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Bank Failures And FDIC Actions Update

As seen in the chart below, the number of bank failures in 2011 dropped from the highs of 2010 and 2009.

But the number of bank failures in 2011 is still significantly greater than the relatively low numbers prior to 2008. In recent years, the Federal Deposit Insurance Corporation (FDIC) has authorized suits in connection with 54 failed institutions, naming 469 individuals for Directors and Officers (D&O) liability with damage claims of at least $8 billion. This includes 27 filed D&O lawsuits naming 222 former directors and officers. However, the FDIC doesn’t file an action against the directors and officers of a bank just because the bank fails. In fact, the FDIC only brought claims against the directors and officers of 24% of the bank failures from 1985 to 1992.

Annual Number of Failed Banks Since 2000

Statute Of Limitations
When they act as a receiver, the FDIC has three years from the time a bank is closed to file suits for tort claims and six years to file breach-of-contract claims. If there is a longer statute of limitations permitted in a specific state, the longer statute is followed. Prior to bringing an action, the FDIC conducts an investigation into the causes of the failure. The investigations are generally completed within the first 18 months following the closure of the institution.

The FDIC will often seek a settlement prior to filing the claim in order to manage expenses. Available assets and potential insurance proceeds are considered when the FDIC contemplates filing suit and seeking damages.

FDIC Suits Authorized D&O Defendants Damage Claims ($ millions)*
Authorized in 2009 11 $366
Authorized in 2010 98 $2,123
Authorized in 2011 264 $5,110
Authorized in Q1 2012 96 $401.1
Totals 469 $8,000.1

* Losses typically exceed these amounts and may result in higher damage claims in filed lawsuits. Recovery on these claims is dependent upon available recovery sources, such as insurance and personal assets, and competing claims. http://www.fdic.gov/bank/individual/failed/pls/index.html

Personal Liability
According to the Federal Deposit Insurance Act 11(k) (FDIA): “Liability Of Directors And Officers. A director or officer of an insured depository institution may be held personally liable for monetary damages in any civil action by, on behalf of, or at the request or direction of the Corporation, which action is prosecuted wholly or partially for the benefit of the Corporation (FDIC) … for gross negligence, including any similar conduct or conduct that demonstrates a greater disregard of a duty of care (than gross negligence) including intentional tortious conduct, as such terms are defined and determined under applicable State law.”

What Does This All Mean?
As discussed above, bank failures frequently lead to suits brought by the FDIC against the directors and officers of a failed bank. The potential for damages is substantial, and the individuals can be held personally liable per section 11(k) of the Federal Deposit Insurance Act.

Further, litigation brought by the FDIC does not preclude actions brought by other creditors or shareholders of the bank. Since merger activity is one of the leading causes of litigation against directors and officers, and 94% of banks are acquired rather than fail, the risk of litigation against the directors and officers of financial institutions is meaningfully higher than in other industries.

Because the underwriters of Directors and Officers insurance are acutely aware of these factors, their underwriting guidelines will be extremely stringent — if they will even consider this class of business. Typical D&O policies, including Side A D&O policies, can respond to actions brought by the FDIC. It is important to watch out for regulatory exclusions that could preclude coverage. It is also important to negotiate a waiver of the bankruptcy stay on a primary D&O policy so the policy proceeds do not get frozen by a bankruptcy trustee in order to pay liabilities of the corporation ahead of the interests of insured individuals.

As a wholesaler in professional and management liability insurance, AmWINS has many markets that are providing insurance to banks of all sizes and financial conditions. The more distressed the bank, the more difficult the placement will be, so it is important to gather and provide as much information as possible. A high quality submission will influence the perception of the underwriters.