If the Federal Deposit Insurance Corp. (FDIC) wins its appeal against a federal judge’s decision in a prominent court case, it may become fundamentally easier to sue bank directors.
Directors of all financial institutions, including credit unions, should take note.
Should NCUA adopt the FDIC’s approach, you could be found personally liable for damages caused by “ordinary negligence” instead of the more rigorous “gross negligence” standard.
This means you could be held liable for damages even if you acted in what you believed were the best interests of your credit union—but, in hindsight, you made a costly business mistake.
According to the trial court for FDIC v. Rippy, et al., the FDIC failed to prove gross negligence against the directors of a failed North Carolina bank. For that reason and others, the court blocked the suit, prompting the FDIC’s appeal. An appeals court heard oral arguments on May 13, 2015, and had yet to hand down a decision as of press time.
Of course, this case might never affect you or your credit union directly, even if the FDIC prevails and ultimately wins damages from this failed bank’s directors. But the case serves as a warning that the regulatory climate might be changing. And other types of lawsuits have emerged that target individual directors and officers (D&O)—such as class-action lawsuits regarding data breaches and collection procedures.
So here’s your main takeaway: Don’t underestimate the possibility that regulators—or any other plaintiff—will come after your personal assets.
What about D&O liability insurance?
Boards regularly review a credit union’s liability protection insurance program. Naturally, that includes evaluating directors’ protection against personal
liability. Answer these three questions during your next policy review:
1. What’s the policy limit for our credit union directors and officers liability insurance? Insurers generally express coverage limits as an annual aggregate amount. This sum typically applies to losses and expenses all officers and directors incur, not each person individually.'
Your D&O limit might seem enormous, but you’d be surprised how fast it can disappear when multiple parties get sued. If your credit union also purchases “entity coverage,” suits against the credit union would deplete the D&O limit, too.
2. Does the D&O liability coverage limit include the cost of defending lawsuits? Confirm whether the cost of defense, investigation, negotiation, etc., counts against your D&O liability aggregate limit.
That limit might solely cover losses such as lawsuit awards or out-of-court settlements, with “reasonable expenses” for defense provided in addition to that limit.
3. Do you have additional coverage beyond your D&O liability insurance? For example, your credit union might have purchased umbrella coverage to increase your aggregate limit.
Also, to further protect their personal assets, some directors have purchased their own dedicated limit that kicks in when you reach the aggregate limit.
Work closely with your liability insurance provider for your next coverage review, and make sure your coverage reflects today’s emerging risk exposures.
JAY ISAACSON is vice president, product executive for CUNA Mutual Group’s business protection products.