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To: AABD Members and Friends
From: David Baris, Executive Director
Subject: Can bank directors still legally buy insurance for civil money penalties?
Date: December 10, 2013

AABD believes that FDIC regulations and the applicable provisions of the Federal Deposit Insurance Act do not prohibit bank directors from buying their own insurance to cover civil money penalties assessed against them, even if the insurance is a rider to an insurance policy in the name of their bank so long as the bank does not pay the premium for the rider. Does that conflict with the FDIC’s FIL-47-3013 (Director and Officer Liability Insurance Policies, Exclusions, and Indemnification for Civil Money Penalties) dated October 10, 2013?

That is not AABD's reading.

The FDIC's guidance reminds bank directors that FDIC regulations prohibit an insured depository institution or depository institution holding company from purchasing insurance that would be used to pay or reimburse an institution-affiliated party, including bank directors, for the cost of any CMP assessed against such person in an administrative proceeding or civil action commenced by any federal banking agency.

The FIL further states that the regulations do not include an exception for cases in which the IAP reimburses the depository institution for the designated cost of the CMP coverage.

The FDIC's position appears to us to have changed from the letter AABD received on February 27, 2012 from then FDIC General Counsel Michael Krimminger in response to my letter to him dated February 3, 2012. His letter disagreed with AABD's interpretation and stated that so long as a bank 'procured' the insurance (meaning, we believe, that the coverage was in the form of a rider to the policy in the Bank's name), it did not matter that the director paid the premium directly to the carrier or the carrier's agent.

The October 10, 2013 FIL does not go as far as Mr. Krimminger's letter did. The question is who pays, not who 'procures.' The statute and regulation do not use the word 'procure' but do use the word 'purchase.'

Just to be sure, we are writing the FDIC again. 

Download PDF: AABD Letter to FDIC, December 11, 2013

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    If the FDIC reverts to the position that Mr. Krimminger took in February 2012, we will suggest that his position is contrary to the law and regulations, and at the very least the FDIC would need to initiate a rule-making process so that the public, including banks and bank directors, will have an opportunity to comment on the appropriateness and legality of such a position.

    Mr. Krimminger's letter states that the regulation and law are 'clear' in supporting his interpretation. Yet it is our understanding that for at least seventeen years, the FDIC acquiesced to the insurance industry's offering of a rider to D&O policies in the bank's name, paid for by directors, that would reimburse or pay directors for the costs of any CMP.

    Directors know that civil money penalties may be assessed by the federal banking agencies without proof of wrongdoing. Congress authorized the agencies to impose such liability solely on the basis of directors 'participating' in a violation of law or regulation, a violation of a condition in an administrative action or to an application approved by the agency, or in an unsafe or unsound banking practice. The agencies do not need to prove that the directors knowingly acted improperly or even acted negligently. Being in the wrong place at the wrong time is sufficient.

    Bank directors and officers have a legitimate reason to purchase insurance for that risk, and the law and regulations do not prohibit it.

    Some bank directors have resigned over their concern about personal liability. The results of AABD's survey on that subject will be released next week. There is no need to feed the fire.

    See 12 USC 1828(k) and 12 CFR Part 359.