New rules exposing executives and directors of troubled financial-services institutions to unexpected negative consequences—including the possible loss of their salaries and other compensation—have sparked the creation a new insurance coverage.

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

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

Marsh's FDIC Receivership Endorsement is an endorsement to a company's directors and officers Side-A insurance program, says Machua Millett, senior vice president and product leader for the general-partner liability team within Marsh's financial and professional liability division known as FINPRO.

(Editor's Note: Side-A coverage responds to non-indemnifiable D&O losses—losses arising in situations where a corporation cannot indemnify directors because of statutory prohibitions in a state, because the corporation is financially impaired, or for some other reason.)

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

Under the law and proposed rules still being formulated, any financial institution “teetering on insolvency” and deemed to be of systemic risk to financial stability of the country can be placed into receivership under the FDIC's authority, he says. When that happens, Millett explains, the FDIC is in a position to do two things:

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

• Force an individual who is deemed substantially responsible for the failure of the company to return two years of compensation, whether there is a finding of negligence or not. This applies to current or former senior executives or directors.

Under the endorsement, Millett says executives receive compensation they are not paid if a contract is repudiated. It also covers the return-salary clawback.

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

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

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

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

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

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

The program has been in effect for two months and there have been 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 best known carriers in the D&O space.” Both are highly rated, he says. He adds that Marsh is in talks with other insurers who have expressed interest in underwriting the program.

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