Plan May Lift Insurance Fees For Officers
WASHINGTON - The price of liability insurance for bank directors and officers could skyrocket if the Bush administration persuades Congress to make a subtle change in the 1989 thrift-bailout law.
The amendment would prevent insurance companies from denying damage claims by regulators against officials of failed banks. The change would expose insurers to greater risk - and probably raise the premiums banks would pay to any insurers still interested in providing the coverage.
The Federal Deposit Insurance Corp. is leading the lobbying effort in Congress to effect the change, which would reverse court decisions that have blocked that agency from recovering money from people involved in bank failures.
Current directors' and officers' policies, known as D&O insurance, offer a "regulatory exclusion." It allows an insurance company to deny claims if a director or officer is sued by a regulatory agency.
Banks often accept the exclusion because it significantly lowers the cost of D&O policies. But the exclusion would be outlawed if the FDIC has its way.
In 1990, the FDIC collected $373 million from insurance companies through D&O claims; in the first six months of this year, the figure was $208 million.
John Thomas, an FDIC associate general counsel, said he could not quantify what the agency has been unable to recover because of the exclusion. He suspects it is "substantial."
In its most recent legal setback, on Sept. 20, the deposit insurer lost the only such D&O liability case to reach the appeals court level. The U.S. Court of Appeals for the Eighth Circuit in St. Louis ruled that American Casualty Co., Reading, Pa., did not have to pay off the FDIC's claims against nine former directors and officers of Farmers National Bank of Aurelia, Iowa.
Meanwhile, former directors and senior officers of First RepublicBank Corp. in Texas are suing National Union Fire Insurance Co. of Pittsburgh for failing to protect them from a $100 million federal lawsuit. The bank had purchased a policy with an exclusionary clause.
The thrift-bailout law required the FDIC, in conjunction with the Treasury and Justice departments, to study the limits of directors' and officers' insurance. The report was due in January 1990, but was completed only last week.
The FDIC is facing an uphill fight for congressional relief.
With a major banking reform bill wending its way through Congress, Treasury has higher priorities. In addition, the banking industry is expected to lobby against any change in the D&O provision.
Premiums Would Soar
If the regulatory exclusion were to be taken away, bank directors and officers would face huge premiums - if they could get the coverage at all, said James McLaughlin, director of agency relations for the American Bankers Association.
Mr. McLaughlin added that banks may have more difficulty attracting outside directors if they have less insurance coverage.
"The price of D&O insurance would go through the ceiling, particularly for a bank that was troubled, or else they wouldn't even be able to get it," said Diane Casey, executive director of the Independent Bankers Association of America.
"The regulators are using this as a means to recover losses for the Bank Insurance Fund, and the insurers are saying that's not what D&O insurance is for."
Right now, a top-rated bank with $10 billion to $20 billion in assets can get $10 million in coverage with the regulatory exclusion for $500,000 a year, according to Steve Sills, President of Aetna Executive Risk Co. in Los Angeles. Comprehensive coverage - lacking the exclusion - would not cost much more for a top bank, but it could make a significant difference for poorly performing banks.
John Thomas, who runs the FDIC's the professional liabilities section, said he has seen banks paying as much as $300,000 for $1 million of coverage.
"We see very little justification for banks spending a lot of money on policies that will not provide coverage if the bank fails," he said.
Mr. Thomas said the FDIC is aware that dumping the regulatory exclusion could force up premiums, but the anticipated effects do not outweigh "the problems caused by the current situation."