Shaky Banks Face Limits on Insurance Coverage for Suits, Probes

With public confidence in the banking sector shaken, cautious insurers are moving to reduce coverage for banks and their executives to limit their exposure to pricey litigation and regulatory penalties.

Director and officer insurers are finding themselves in the thick of the recent banking collapses because they cover exactly what problematic banks are experiencing: securities class actions and regulator investigations. Banks, as well as venture capital and private equity firms, should expect tougher questions on risk management, higher insurance premiums, and lower coverage limits as they get into the D&O renewal season this spring, insurers and brokers say.

Eileen Yuen, a managing director at broker Arthur J. Gallagher, said insurers have proposed to cut a handful of banks’ D&O policy limits by up to half in recent weeks. Some regional banks that held $10 million D&O policies may be only able to get $5 million upon renewal if insurers think they are not performing well, she said.

“The banking crisis will make D&O insurance expensive across the board,” said Robert Tomilson, a Clark Hill attorney who represents insurers. “It’s not just the frequency of the claims; these massive claims are going to reach the insurance limit on all of these banks.”

First Republic Bank, Credit Suisse, Silvergate Bank, SVB Financial, and Signature Bank are all facing potential shareholder class actions. Silicon Valley Bank and Signature are also dealing with Department of Justice and Securities and Exchange Commission probes. Meanwhile, President Biden asked Congress in March to expand the Federal Deposit Insurance Corporation’s authority to penalize bank executives for mismanagement, opening a door to further regulatory claims.

Given the litigation climate and heightened regulatory scrutiny, insurers will grill banks over their investment allocation, holding of long-term illiquid assets, and customer base diversification, said Matthew McLellan, D&O product leader at Marsh McLennan.

Banks, too, shouldn’t be surprised if insurers raise premiums and deductibles, said Ray Santiago, head of financial lines, North America, at Sompo International, a top US D&O insurer. Even so, no one expects D&O insurers to abandon underwriting for banks entirely.

“We’re in an elevated risk environment,” Santiago said. “I can easily see why people would want to achieve a higher rate environment, given the higher exposures that they’re underwriting to,” he said, referring to insurers.

Harsher Underwriting

In the wake of the fall of SVB and Signature, banks are scrambling to convince insurance underwriters that they are still worthwhile risks, while carriers finally see an opportunity to jack up prices after D&O premiums fell last year.

Tomilson predicted that large banks such as JP Morgan Chase & Co., Bank of America Corp., and Wells Fargo & Co. will see double-digit increases in their D&O premiums, as insurers work to contain risks. That price hikes will likely come into play in April, May, and June when many major banks’ D&O contracts come up for renewal.

“There is no doubt there will be a higher level of underwriting” this year, says Ron Borys, a managing director at Alliant Insurance Services, a broker.

Sompo’s Santiago said the insurer “has been drilling down into banks’ credit quality, access to liquidity, crypto exposures, and market risks,” in D&O renewal sessions in the past week. “I see a lot of questions around risk management’s protocols,” he said.

Insurers can get particularly nervous if a bank’s customers are concentrated in a single industry—especially if it’s experienced volatility like tech, crypto, or real estate, carriers and brokers say.

Underwriters are also asking more pointed questions about banks’ investment portfolios, instead of just routinely going through their financial statements, Yuen said.

Carriers are not just scrutinizing banks. They are checking all their clients to see if they have deposits in the troubled banks, brokers said. Insurers are concerned about potential investor claims against companies alleging failed due diligence on the banks they store money in, said Evan Bundschuh, vice president at broker GB&A.

“Insurers are going to try to raise rates on everybody for everything because of uncertainties and brokers will fight back,” said Lawrence Fine, management liability coverage leader at Willis Towers Watson. “Some insurers will just say, ‘We don’t really underwrite banks,’ but other carriers see an opportunity to try to take more business.”

Growing D&O Exposure

The Biden administration has said depositors of the failed banks will be protected but not investors, who have responded by filing suit. That is where D&O insurance, which covers defense costs against securities claims whether they have merit or not, would kick in.

The defense alone “can be astronomical, especially if you have six different directors with some big white shoe firms billing at their rates. It depletes limits fast,” said Paul Curley, a partner at Kaufman Borgeest & Ryan LLP.

Insurers also see increasing risks from government probes against banks, given that D&O policies also typically cover fines and penalties against executives.

In March, Biden urged tougher mismanagement penalties for bank directors, lobbying for greater regulator authority to seek clawback compensation—including directors’ gains from stock sales. The SEC forbids insurance reimbursement for clawback amounts, but insurers would still have to cover directors’ legal defense costs and related fees.

Regulators are more likely to sue or launch probes once they know the banks have D&O insurance because they view it as a potential source of funds for fines and recovery for depositors, said Kevin M. LaCroix, executive vice president at broker RT Specialty.

“One of the first things FDIC did when it came into a bank as receivers in the last financial crisis was asking if the bank has D&O insurance,” he said. More than 100 FDIC lawsuits were filed against failed banks in the 10 years after the last crisis, which gave rise to dozens of D&O insurance lawsuits, brokers and attorneys say.

Competitive Market

It’s too early to say to what extent insurers will restrict policy terms or deny coverage for banks, as current bank failures haven’t posed a systemic risk the way the last financial crisis did.

Insurance premiums and underwriting are “influenced by much greater forces than a handful of banks having financial problems,” said Micah Skidmore, a partner at Haynes and Boone LLP.

Top D&O players like Chubb Ltd., The Travelers Companies Inc., American International Group Inc., AXA XL, and CNA Financial Corp. will be more impacted by the banking crisis than others, said Alliant’s Borys. However, their exposure to any one loss will be capped at $10 or 15 million, he said. Most insurers limit their D&O coverage amount to under $20 million, and big banks’ hundreds of millions of dollars in D&O coverage is always shared by multiple insurers, Borys said.

The D&O insurance market is also competitive, so carriers aren’t expected to abandon the banking industry or raise costs for every bank, said Thomas Power, financial institutions leader at broker CAC Specialty.

“A primary carrier issuing $20 million may cut it down to $15 or $10 million,” Marsh’s McLellan said. However, he said, that won’t affect the overall availability of D&O insurance to banks.

“D&O insurers want to develop a long-term relationship with their customers,” he said.