November 2011 we reported that there
was activity by FDIC examiners whereby they were citing banks for carrying the Civil
Money Penalties endorsement for scheduled Directors & Officers on the
bank's D&O policy. May 30, 2012 delivered a new chapter to the
saga when legislation was introduced that would prohibit executives from
purchasing civil money penalties coverage or any other type of "clawback"
coverage to protect them from penalties intended to be punitive in nature.
bill was introduced by Representative Barney Frank and is entitled, "Executive
Compensation Clawback Full Enforcement Act". Experts in the insurance industry believe
it's likely to pass because there's no significant opposition. The Civil Money Penalties coverage developed largely
due to competition - if one carrier offered it, everyone else had to follow or
they would lose market share. A few
insurance carriers elected not to provide the coverage, but soon were forced to
add it, just to gain or keep business.
Simultaneously, the cost for the coverage has historically been cheap -
not an exaggeration - at $25 per director or officer, it has been too cheap for
many banks to pass up! Recently, due to
the controversy, some insurance carriers have been adding the endorsement, upon
request by the bank, to the bank's D&O policy. Without additional premium,
there's no money in it for the insurance industry - so they're not expected to
challenge the new legislation.
proposed Act allows insurance for an individual's defense costs. The insurance
industry's traditional D&O policies generally allow for defense costs for
these types of allegations; however the penalties and returned compensation
amounts associated are the real questions of the argument. If Representative Frank's
bill is passed, it's likely that those questions will be answered. Most insurance carriers and brokers, which
have been wrestling with the dilemma for the past year, will welcome the
resolution of these issues. Unless
there's a call from the banking industry to take on the challenge we believe
the Civil Money Penalties endorsements will be removed from policies, with a
return of the unearned premiums as soon as the bill, as written, becomes law.