Civil Money Penalties Update

I’ve had several (OK, many, many) conversations over the past few weeks on the issue of bank directors and officers insurance civil money penalties coverage.  (See my other posts on this blog on this topic.)

I have worked on dozens of D&O renewals in the past few months.  Not once has the insurer or agent brought the subject of CMP up – until I prompted the conversation.  Insurers and agents do not seem to be offering any guidance to banks.  I see it as my job to do so.  None are offering specific recommendations (other than talk with your lawyer).

My Advice

Remove the CMP coverage from your D&O.

FDIC and OCC are quite clear – no insurance coverage (or indemnification) to pay for fines and penalties should be attached to anything the bank does.

I am not agreeing with the regulator’s position on this.  I think bankers should be able to buy this coverage – as insurers should be able to sell it.  Right now though, the regs seem clear to me. I have zero interest in seeing any regulator look harder at a bank client of mine.

The status of CMP in the current marketplace

Different insurers are taking different approaches.

Travelers, ABA Insurance/Everest and several other insurers are continuing to include CMP coverage in their D&O policies for “qualified” banks.  Banks can request that the coverage be removed.  No premium refunds are made as these insurers claim that no additional premiums are charged for CMP.

Zurich and FinSecure offer CMP to their clients.  They charge a per-officer/director fee that is to be paid directly to the bank by the directors.  Neither insurer will accept payments by the directors as the billing system used by the insurer does not allow for such.

Cincinnati has removed CMP from all their bank D&O policies as they see the coverage as contrary to regulations.  Kansas Bankers Surety has never offered CMP coverage as they have always seen the coverage as failing to meet regulations.

What if the directors pay for their own coverage?

Zurich and FinSecure provide a separate premium for each director/officer.  They require that the bank collects the premium from the directors so that it can be said that the directors pay for the CMP coverage.  Some see this as a way around the issue of CMP on a bank D&O policy.

I don’t see that the regs say anything allowing this approach.  CMP is still on the bank’s insurance – contrary to what the regs state.

I have had conversation with FDIC officials and they see no distinction between the bank paying the premium or a director reimbursing the bank.  The coverage is on the bank’s insurance.  A no-no according to regulators.

What is covered without CMP coverage?

Defense costs of regulatory actions against banks is covered by most bank D&O insurance – unless you have a regulatory exclusion on your policy.

Absent the CMP endorsement, fines and penalties are excluded from D&O coverage.

All insurers have some form of exclusion for illegal, intentionally fraudulent, or criminal actions.  Defense coverage exists for a director (or officer) to the point that it is found that their actions were fraudulent or illegal.  (Obviously, this is a simplification.  I use the analogy of a car accident involving a single car and a pedestrian.  The event is covered by the driver’s auto liability insurance if running over the pedestrian was accidental.  If the driver intentionally hit the person, no coverage, as intentional acts that knowingly cause injury are excluded by all auto policies.)

Outside of the D&O policy, is there any place a director can get CMP coverage?

At this point I am aware of no insurer providing individual CMP coverage for bank directors.  I have talked with many insurers about offering this insurance.  I have also made contact with several bank associations.  No takers right now as Barney Frank has pending legislation that would make such a policy illegal. No insurer wants to do the work of putting this together then have it fall apart.

My desired solution is a policy directors buy directly from an insurer, in a transaction that does not involve the bank or the bank’s insurance program.  A transaction as separate as the director purchasing home or car insurance.

What should a bank do right now?

Look at your insurance.  If you have CMP insurance consider the risk of regulator action.  Talk with your compliance people and your legal team.

I’m glad to talk with your team too.