CUNA Mutual Answers Volunteer Indemnification FAQs
April 14, 2011
April 14, 2011
By John Wallace
Reviewing your credit union’s protections against legal action against its board of directors is important now, given the NCUA’s new financial literacy requirements and other rules on fiduciary requirements for directors. And the proposed “Golden Parachutes and Indemnification Payments” rule should be on your board’s radar screen.
In general, fiduciary duties of board members are changing. Your credit union may be thinking about adjusting or augmenting its Directors and Officers (D&O) liability policy.
Here are some FAQs about D&O coverage:
Q: Does my policy have an insured-versus-insured exclusion, and what does that mean?
Most D&O policies basically exclude coverage for claims involving one insured suing another insured. Examples include a director suing another director, or an officer suing an employee, for breach of fiduciary duty. Insurers added the exclusions after seeing the moral hazard in this type of claim. In the mid-1980s, Bank of America executives sued their own loan officers for making bad loans, and the loan officers were covered by the bank’s D&O policies.
If your policy has such an exclusion, find out whether it applies to situations in which a bankruptcy trustee or examiner—who may be considered an insured under the policy—sues your board. Often, the exclusion specifies that it doesn’t apply to these situations. Without that limitation, the exclusion would amount to an exclusion against claims resulting from the action of regulators.
Q: What happens to our D&O policy if the credit union goes into conservatorship?
Each policy is different, but when a credit union goes into bankruptcy or conservatorship, many D&O policies either cancel or switch to a “run-off” policy that may cover different wrongful acts only prior to the conservatorship. (The Management & Professional Liability coverage underwritten by CUMIS Insurance Society, Inc., is an exception.) In short, a credit union’s coverage dwindles when it’s needed most.
Q: How do we know that our directors’ indemnification agreement provides the best protection allowable if they should be sued?
Consult a qualified attorney to help you construct your board’s indemnification agreements to create the broadest indemnification.
Q: What can credit unions do to protect board members with these new rules from the NCUA being adopted and other potential changes on the horizon?
- Your board will face additional legal exposures, so consider additional D&O coverage. The policy’s coverage limits can simply be increased, but in addition, consider a Management Umbrella or Side A (Difference In Conditions) DIC. A Management Umbrella provides broader indemnification when other insurance does not apply.
- Have an attorney review the indemnification provisions to ensure they align with the new rules. The attorney should also update your board about its fiduciary requirements.
- Start documenting your board’s attendance at financial-based courses to support the new financial literacy requirements.
- Consider broader corporate governance standards.
John Wallace is the product executive for CUNA Mutual Group’s Bond and Management & Professional liability insurance products. Contact him at 800.356.2644, ext. 7151, or at firstname.lastname@example.org.
Insurance products offered to credit unions are underwritten by CUMIS Insurance Society, Inc., a member of the CUNA Mutual Group. CUNA Mutual Insurance Agency, Inc., an affiliate within CUNA Mutual Group, is the marketing agent licensed to broker Property and Casualty coverages. This document highlights only some of the major coverage features. Coverage may vary or may not be available in some states. For details on state-specific regulatory approvals, please visit www.cunamutual.com/cuppolicyinfo. This summary is not a contract. No coverage is provided or implied by this summary, nor does it replace any provisions of any policy. Please contact the company or an agent for further information about coverage, terms, conditions, and exclusions. This summary does not make or imply any representations that coverage will, does, or does not exist for any particular claim or loss, or type of claim or loss, under any policy. Whether or not coverage exists for any particular claim or loss under any policy depends on the facts and circumstances involved in the claim or loss and all applicable policy language
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