Fill the gap
in D&O insurance protection
you didn’t know you had.
Introducing First Monetary's Institution Affiliated Party Policy
Why should you own an IAP policy as a community bank director?
There’s a major hidden exposure in bank-provided D&O coverage that you are probably not aware of. Civil money penalties (CMP) are a large and growing exposure for the management, directors and decision-makers of financial institutions. Fines can be assessed for “any violation of law, rule or regulation – WHETHER OR NOT the bank is operating. The cost of civil money penalties can range from nominal sums to millions of dollars.
The troubling issue for the IAP (Institution Affiliated Party) as respects civil monetary penalties is that they are brought against the trustees, directors and officers individually, and that regulators are becoming more aggressive in their use and application. While IAP’s are entitled to due process, there’s the attendant cost of defense that goes with it. Most alarming, both the cost of the penalty and associated defense costs are specifically excluded by many corporate D&O policy provisions. As detailed in a 10 October 2013 Financial Institution Letter (“FIL”), the FDIC specifically prohibits a bank’s D&O policy from providing any coverage or indemnification for this risk.
So what’s the solution?
First Monetary has developed a special Institution Affiliated Party (IAP) policy that addresses these substantive gaps in conventional coverage. Our low-cost insurance is the only product of its kind made available and issued directly to IAPs – the Directors, Trustees, Officers and staff of the institution. Our product avoids the bank integration issue by permitting IAPs to secure this critical insurance coverage on their own.
What First Monetary’s IAP Plan delivers …
Part One of the IAP policy coverage provides second position D&O protection in excess of the Member Bank’s primary insurance program.
Part Two of the IAP policy coverage provides primary protection against CMP and is issued directly to the IAP.
Want more information? Continue reading down, or begin the process of securing coverage with our simple application form. Just click the button below to get started.
Should community bank directors be concerned about civil money penalties?
Absolutely! The issue that should trouble them relative to CMP’s is that they are brought against the trustees, directors and officers individually, and regulators are becoming more aggressive in using them.
Civil Money Penalties can be brought while banks remain open, and penalties can be assessed for “any violation of law, rule or regulation. IAP’s have the right to due process (i.e. hearings), but there are attending costs associated with defense as well.
The dollar cost of civil money penalties can range from very small amounts to millions. A statistical review of CMP activity indicates that most assessments range from $500 to about $30,000 against IAP’s. Much higher penalties have been issued in the most egregious cases.
CMP by the numbers
- 1,300+: OCC has filed approximately 1300 CMP’s since 1991
- 76% of OCC CMPs settled for $10,000 or less
- 92% of OCC CMPs settled for $30,000 or less
Insurance and Banking Regulations
In a 10 October 2013 Financial Institution Letter (FIL-47-2013), the Federal Deposit Insurance Corporation (FDIC) formally restated their position that no insurance coverage (or indemnification) to pay for fines and penalties should be attached to any bank insurance policy or indemnity agreement (i.e. banks are no longer able to take out a policy that provides that it will pay for any fines/penalties incurred by director, officer etc.).
As a result, FDIC regulations prohibit the Member Banks from purchasing the current D&O policy which can be used to pay or reimburse one of their directors, officers or employees, each defined as an institution affiliated party (IAP), for the cost of any civil money penalty (CMP) assessed against such IAP in an administrative proceeding or civil action commenced by any federal banking agency.
FDIC regulations do not include an exception for cases in which the IAP reimburses its employer for the designated cost of the IAP liability coverage.
In the light of these FDIC regulations, First Monetary presently excludes CMP policy from the D&O policy issued to the Member Banks. However, to address this issue and help member banks provide full D&O coverage for each of their IAPs, the Company has redefined the structure of its D&O liability policy.
Insurance Carrier Response
The issue with civil money penalties insurance under the bank’s D&O policy is Part 359 of the FDIC Regulations. This provision prohibits banks from providing insurance policies that cover civil penalties. Translated, that means the FDIC can prohibit insurers from paying coverage for civil penalties, even if banks have coverage that address this section.
The typical D&O policy excludes civil money penalties coverage. There are a few exceptions under which insurers offer coverage to qualified banks, but there are issues with each:
The $0 Cost Approach: Insurers claim that no additional premiums are charged for CMP
Issue: Regulations do not appear to sanction this approach because CMP coverage is included in the bank’s insurance contract. FDIC officials make no distinction between banks paying premium for coverage directly or director’s reimbursing banks for the corresponding cost of coverage. Regulators will frown on any D&O insurance contracts with CMP provisions.
The Separate Charge Approach: Under this scenario, insurers require that the bank collect premium from each officer and/or director, creating the appearance that they pay for their own CMP coverage.
Issue: Existing regulations do not clearly sanction this approach, because CMP coverage remains part of the bank’s insurance contract, not a director’s or officer’s individual policy of insurance.
First Monetary's Risk Management Solution
Subject to its terms and conditions, First Monetary’s special Institution Affiliated Party policy addresses this gap and exposure in conventional coverage. This low-cost insurance policy is issued directly to the IAP - Director, Trustee, Officer or Staff – thereby avoiding the integration and linking issues described in the previous section.
About First Monetary
First Monetary Mutual Limited (“FM”) is a non-assessable mutual company owned by community banks in the States of New York and Pennsylvania. It is organized under the laws of Bermuda in 1986 and is licensed and regulated by the Bermuda Monetary Authority (“BMA”).
FM does not maintain offices in the United States. It maintains its books and records, holds its Annual Shareholders meeting and undertakes all management functions outside of the United States. FM’s mailing address is 40 Chruch Street, Hamilton, HM 12 Bermuda. The facsimile number is 441.295.1143 and the telephone number is 441.295.2185. The information web site is firstmonetary.com. Institution Affiliated Party Member applications are made to the Company through: firstmonetary.co.uk
Corporate and Membership Information are provided in the Membership and Insurance Section of this site. Please create an account and/or login for information.