New rules exposing executives and directors of troubledfinancial-services institutions to unexpected negativeconsequences—including the possible loss of their salaries andother compensation—have sparked the creation a new insurancecoverage.

Insurance broker Marsh, a subsidiary of Marsh & McLennanCos., says it has developed an insurance endorsement aimed atcompany officials whose personal assets “are now at greater risk asa result of expanded Federal Deposit Insurance Corp. (FDIC)authority” to place financial-services companies intoreceivership.

The FDIC authority is spelled out in the Dodd-Frank Wall StreetReform and Consumer Protection Act.

Marsh's FDIC Receivership Endorsement is an endorsement to acompany's directors and officers Side-A insurance program, saysMachua Millett, senior vice president and product leader for thegeneral-partner liability team within Marsh's financial andprofessional liability division known as FINPRO.

(Editor's Note: Side-A coverage responds to non-indemnifiableD&O losses—losses arising in situations where a corporationcannot indemnify directors because of statutory prohibitions in astate, because the corporation is financially impaired, or for someother reason.)

“Rather than wait for issues to arise, we wanted to get out infront for our clients,” says Millett, explaining that theendorsement was developed after FINPRO executives examined theDodd-Frank Act to understand what, if any, additional liabilitymight crop up for clients under the law.

Under the law and proposed rules still being formulated, anyfinancial institution “teetering on insolvency” and deemed to be ofsystemic risk to financial stability of the country can be placedinto receivership under the FDIC's authority, he says. When thathappens, Millett explains, the FDIC is in a position to do twothings:

• Repudiate contracts it determines to be burdensome,including compensation agreements.

• Force an individual who is deemed substantiallyresponsible for the failure of the company to return two years ofcompensation, whether there is a finding of negligence or not. Thisapplies to current or former senior executives or directors.

Under the endorsement, Millett says executives receivecompensation they are not paid if a contract is repudiated. It alsocovers the return-salary clawback.

Millett says “the endorsement is broadly written to coverbonuses and all other forms of compensation and benefits” subjectto FDIC actions.

It does not cover cases of fraud or criminal behavior, but doescover acts short of that, Millett adds.

The endorsement, which is purchased by the company on behalf ofthe directors and officers as part of their D&O coverage, alsoprovides for reimbursement of costs incurred responding to anddefending against FDIC efforts to deny compensation andbenefits.

Target insureds for the endorsement include bank holdingcompanies, hedge funds, alternative-investment funds,private-equity funds and venture-capital funds.

While not getting into specifics, Millett says coverage is basedon what the purchaser believes is meaningful.

Cost is based on a company's situation, he said. A company ingood financial condition will receive a better rate than one thatis trending toward difficulty, Millett notes, but “for the securityit gives, it is fairly cheap.”

The program has been in effect for two months and there havebeen a few purchasers, none of whom he would name.

As for insurers, there are two underwriters of the program.Without naming them, Millett describes them as “two of the bestknown carriers in the D&O space.” Both are highly rated, hesays. He adds that Marsh is in talks with other insurers who haveexpressed interest in underwriting the program.