While problems at large financial institutions have received more attention during the financial crisis, community and regional banks have also been greatly affected.
“As of June 25, there are 89 banks that have failed in the United States this year,” says John George, vice president, business development with Aon Risk Services Central, Inc. “This is well above the pace of the 140 that failed in all of 2009. With approximately one of every 10 banks currently operating in the U.S. listed on the FDIC ‘troubled banks’ list, the issue looks to be far from being resolved.”
And that increasing rate of failure is making it more difficult for community banks to protect their directors and officers.
Smart Business spoke with George about how changes in community banking are affecting directors and officers liability insurance and how banks can protect themselves.
How is the community banking D&O marketplace changing?
The current situation is radically different than the environment in which community and regional banks have historically operated. The community banking space was long considered very safe business by directors and officers liability underwriters. As a result, coverage was available on multiyear policies at extremely attractive pricing. But that has changed for almost all banks.
Policy terms are now less favorable to the insured bank, while at the same time, coverage is more expensive and deductibles are increasing. Banks are finding that it is not uncommon for premiums to increase by multiples at renewal rather than by just a few percentage points.
How is this affecting D&O insurers?
During the savings and loan crisis in the late 1980s and early 1990s, the FDIC established a practice of filing suit against the former directors and officers of failed financial institutions, and it is doing so with banks that have failed during the current banking crisis.
There are recent instances in which the FDIC has made demands for payment of civil damages against former directors and officers of failed banks, and it has filed claims directly with the failed bank’s D&O carrier.
Insurance carriers are looking for ways to limit their exposure to costly claims, and mid-term cancellations are not uncommon if the existing policy allows it. Notices of nonrenewal are also being issued if the insurance carrier is not comfortable with the bank’s performance. If the carrier does offer renewal terms, they often contain new endorsements that limit the most likely types of claims.
Because most bank failures are extremely expensive for the FDIC to process, the agency is looking for any avenue through which it can recapture some of that expense. Banks that do not have adequate limits in place, or that do not have their coverage structured in such a way that it will respond to those claims, must look to other sources of funds to address those demands.
