Ask Questions About Your D&O Coverage

New NCUA rules shine a light on directors’ duties and risk exposure.

January 31, 2011

The National Credit Union Administration (NCUA) in December finalized sections from its rules and regulations concerning federal credit union directors’ fiduciary duties and indemnification.

As a result, many directors now are facing additional indemnification limitations, redefined fiduciary duties, financial literacy requirements, and many other changes that will increase their exposure as board members. Not only does adoption of these rules expand risk for credit union directors, but there are additional risks on the horizon.

That’s because NCUA hasn’t issued a final ruling yet on Part 750 related to golden parachutes and indemnification payments. If adopted, this rule would further restrict potential indemnification for board members.

Directors NewsletterRecent actions by the Federal Deposit Insurance Corp. (FDIC) provide some context and might be a potential precursor for what credit union directors could face. During the savings and loan (S&L) crisis of

the 1980s and 1990s, bank regulators pursued claims against directors and officers of failed institutions in 25% of the cases. The FDIC subsequently recovered $1.3 billion from directors and officers.

In October, the FDIC announced it authorized lawsuits against more than 50 directors and officers of failed banks in an attempt to recoup at least $1 billion, according to

And while banks have been strained for some time, actions by the FDIC are just ramping up. This lag is typical and occurred during the S&L crisis as well. With all that’s looming, it’s important credit union directors have as much protection as possible.

In the January issue of Credit Union Directors Newsletter [pdf], John Wallace, product executive for CUNA Mutual Group’s bond and management and professional liability insurance products, suggests boards ask several questions about the credit union's directors’ and officers’ (D&O) liability policy provider, including:

What does it mean to have an “insured vs. insured” exclusion in my policy?

A An “insured vs. insured” exclusion basically excludes coverage for claims where one insured brings suit against another insured. An example would be if a director sues another director or an officer sues an employee for breach of fiduciary duty.

This exclusion surfaced in the mid-1980s when Bank of America executives sued their own loan officers for making bad loans. The result was that they could access D&O policies that covered the loan officers.

Because this type of action presents a significant moral hazard, the industry responded by adding an “insured vs. insured” exclusion.

If your policy has such an exclusion, find out if you have a “carve-back” for it that precludes the “insured vs. insured” exclusion from applying when a bankruptcy trustee or examiner brings a suit against your board. The “insured vs. insured” exclusion is found in almost all D&O policies.

Without having a carve-back for bankruptcy trustees, the policy is almost as restrictive as having a regulator exclusion.

Read more questions here [pdf].