To provide additional cover to executives and directors at financial companies, whose personal assets are now at greater risk as a result of expanded Federal Deposit Insurance Corporation (FDIC) authority, Marsh has created a new form of insurance protection that is designed to cover the costs associated with an FDIC receivership action.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), the FDIC was given broad authority to become the receiver of a wider range of struggling financial companies. Under this authority, the FDIC can conduct investigations, recoup executive compensation, repudiate personal services contracts, and sue directors and officers of financial companies in receivership.
The FDIC has the authority to repudiate contracts that it determines to be "burdensome," including compensation agreements. In addition, it can also recoup compensation received during the previous two years by any current or former senior executive or director that it deems "substantially responsible for the failed condition" of the company. This potentially includes individuals who have not engaged in any negligent acts or other wrongdoing.
Developed by Marsh's Financial and Professional Liability Practice (FINPRO), the first-of-its-kind FDIC Receivership Endorsement is designed to protect senior management of covered financial companies, as defined under Dodd-Frank, that end up in receivership. Such “covered” organizations include bank holding companies, hedge funds, alternative investment funds, private equity funds, and venture capital funds. The endorsement provides for reimbursement of costs incurred in responding to and defending against FDIC efforts under Dodd-Frank to repudiate and recoup compensation and benefits. It also provides for indemnification for amounts repudiated and recouped by the FDIC in the form of earned salaries, wages, commissions, benefits and/or other compensation obligations.
In the absence of this insurance coverage, senior management at covered financial companies placed into FDIC receivership could be required to forfeit up to two years of their compensation without any right of recovery.
"While the full ramifications of Dodd-Frank may not be known for years, it is clear that the FDIC's dramatically expanded authority represents significant personal risks to executives, directors, and general partners of financial companies," said Mark Cuoco, a managing director in Marsh's FINPRO practice. "Marsh's endorsement allows executives to protect their personal assets in an environment of increasing scrutiny of executive decision-making and compensation."
Marsh's new endorsement is designed to be part of a financial company’s existing directors and officers liability (D&O) policy and is underwritten and provided by two leading global insurers.