Bank Civil Money Penalties Insurance Update

A note from a client today – to his agent, cc to me:


Bob (not the agent’s real name),
With the many new laws, regulations and agencies to enforce them, we are concerned about the possibility of errors in the mortgage lending area and possible fines related thereto. 
It is our understanding that it is possible for the institution, and the loan officer as well, to be fined or penalized even for unintentional errors.
Do we have coverage for the bank and/or the loan officer if such an event occurred?



My reply:

Wes (again, not the real name),

Rarely are fines and penalties insured.  Your car insurance does not pay your speeding ticket.  (Not to minimize the impact of an FDIC fine.)

Some D&O policies include civil money penalties coverage.  It is less and less desirable due to regulators position on the pain they are trying to inflict.  Insurance for fines equals less pain to the individual.  Recall that these fines are probably not indemnifiable by the bank either.

Here are something I wrote last November on the subject –

Here is my current position – solidified just yesterday after conversations with bankers, lawyers, and regulators over the past six months…

While civil money penalties insurance may be a desirable risk management tool for individuals, I do not think it is in a bank’s best interest to have it on their d&o insurance policy.  I agree with the bankers who tell me it sends the wrong signal to regulators about what the bank is about.

FDIC has made it quite clear that they do not like civil money penalties insurance paid for by a bank.  Some insurers put the premium on individual directors – to make the case that the bank is not buying the coverage.  

In private conversations, representatives of the FDIC have told me that such is still outside of their intent.  Their position is that a bank’s officers should not have insurance against a fine/penalty.  CMPs are to be a penalty.  Insurance means less pain.

I think it is just a matter of time before we see a civil money penalty assessed because a bank has civil money penalties insurance.

The issue of truly separate insurance is another matter.  Perhaps someday an insurer will come up with a policy that individual directors can buy.  I’m a free-market guy.  If I were on a bank board I might like to have that like I have personal liability insurance.  As of now I am unaware of any such policy.  (Tell me if you know of one.)  Until then the discussion on the ethics of such is of little use.

In short, if the regulators don’t want CMP insurance on a bank’s policy it should probably not be there.  Who wants the added scrutiny.

Glad to talk.