has failed. The only time that bank directors are subject to lawsuits filed by the FDIC, other than Civil Money Penalties, is after the bank has failed. he real problem is that if you allow that regulatory exclusion to be removed from your policy and your bank has a poor year or two, like many banks had during the mid-1980s, the insurance company will cancel the coverage before the bank has time to fail. That is not to say that all insurance companies are bad and will cancel your coverage if your bank gets in trouble. The fact is that if your bank is likely to fail, it is prudent business for the insurance company to cancel your coverage because the FDIC will sue your directors upon the failure of the bank if there is insurance available. It will be difficult, if not impossible, for your bank to purchase D & O insurance from another company when your bank is in financial trouble; thus, no protection at all for your Directors and Officers. If the regulatory exclusion is in the policy and your bank has a bad year or two, there will be no fear of the FDIC lawsuit and the insurance company will not cancel your coverage during bad times. You may think that no good insurance company would cancel cover- age because a bank has a bad year or two. However, most contracts contemplate a fairly even exchange of values. That is, a seller thinks that the price paid is about equal to the value of the goods and the buyer expects to get goods equal to the price paid. In an insurance contract, the buyer pays a very small premium for the insurer to assume the risk to pay a very large amount of money under conditions that probably will not occur. Directors and Officers insurance is a guarantee of being sued by the FDIC when the bank fails, and an absolutely guaranteed very large loss to the insurance company that received the very small premium. The insurance company has no choice. It must cancel your coverage when the bank gets into economic trouble. Let us put the same situation in banking terms. If I had a net worth of three million dollars, your bank would be happy to loan me $50,000 and renew that note without any problem. If I should lose that $3,000,000 on poor investments or lose a lawsuit so that my net worth was only $8,000, your bank would not renew the note or loan me any more money. That is just good business judgment on the part of the loan officer. That is the same as the insurance company that will not continue your insurance when your bank is likely to fail. It is in your bank’s best interest to have a policy with a regulatory exclusion so that the policy is not likely to be cancelled by the insurance company if you have a bad year or two. Having the regulatory exclusion removed from the Directors and Officers policy does not mean Civil Money Penalties imposed by regulators are covered. It is against the law for a bank to indemnify its directors and officers for fines and penalties imposed by law and it is against the law for a bank to use bank funds to pay a premium to protect the bank’s directors and officers for Civil Money Penalties imposed by bank regulators. For more information, please give us a call at (785) 228-0000. SECURITY OFFICER’S BY-WORD NEVER ALLOW THE REGULATORY EXCLUSIONS TO BE REMOVED FROM THE BANK’S DIRECTORS AND OFFICERS POLICY By DonaldM. Towle, President Kansas Bankers Surety Company