NU Online News Service, May 25, 3:10 p.m.EDT

Insurers are strongly objecting to a proposed regulation thatwould require officials of an insurance company being liquidated byFederal Deposit Insurance Corp. (FDIC) to prove that they were notresponsible for the company's failure and therefore liable fordamages.

Instead, officials of the American Insurance Association (AIA)say in a comment letter to the FDIC that a lower, state-basedstandard should be used to determine responsibility.

The AIA letter was sent in response to an FDIC proposalgoverning how it would recoup the cost of rehabilitating orliquidating a failed non-bank such as an insurance company.

The FDIC proposal includes clawing back compensation paid tosenior executives and directors. It goes back to early 2009, whenAmerican International Group came under intense fire for payinglarge bonuses to its employees despite the fact it had receivedmore than $100 billion in federal cash and guarantees starting inSeptember 2010.

The FDIC was granted this authority under the Dodd-Frankfinancial-services reform law in response to the huge controversyinvolving the payments to AIG executives and others similarlysituated—for example, at banks, investment banks and auto companiesthat had received federal aid.

In its letter, signed by J. Stephen Zielezienski, AIA seniorvice president and general counsel, the AIA notes that it is"highly unlikely that an insurance company will become subject tothe FDIC's orderly liquidation authority because under Dodd-Frank,the liquidation or rehabilitation of an insurance company should beconducted under applicable state law."

Consistent with that, the letter says, "the presumption ofresponsibility" standard imposed under federal law is inappropriatefor use in dealing with a failed insurer. That standard shifts theburden to the person under scrutiny to prove that he or she waswithout fault, rather than requiring the FDIC to prove itscase.

Instead, when dealing with liability of officials in the case ofa failed insurer, the FDIC "should look to standards established bystatutes or case law of the jurisdiction in which the coveredfinancial company is organized or in which it maintains itsprincipal office as the basis for its determinations," the AIAletter says.