NU Online News Service, Oct. 13, 2:34 p.m. EDT

Reports that the Federal Deposit Insurance Corp. (FDIC) has given the green light to sue more than 50 directors and officers of failed banks has one broker asking if the agency did its due diligence before deciding to sue.

"With a lot of these [D&O] policies, limits have been depleted - terms have been carved back," said Michael White, senior vice president of Willis' Executive Risks Practice. "They are barebones policies."

Though the FDIC is seeking to recoup more than $1 billion in losses related to the credit crisis, it will be interesting to see whether there is valid, collectible insurance in place, he said.

Policies have already been tapped to defend securities lawsuits filed against directors and officers related to drastic drops in stock prices where it is alleged executives breached their fiduciary duties, Mr. White said.

The FDIC has been appointed receiver of more than 300 banks since Oct. 1, 2000, according to its website.

When D&O insurers renewed with troubled banks, many scaled back coverage and included exclusions, Mr. White explained. One of these exclusions, a regulatory exclusion, could protect insurers from having to defend policyholders from the FDIC.

He noted that many D&O policies include exclusion against claims based upon the fraud or dishonesty of directors and officers. Insurers may not be able to rely on this exclusion because it is triggered by final adjudication.

"Really what the FDIC may be doing here is buying a coverage dispute," Mr. White said. "The point is there is going to be a lot of litigation, which is extremely expensive."

No one knows the identities of the 50 or so directors and officers the FDIC intends to sue, he said. The FDIC sends letters to directors and officers once they determine litigation is possible, which opens up more questions.

"There could be an issue about when the issue was first reported to the insurer," Mr. White theorized. "If it was reported before the terms or exclusion of the policy was changed, the policyholder will want and may be able to go to the previous policy for coverage."

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FDIC Plan to File Lawsuits Creates D&O Policy Coverage Questions

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