1. Directors & Officers Liability:
What Steps Can You Take to Improve Your Coverage and Process?
Bank Chairman/CEO Peer Exchange
Dennis Gustafson,
SVP & Financial Institutions Practice Leader
2. Agenda
• Introduction of A H & T
• A snapshot of the same tools D&O underwriters use to
evaluate your bank
• D&O Renewal Process & Limits benchmarking
• D&O ‘top 10’ coverage enhancements
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3. About A H & T Insurance
• A H & T was established in 1921 with headquarters in DC metro, Seattle, and NJ.
• Privately held, Employee owned and Independent full service insurance brokerage and risk
management consultant.
• AH&T has also been recognized as one of the "100 Largest Brokers of U.S. Business" and
“Best Places to Work in Insurance” as ranked by Business Insurance magazine and “top ten
D&O insurance brokers in the nation” in the independent Tillinghast Towers-Perrin Directors
& Officers Liability insurance report.
• The Financial Institutions Practice at AH&T Insurance focuses on providing Management
Liability solutions for community and regional banks with three basic principals:
– Knowledge: With years of experience in the underwriting, brokerage, claims, and legal fields we
have assembled a team of subject matter experts obtaining the best-in-class terms and conditions.
– Leverage: We obtain the most competitive pricing by leveraging the volume of placements with the
Insurance Carriers that focus on the asset size and specialization of our clients.
– Responsiveness: As an employee owned company for over 90 years, every AH&T employee is
completely vested in providing unparalleled responsiveness and professionalism.
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4. Sample Bank Analysis- snapshot
Carriers would
like to see the
total CRE +
construction <
300%, some even
< 200%
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7. Sample Bank Analysis- loan & asset quality
90+ days past due + nonaccrual loans
<4%
>1%
<100%
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8. Sample Bank Analysis- liquidity
Short term assets /
total loans
% of Securities as
collateral
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9. Sample Bank Analysis- enforcement actions
Other factors not shown on the snapshot:
% of Brokered Deposits (< 5%)
OREO
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10. D&O Claims Trends
Regulatory exposure
• Regulatory risk continues to be the single largest concern for D&O underwriters although we see an
interesting data inflection:
180
# of FDIC D&O Total Damage Claims
160 Time Period
Defendents (000,000)
140
120 Class Action 2000 - Q3 2010 53 $1,360
100 Filings related to
2010 Q4 56 $1,130
the Credit Crisis
80
2011 Q1 49 $1,083
60 Failed Banks
40 2011 Q2 80 $3,187
20
2011 Q3 56 $464
0
2008 2009 2010 2011 2011 Q4 79 $376
* 54 more in January & February 2012
• FDIC updated their Professional Liability Lawsuits page (www.fdic.gov/bank/individual/failed/pls/index.html)
to reflect that the number of authorized lawsuits has increased. While FDIC has up to 3 years for tort claims
and 6 years for breach of contract claims, the site states that most investigations are completed within 18 - 24
months.
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11. When is a Bank considered a ‘Regulatory Risk’
• Formal Written Agreement
• Consent Order
• C&D
• MOU (relating to asset quality, earnings, or capital, not so much for Bank Secrecy)
• Severe degradation of asset quality following a regulatory exam or audit where the
expectation would be a regulatory restriction on the following exam. (Classified Assets > 75%
or Tier 1 capital ratio <6%)
• Qualities of an institution taken off the Regulatory risk category include: Removal of
regulatory restriction, positive ROA 3 quarters, Classified loans/Capital <= 40%
• D&O Policy considerations:
– Lack of Regulatory Exclusion
– Named Insured = Holding Company
– Side A Non-Rescindable language
– Insured vs. Insured Carve-backs
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12. D&O Claims Trends
M&A
• Stanford Securities estimates 188 Securities Class action lawsuits in 2011, 39 of which were
related to Chinese reverse mergers or U.S. listed Chinese companies.
• Of the 149 non-Chinese related suits, we count 53 M&A related cases or approximately 36%.
This represents a significant increase from 24% in 2010. M&A claims can relate to perceived
improper pricing/valuations, going private transactions, management buyouts, and/or
allegations of proxy violations.
