Aoba 2012 Conference Presentation


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D&O Liability, what you need to know. For Bank Director conference

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Aoba 2012 Conference Presentation

  1. 1. Directors & Officers Liability: What You Need to Know Dennis Gustafson,SVP & Financial Institutions Practice Leader
  2. 2. Agenda • Introduction of A H & T • D&O Risk Profiles and Claims/Litigation trends related to – Regulatory Exposures – Mergers & Acquisitions • D&O Limits benchmarking • D&O ‘top 10’ coverage enhancements2
  3. 3. About A H & T Insurance • A H & T was established in 1921 with headquarters in the DC metro, Seattle, and NJ. • Privately held, Employee owned and Independent full service insurance brokerage and risk management consultant. • AH&T has also been recognized as one of the "100 Largest Brokers of U.S. Business" and “Best Places to Work in Insurance” as ranked by Business Insurance magazine and “top ten D&O insurance brokers in the nation” in the independent Tillinghast Towers-Perrin Directors & Officers Liability insurance report. • The Financial Institutions Practice at AH&T Insurance focuses on providing Management Liability solutions for community and regional banks with three basic principals: – Knowledge: With years of experience in the underwriting, brokerage, claims, and legal fields we have assembled a team of subject matter experts obtaining the best-in-class terms and conditions. – Leverage: We obtain the most competitive pricing by leveraging the volume of placements with the Insurance Carriers that focus on the asset size and specialization of our clients. – Responsiveness: As an employee owned company for over 90 years, every AH&T employee is completely vested in providing unparalleled responsiveness and professionalism.3
  4. 4. D&O Claims Trends Regulatory exposure • Regulatory risk continues to be the single largest concern for D&O underwriters although we see an interesting data inflection: 180 # of FDIC D&O Total Damage Claims 160 Time Period Defendents (000,000) 140 120 Class Action 2000 - Q3 2010 53 $1,360 100 Filings related to 2010 Q4 56 $1,130 the Credit Crisis 80 2011 Q1 49 $1,083 60 Failed Banks 40 2011 Q2 80 $3,187 20 2011 Q3 56 $464 0 2008 2009 2010 2011 2011 Q4 79 $376 • FDIC updated their Professional Liability Lawsuits page ( to reflect that the number of lawsuits that it has authorized has been increased. While FDIC has up to 3 years for tort claims and 6 years for breach of contract claims, the site states that most investigations are completed within 18 months.4
  5. 5. Bank Failure trends Future Failures High Risk Bank Counts by State, 3Q 2011 > 10 5 to 10 3 to 5 Source: Trepp Bank Navigator 1 to 3 0180 Actual Low Hi160140120 Bank Distress100 80 Bank Failures per Year 60 — Current Cycle 40 20 0 2007 2008 2009 2010 2011 2012f5 Sources: FDIC, Trepp LLC
  6. 6. When is a Bank considered a ‘Regulatory Risk’ • Formal Written Agreement • Consent Order • C&D • MOU (relating to asset quality, earnings, or capital, not so much for Bank Secrecy) • Severe degradation of asset quality following a regulatory exam or audit where the expectation would be a regulatory restriction on the following exam. (Classified Assets > 75% or Tier 1 capital ratio <6%) • Qualities of an institution taken off the Regulatory risk category include, Removal of regulatory restriction, positive ROA 3 quarters, Classified loans/Capital <= 40% • D&O Policy considerations: – Lack of Regulatory Exclusion – Named Insured = Holding Company – Side A Non-Rescindable language – Insured vs. Insured Carve-backs6
  7. 7. D&O Claims Trends M&A • Stanford Securities estimates 188 Securities Class action lawsuits in 2011, 39 of which were related to Chinese reverse mergers or U.S. listed Chinese companies. • Of the 149 non-Chinese related suits, we count 53 M&A related cases or approximately 36%. This represents a significant increase from 24% in 2010. M&A claims can relate to perceived improper pricing/valuations, going private transactions, management buyouts, and/or allegations of proxy violations. • Underwriting considerations include % of shareholder votes against the M&A in addition to evaluation of dissenting shareholders • D&O Policy considerations: – Mid-term acquisition threshold % – Discovery provisions – Change of Control provisions – Cancellation provision – Existence of an M&A exclusion – Typically no prior acts for acquired company7
  8. 8. Peer Benchmarking: D&O Survey results8
  9. 9. Peer Benchmarking: D&O Survey results Bank Detail- by asset size $80,000,000 $70,000,000 $60,000,000 $50,000,000 Limits $40,000,000 $30,000,000 $20,000,000 $10,000,000 $0 Asset Size ABC Limits A Side limits?9
  10. 10. Peer Benchmarking: Carrier Breakout10
  11. 11. Directors & Officers Coverage discussion Top 10 D&O Coverage enhancements – Named Insured = Holding Company – Civil Money Penalties (state specific) – Limit Definition of Application to filings for just the past 12 months. – Update Definition of Claim to include informal investigations – Investigative Costs sub-limit – Order of Payments – Side A Non-Rescindable language and limit the imputation of knowledge (severability) – Update definition of Company to include Debtor-in-Possession – Insured vs Insured carve-backs for: • Creditor Committee, Bankruptcy Trustee • FDIC • Whistleblower, prior Board member, foreign equivalent – Limit when Insurance carrier can cancel policy Side A Insurance protects the individual Directors & Officers for claims where the Insured company – Limit the threshold of the conduct exclusions (fraud & personal can not indemnify the D&O’s in scenarios such as profit) to the ‘final adjudication’ standard. insolvency and derivative actions.11
  12. 12. Contact Information Primary Contact Dennis Gustafson, SVP & Financial Institutions Practice Leader Contact us when… p: 973.286.3572 c: 917.846.5548  You receive notice of a claim e:  Circumstances occur that may give rise to a claim P&C Practice Leader  Mergers or acquisitions occur Peter Dean , Principal p: 703.669.1135  A subsidiaries or spin-off is created c: 603.380.2557 e:  Secondary, follow-on or debt offerings are planned Secondary Contacts  The SEC initiates an investigation of the Michael Tomasulo, SVP & Directors & Officers Practice Leader Company or individuals p: 973.286.3570 e:  Asking employees to sit on the board of for profit companies Account Manager Jonathan Maio  20% or more of the Company’s stock p: 973.286.3571 will change hands e:  A bad news disclosure occurs Claims Director  Reviewing limits of liability and scope Rick Hirschoff, MA, MSW, SCLA of coverage p: 703.737.2259 e: rhirschoff@ahtins.com12
  13. 13. Q&A13