Dec. 16 (Bloomberg) -- The Federal Deposit Insurance Corp. and insurer Chubb Corp. are clashing over a Georgia bank failure as the U.S. seeks to recover costs of shutting the lender.
Silverton Bank NA was seized on May 1, 2009. That same day, Chubb sent a message to an insurance agent who worked with the bank, limiting a policy that covered its directors and officers against lawsuits, according to a government complaint filed in August. The insurer has used the amendment to deny a payout as the FDIC seeks at least $71 million from the Atlanta-based bank’s former board members and executives.
The FDIC’s push to recover funds from former leaders of failed banks is sparking more confrontations with insurers that sold directors-and-officers, or D&O, protection. The regulator said it won approval to pursue claims for more than $5 billion in damages this year, double the amount authorized through 2010.
“The next 12 to 18 months, we’re going to see a whole bunch of these lawsuits,” said Kevin LaCroix, executive vice president at OakBridge Insurance Services LLC, an insurance intermediary that focuses on management liability issues. “It’s a salvage operation” for the FDIC.
Seventeen of the 41 suits authorized by the FDIC’s board had been filed as of Dec. 8. It takes about 18 months to study the failures and determine if legal action is appropriate and cost-effective, said Richard Osterman, FDIC deputy general counsel. The regulator will decide in coming months which additional cases to pursue as it reviews some of the more than 400 failures since 2007, he said.
Limits on Coverage
D&O policies in general pay for damages and defense costs associated with alleged wrongful actions by executives or board members. Some policies exclude coverage for regulatory actions, which limits the funds the government can recoup, said Osterman.
Chubb, American International Group Inc., Travelers Cos., XL Group Plc and Ace Ltd., were among the largest primary providers of the protection to banks in 2008, the last year of available data, according to a Towers Watson & Co. survey.
Insurance policies affect the agency’s decision about whether to make claims against directors and officers, and are part of the analysis even before a bank fails, Osterman said in a Dec. 6 phone interview. The FDIC seeks to settle before going to court to limit legal fees.
“It’s important to not only hold people accountable but also to recover funds for the receiver,” said Osterman.
The FDIC reached $64.7 million settlement with three former executives of Washington Mutual Inc., the largest U.S. bank to fail, according to a statement yesterday from the regulator. About $40 million of the total is being paid by insurance, according to a settlement document, which names units of Warren, New Jersey-based Chubb, XL, Hartford Financial Services Group Inc., CNA Financial Corp., Axis Capital Holdings Ltd. and Lloyd’s of London underwriters as providers of coverage.
The latest lawsuits recall tactics used during the savings-and-loan crisis. From 1986 to 1996, the FDIC brought cases against failed lenders, and along with the Resolution Trust Corp. recovered more than $5 billion through professional liability cases. Bank failures have cost the insurance fund more than $80 billion since 2007.
In the Silverton case, the regulator said that former board members and executives disregarded the lender’s policies when making loans, “robotically voting for approval of transactions without exercising any business judgment, according to the Aug. 22 complaint filed in federal court in Atlanta.
Bank officials set a “course of expansive and extravagant spending,” including annual lease payments of about $2.6 million on a “large and lavish” office building called the Medici; $3.5 million for a Falcon 20 jet; and, from 2002 to 2009, a combined $4 million on an annual board meeting and conferences, the FDIC said.
The directors named in the case said they weren’t negligent and they “took great pride in the services that Silverton provided to the banking community and had planned carefully for its further growth and expansion,” according to a joint report filed on Nov. 30. An attorney for the group declined to comment.
The bank’s former chief executive officer, Tom Bryan, is among company officials who denied wrongdoing. Bryan intends to file claims against Chubb for breach of contract, according to the document. He declined to comment in a phone interview.
Chubb’s Federal Insurance unit, a defendant in the lawsuit, denied coverage under a $5 million policy partly on grounds that it prohibited claims made after regulatory action, the government said. The exclusion wasn’t in the policy when issued, according to the lawsuit.
“The timing of the alleged amendment certainly suggest that Chubb was tipped off regarding the bank’s closing,” the FDIC said in its complaint. The “last-minute attempt to unilaterally change the terms of the policy fails miserably.”
Chubb said that the language excluding coverage of regulatory actions wasn’t originally attached to the policy “through administrative error,” in an answer to the FDIC’s complaint filed on Oct. 31. The insurer said it had no prior knowledge of Silverton’s closure. Mark Schussel, a spokesman for Chubb, declined to comment.
AIG’s Chartis division is in a separate dispute with former directors and officers of Westernbank Puerto Rico, which failed in 2010. The managers sued Chartis after the insurer denied coverage on D&O policies that provided as much as $50 million a year in protection, according to a complaint filed in October. The FDIC has said it intends to sue the WesternBank directors and officers, the complaint shows.
Mark Herr, a spokesman for New York-based AIG, declined to comment, as did an attorney for the bankers.
In another dispute, the FDIC sued Catlin Group Ltd., the third-biggest Lloyd’s of London insurer by market value, for $40 million after it denied coverage under a D&O policy sold to First National Bank of Arizona. The government filed a complaint in October.
James Burcke, a spokesman for Catlin, declined to comment.
The total cost of the lawsuits to the insurance industry is difficult to estimate because many underwriters don’t disclose losses or projected claims on individual policies and not all cases name the insurers that sold D&O coverage.
Travelers, the insurer in the Dow Jones Industrial Average, said in July 2009 as bank collapses accelerated that it had potential losses of $100 million tied to 26 failed banks, a cost that may fall because of actions taken to reduce risk. The company said a year later that it had coverage on 33 more banks that failed in 2010. Shane Boyd, a Travelers spokesman, declined to comment on loss trends.
Insurers Being Careful
Insurers have tightened underwriting standards and boosted prices for some D&O policies since the financial crisis, said OakBridge’s LaCroix.
Firms are “being more careful, they’re being more painstaking in their underwriting” for banks, he said. “They’re trying to reduce their exposure.”
The industry is likely to face years of negotiations from bank failures, said Tom Orrico, a practice leader in Marsh Inc.’s financial and professional liability operations.
“There’s going to be losses,” he said. “One would expect significant payouts by the market.”
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