Civil Money Penalties Insurance & Banks

Lots of heat (and little light) lately in the discussion of civil money penalties insurance within bank directors’ and officers’ insurance.  
I talked with a client today on the issue and promised a letter he could send to his attorney.  (Names changed…)
Bill and Steve,
We discussed the issue of civil money penalties today.
Your current policy provides $100k per director and $1m for the total of all claims.
Attached is a letter sent out by the LA Bankers’ Association.  Many have called this overkill.
Here is the question I posed to a senior Travelers underwriter last week on this topic: “I’m interested in (your) comments on the civil money penalties discussion going on in the industry.  It appears that Travelers is including coverage and has no provision to charge directors.  Insight appreciated.”
Her response:  “Yes – good question.  We are getting lots of questions on this from our Community Bank Agents on how to advise their clients on whether or not to purchase this coverage (which Travelers offers via Endorsement #CB103).  Travelers’ position is that it has been the long standing position of the industry (including Travelers) to make D&O Civil Money Penalties Coverage available to our clients.  We believe that there continues to be a reasonable basis under the law to support the permissibility of this coverage.  We want to remind our clients that Travelers is not in a position to provide insureds with legal advice. The client will have to make a determination for themselves, in consultation with their own legal counsel on whether to purchase or retain this coverage.  Even without endorsement CB103, the bank will still have the benefit of defense coverage (subject to any applicable policy terms, conditions, & exclusions) for claims seeking civil money penalties under the Travelers Policy.”
Good sidestep – but realistic advice – given the fluidity of the regulatory world.
Cincinnati Insurance has taken the approach that civil money penalties is a real problem and is removing the coverage from all their renewals.  A bit paternalistic for my taste.
Zurich has each director pay their own premium for the insurance coverage – an approach they have maintained for years.  This means that the bank is not buying the insurance, the directors are.
FinSecure takes the same attitude – many of their top people are former Zurich employees.
The ABA says that their policy includes the coverage as part of the insurance program.  It can not be removed, the banks are not at fault for the coverage that is in the policy.  I call this the Prego approach – “It’s in there!”
Kansas Bankers Surety years ago took the stance that the coverage is not in keeping with their perception of public policy.  A senior KBS person predicted this exact storm.  That said, this is an insurance company who will only sell banks defense cost coverage on employment claims and have no professional liability protection in their contracts other than lender liability.  They are convinced that insurers who sell more coverage are heathens out to scam bankers with useless insurance coverage.  I’m not a fan.  Though their executives are up for a lively discussion.
You might forward this whole email to your attorney (allowing you to sidestep).  I am glad to discuss further.
Scott Simmonds, CPCU, ARM, CMC
Insurance Assurance Consulting
The Unbiased Bank Insurance Guy™
Consulting On, But Never Selling, Insurance