A new insurance product promises to cover individual directors' and officers' legal costs if they are sued.
Directors Defense Cost, to become available in July, insures bank executives for legal costs up to $300,000, regardless of the institution's role in the lawsuit.
Arthur B. Seifert, president of ECS Group, an insurance company based in Bethesda, Md., said his product is the first of its kind, since it covers four areas that account for more than 80% of actions against directors: regulatory actions, discrimination and sexual harassment, environmental pollution, and activity on nonprofit boards.
'A Way to Fight Back'
These areas are typically excluded from coverage under D&O policies, he said.
"This gives bankers a way to fight back," said Mr. Seifert.
Mr. Seifert estimates that 80% of D&O lawsuits are settled before trial, mostly because executives are afraid of legal costs.
The product, which is under-written by the AIG Co., has been in development for the past three years. It will cost between $18,000 and $22,000 per director, depending on variables such as the bank's asset size and the experience of the board.
Mr. Seifert said he expects the next wave of D&O suits to be over consumer regulations, especially the Community Reinvestment Act.
He said his primary target is the 87,000 directors at banks with less than $175 million of assets.
Eligibility
Mr. Seifert said he will use bank rating services to determine whether applicants are qualified for the insurance. "If you're average or better, that's what we're looking for," he said.
Nevertheless, he said, he is willing to consider troubled banks that have a clear record of trying to do better.
Mr. Seifert said he expects to write 2,000 policies in the first 18 months.
"The most difficult hurdle will be to educate directors that this provides what has never been offered before," he said.
To apply, directors are asked to fill out an eight-question form and to have their comptroller fill out an application asking about the management of the bank, its assets, number of overdue loans, and other questions that can help ECS decide if the bank is healthy.
Every member of a board may buy the policy, although each must do so individually.
