If you want your directors and officers covered in this environment, this is no time to not communicate with D&O carriers.
In times like these, you need to bond with your carrier, even if you’re not feeling especially gregarious
In a potentially severe directors and officers insurance market, no truism is more fundamental than the one that “relationships count.” This remains true despite any lingering discomfort caused by the reality of ongoing bank failures.
Strong performing banks will need to remind primary—and secondary—carriers of their strengths, and weaker banks will need to build the best case they can.
“We did well for ourselves this year in terms of premium rates and coverage,” says Carmelo Casella, managing director, Corporate Insurance Group for BNY Mellon. “Still, we had to take the time to explain our position in the market and differentiate ourselves with all our carriers. We had to remind the carrier that we operate as a kind of banker’s bank with our custodial and asset management work. Our risks, therefore, are very different than a retail bank.” BNY Mellon has total assets of $212 billion, but has assets under custody and administration of $20.7 trillion, and assets under management of $926 billion. Given the bank’s size, says Casella, it relies on at least 20 carriers to build its “tower” of policy protection. (A multi-carrier approach is a fact of life for any large bank after the tragic events of September 2001, when policies were written for much smaller amounts of coverage.) The effort to build a careful case got Casella what he wanted.
Whether a bank is a “have” or “have less,” the insurance purchasing process should be about sharing information and spending time.
“We would always advocate an open, partnership-based approach with our clients and this environment is clearly one where demonstrating soundness will pay dividends,” notes Kevin Payne, partner, Financial and Professional Risks, First City Partnership Ltd., London. The firm advises banks on insurance and reinsurance and specializes in the financial sector.
“The firm is seeing a reduction in capacity from some insurers and an ‘open approach’ can help to minimize this, particularly in conjunction with the longevity of the D&O insurance relationship,” according to Payne.
Pricing and capacity will ever ebb and flow, and lawsuit trends may tempt a banker to toss up hands in frustration as to a given policy’s actual value, but as a rule, D&O coverage is simply too important to be picked up routinely, even in good times. “The policy that protects your most senior people shouldn’t be purchased as if it were a commodity,” says Roger Haynes, executive vice-president, WGA Risks, William Gallagher Associates Insurance Brokers, Boston. These days, he says, no sophisticated director would sit on a board without coverage.
Necessary, complex coverage
“D&O has evolved into a complex product,” Haynes explains. “You get the best results in the underwriting [and policy development] process when the insurance companies, intermediaries, and bank representatives have reached a real understanding.” By this he means, all parties know about each other and buy the policy with full awareness of terms and exclusions.
Smaller banks traditionally have had fewer options. “The market for smaller and more distressed banks has become more transactional—blended programs can be very difficult to renew and extremely high premium increases are commonplace,” notes FirstCity’s Kevin Payne. “Banks operating under MOUs or C&Ds need to be very open in explaining both their history and their progress to potential insurers,” Payne says.
Yet even those banks that have the clout of size to run with a fairly rigorous due diligence process in D&O placement and engage in relationship-buy tactics, sometimes don’t. And this is distinctly odd given the knotty reality of the insurance market where you would expect buyers to show their best game.
Last year, financial services companies faced the highest premiums of any industry, surpassing rates paid by life sciences and technology firms, according to Carpenter Moore Insurance Services, a leading provider of executive liability risk management services, acquired by Aon Corp. Compared to an epic rise in the first half of 2009, premiums (which rose only 3.2% in the third quarter) should stabilize, according to Aon projections.
And yet, on the verge of 2010, banks, along with their business clients, continued to cope with uncertainty caused by a droning low-gear recovery, and for many, the overhang of bad credits.
While a strong bank has little to fear, per se, and experts predict no global drivers of insurance pricing in the year ahead the way TARP was in 2009, the psychological after-effect of the industry’s recent issues may have some smaller banks wondering if they have any leg to stand on, in negotiations.
Two different relationship buys
“This is a time when everyone is naturally wary, yet each party needs to function as a collaborator and partner,” says Robert J. Brewer Jr., vice-president First Niagara Risk Management, Inc., Buffalo, N.Y. “But the fact is, nobody wants to get saddled with an untenable risk.”
In charge of purchasing insurance for the $14.1 billion-assets First Niagara Bank, Brewer described a process that began early in autumn, where the underwriter met with the bank’s CEO, CFO, Chief Risk Officer, and agency CEO and completed a systematic review of “how things had gone” and what performance was anticipated.
“Many of the financial details could be obtained from the website and public records,” says Brewer, “but in the meeting we also provided key details about internal bank business—anything that’s relevant for our risk profile.” It’s an approach Brewer believes is especially useful in times of transition.
“We’ve undergone a spike in growth in recent years, so we wanted to make sure that our people are covered and that the policy met our needs,” he says, referring to First Niagara’s agreement to buy 57 National City branches in western Pennsylvania from PNC Financial Services.
