05.31.2011 Beware of Potential Pitfalls in Directors & Officers Insurance Policies
By: Harold E. Johnson

Not surprisingly, the recent financial crisis gave rise to a variety of lawsuits against banks, asset management companies and other financial institutions.  Many in the financial industry are worried about their increased exposure to claims from disgruntled shareholders, customers and beneficiaries, not to mention the ever-increasing threat of governmental investigations.  While the threat of these lawsuits is bad enough, those in the financial sector must also be concerned about potential gaps in any insurance coverage that might protect them against such claims.  Most financial institutions carry substantial insurance designed to cover those institutions and their directors, officers and other employees against such claims, but the coverage often is not as broad as insureds might imagine.  For example, many Directors and Officers Liability policies exclude coverage for regulatory proceedings by a government agency as well as claims arising out of a financial institution’s insolvency.  Many policies also exclude coverage for claims against officers and directors arising out of any merger or acquisition with another entity.  Institutions that do not have appropriate coverage could find themselves facing unexpected liabilities should these types of claims be asserted.  In certain cases, directors and officers might be exposed to personal liability.


Moreover, many individuals serving as directors and officers do not realize that they also might face personal liability for "fiduciary liability" claims related to the Employment Retirement Income Security Act ("ERISA").  These would include claims by employees or other beneficiaries related to the management of any or all of pension, retirement, health care, and life insurance plans.  One need not be a trustee or administrator of the plan to be targeted in a lawsuit.  In fact, directors and officers of the corporation who exercise any discretionary authority that may affect the plan (such as hiring a plan administrator) are often named as defendants.  Fiduciary liability claims expose directors and officers to substantial personal liability, often without any right to indemnity from the company or financial institution.  While such claims typically are not covered by Directors and Officers Liability policies, companies can purchase fiduciary liability policies as part of their overall insurance package.


Most of these risks are insurable, and financial institutions should devote the time and resources to making sure that they have purchased adequate coverage for the various risks they may face.  Every policy is different, and financial institutions often are able to pick and choose which risks to insure so long as they are willing to pay the premiums.  Now is the time for financial institutions to review their coverages and determine whether they have insured themselves and their management personnel adequately against the risks of litigation and whether they should explore the option to purchase endorsements that may override certain exclusions in their policies.  By being proactive and reviewing existing coverages, an institution can go a long way toward insulating itself and its management from exposure to potential claims.


The bottom line is that financial institutions need to be proactive to ensure that proper types of insurance coverage are in place.  Taking these steps now can help protect a financial institution from substantial costs and liabilities in the future.


For more information about this topic, please contact Harold E. Johnson, or 804.420.6447, or any member of the Williams Mullen Insurance Coverage Litigation Practice.