• Underwriting considerations include % of shareholder votes against the M&A in addition to
evaluation of dissenting shareholders
• D&O Policy considerations:
– Mid-term acquisition threshold %
– Discovery provisions
– Change of Control provisions
– Cancellation provision
– Existence of an M&A exclusion
– Typically no prior acts for acquired company
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13. Sample Renewal Process: Timeline
Date Action
- 4 months Renewal Strategy Meeting: Review current program, limits benchmarking, carrier quality and renewal recommendations
- 3 months Information gathering & Initial submission to D&O markets:
Send blank applications along with copies of last years completed application (as reference)
Send conglomeration of publicly available information (submission) to 20-25 Insurance carriers (A.M. Best rated A-
or better)
- 5 to 7 weeks Coordinate/Host carrier meetings/call: You would provide a similar presentation as you would for an analyst. The call begins with a
general overview of the company operations, recent results and any changes in the past 12 months. At the end the underwriters
would ask any questions they feel they need more details. The benefits of this meeting include, but are not limited to:
Generate a personal connection with the underwriting community so they are underwriting not just on what they
read in the filings. This would also be good in the event of a claim.
Limit the underwriters ability to ask for additional information in their quotes thus streamlining the binding process.
Take advantage of the competitive influences in the marketplace as the underwriter will see their competitors
across the proverbial table.
- 1 month Follow-up communication to carriers: Obtain primary premium indications and resolve any open questions/issues. Coordinate
Excess options
- 2 to 3 weeks Final Renewal Presentation Meeting & Binding orders: Ensure expectations have or will be met. Discuss the need, if any, of
premium financing.
Expiration EXPIRATION DATE – Confirm binder obtained from all carriers.
+1 – 2 Confirmation of insurance, include invoice and confirmation letter
+5 Confirmation that all subjectivities have been met
+14 – 20 Confirm payment received. Or down payment, if financed.
+60 Policy Issuance- Primary policy
+120 Policy Issuance- Excess policy. 3 Ring Binder including all layers
+90, +180, +270 Quarterly contact meeting. Discuss:
Possibility of mid year strategy meeting or underwriter visit
Claims management
Litigation activity or claims trends in the industry sector
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18. Directors & Officers Coverage discussion
Top 10 D&O Coverage enhancements
– Named Insured = Holding Company
– Civil Money Penalties
– Limit Definition of Application to filings for just the past 12
months.
– Update Definition of Claim to include informal investigations
– Investigative Costs sub-limit
– Order of Payments
– Side A Non-Rescindable language and limit the imputation of
knowledge (severability)
– Update definition of Company to include Debtor-in-Possession
– Insured vs Insured carve-backs for:
• Creditor Committee, Bankruptcy Trustee
• FDIC
• Whistleblower, prior Board member, foreign equivalent
– Limit when Insurance carrier can cancel policy
Side A Insurance protects the individual Directors
& Officers for claims where the Insured company – Limit the threshold of the conduct exclusions (fraud & personal
can not indemnify the D&O’s in scenarios such as profit) to the ‘final adjudication’ standard.
insolvency and derivative actions.
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19. Contact Information
Primary Contact
Dennis Gustafson, SVP & Financial Institutions Practice Leader Contact us when…
p: 973.286.3572
c: 917.846.5548 You receive notice of a claim
e: dgustafson@ahtins.com
Circumstances occur that may give
rise to a claim
Secondary Contacts
Michael Tomasulo, SVP & Directors & Officers Practice Leader Mergers or acquisitions occur
p: 973.286.3570
e: mtomasulo@ahtins.com A subsidiaries or spin-off is created
Account Manager Secondary, follow-on or debt offerings
are planned
Jonathan Maio
p: 973.286.3571
The SEC initiates an investigation of the
e: jmaio@ahtins.com Company or individuals
Claims Director Asking employees to sit on the board of for
profit companies
Rick Hirschoff, MA, MSW, SCLA
p: 703.737.2259
e: rhirschoff@ahtins.com 20% or more of the Company’s stock
will change hands
A bad news disclosure occurs
Reviewing limits of liability and scope
of coverage
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