A relationship buy also took place at $10.8 billion assets FirstMerit Bank, in Akron, Ohio—and to good effect, despite an economy that has put some pressure on the region once known as the Rubber Capital of the World but which is now skewed to high tech.
Linda Ann Collins, assistant vice-president and insurance operations officer, says she was pleasantly surprised at receiving only a slight premium increase. Given last year’s increase, caused by industry events, she says she assumed this year’s increase would be worse than it turned out to be.
FirstMerit, which has 161 banking offices in 24 Ohio and western Pennsylvania counties and has $2.5 billion assets under management within its FirstMerit Wealth Management Services, tends to be conservative in its credit analysis and careful in its policy development process. In line with best practices, Collins carefully reviews details coverage in advance of purchase.
“Clauses of concern”
Surprisingly, not all purchasers engage in thorough advanced analysis. One attorney, who asked not be named, indicated that legal staff aren’t brought in until trouble strikes, even though ABA and other professional associations urge otherwise.
And this could be especially punishing in a current climate were carriers may ask for more, according to Bank Lawyer’s Blog, written by Kansas-based attorney Kevin Funnell. As one instance of this, carriers may push for warranty letters at the time of, or as a condition to, issuing the policy (and then raise “breach of warranty” defenses once a claim is made). “Just say ‘no’ to the warranty,” indicated Jenner & Block partner Matt Jacobs in a December 13th post.
Funnell’s blog entry also reminded bank readers to attempt to negotiate as many “carve outs” as they can against so-called “insured vs. insured” exclusions, which insurance companies may rely on to deny claims filed by FDIC against directors and officers it removes.
Adding to the potential sting, especially for officers and directors of failed institutions, which may soon be facing FDIC suits, is the risk of being hit with the “regulatory exclusion clause,” which surfaced during the 1980s S&L crisis. Use of this exclusion would result in coverage being effectively rescinded, leaving directors and officers to shoulder the legal costs on their own, according to FirstCity Partnership. (No FDIC suits had been filed as of yearend, an FDIC spokesman said.)
“FDIC has begun targeting the directors of failed institutions and insurers are responding by attempting to limit these claims, which adds another complex dynamic to a decision over whether to continue coverage with an insurer which appears to be a reluctant partner,” wrote FirstCity’s Kevin Payne. “Regulatory coverage remains available on both a primary and dropdown basis, but pricing, timing and an open flow of information are very important.”
Many banks are having policies reviewed by attorneys familiar with FDIC methods and carrier tactics.
David Baris, executive director of the American Association of Bank Directors, points out that lawsuits related to events surrounding the 2007-2009 financial crisis could have a drawn-out timeline of three or more years that could hurt directors.
“The last time FDIC brought suits against banks in receivership, during the S&L crisis, those suits were brought years after the events occurred,” says Baris. From the perspective of preparing with insurance, this means that if banks are required to renew with a regulatory exclusion, they should consult with their experts and consider protecting themselves by purchasing a “tail,” that is, an additional policy that applies retroactively for potential liability as part of their management liability package of coverages.
Baris adds that, during the S&L crisis period, FDIC took a line of reasoning that directors needed to know, in effect, what loan officers knew. It was, in his view, an unfair standard, but the implied standard nonetheless. Thus, no director or officer should feel prematurely confident, he says.
Baris offers a scenario. “If a suit comes three years after the events happened, it would put directors at a distinct disadvantage unless they have their own records to work with,” he says. “Events will be harder to recall, making it difficult for directors and officers to explain their thinking about a specific project.” Directors and officers should not assume that they will have future access to board records, or that they will be able to reach out to FDIC prior to going to court to present facts or mitigating circumstances favorable to them—they probably won’t.
“Should your bank happen to be struggling,” says Baris, “it’s important for Ds and Os to consolidate and organize records while they are still serving, or before the receivership process begins.”
Uneasy despite decent performance
Even strong performers remain cautious. “Our bank is in good shape, but it’s hard to feel entirely secure when the industry as whole has taken the hit that it has, ” says FirstMerit’s Linda Collins.
Darla Scott, chief financial officer of $688 million-assets Bank of Tennessee, Johnson City, agrees: security isn’t taken lightly, not these days.
Once a small-town train depot, and now a metropolitan melting pot, Johnson City sits in the northeastern part of the state. “This region hasn’t been hit as hard as some areas and we’ve had a good year,” says Scott of the bank’s 2009 performance. “We’ve shored up our loan loss reserves a bit, but only as a proactive measure. Our ratios look good.”
As a result, Bank of Tennessee locked into a three-year D&O contract. “We won’t need to renegotiate until 2011,” Scott says. And yet, Scott remains vigilant.
“Our examination was positive,” she says, “but I definitely sensed greater scrutiny this year.” BJ
The electronic version of this article available at: http://www.nxtbook.com/nxtbooks/sb/ababj0110/index.php?startid=18
Trackback(0)
|
TrackBack URI for this entry
Subscribe to this comment's feed
