AIA Criticizes FDIC Recoupment Plan For Failed Insurers

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

Insurers are strongly objecting to a proposed regulation that would require officials of an insurance company being liquidated by Federal Deposit Insurance Corp. (FDIC) to prove that they were not responsible for the company's failure and therefore liable for damages.

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

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

The FDIC proposal includes clawing back compensation paid to senior executives and directors. It goes back to early 2009, when American International Group came under intense fire for paying large bonuses to its employees despite the fact it had received more than $100 billion in federal cash and guarantees starting in September 2010.

The FDIC was granted this authority under the Dodd-Frank financial-services reform law in response to the huge controversy involving the payments to AIG executives and others similarly situated—for example, at banks, investment banks and auto companies that had received federal aid.

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

Consistent with that, the letter says, "the presumption of responsibility" standard imposed under federal law is inappropriate for use in dealing with a failed insurer. That standard shifts the burden to the person under scrutiny to prove that he or she was without fault, rather than requiring the FDIC to prove its case.

Instead, when dealing with liability of officials in the case of a failed insurer, the FDIC "should look to standards established by statutes or case law of the jurisdiction in which the covered financial company is organized or in which it maintains its principal office as the basis for its determinations," the AIA letter says.