|April 29, 2014|
Previously published on April 24, 2014
In April 2014, the American Association of Bank Directors ("AABD") released results of its survey of more than 2,000 banks and savings institutions assessing banks and savings institutions directors' and prospective directors' fear of personal liability.
The AABD summarized its survey results as follows:
- Eighty banks responded to the survey.
- Nineteen, or 24.5%, reported that within the past five years, they either had at least one director resign from office out of fear of personal liability; had at least one person offered a position as a director refuse to serve out of fear of personal liability; and/or had a director refuse to serve on the Board Loan Committee out of fear of personal liability.
- Of those who declined an offer to serve as a bank director (19 respondents), 47.3% (nine respondents) gave personal liability concerns as a reason.
- Nine banks, or 11.3% of respondents, reported that at least one director resigned because of fear of personal liability.
- Nine banks, or 11.3% of respondents, reported that at least one person offered a position as a director refused to accept the position from fear of personal liability.
- Nine of the banks that had Director Loan Committees, or 11.5%, reported that one or more directors refused to serve or to continue to serve on the Board Loan Committee out of fear of personal liability.
- Six of the banks, or 8.7% of respondents, reported that one or more directors resigned at least in part because of time commitments required in their role as a bank director.
- Fear of personal liability was the first most common reason given for refusing to accept bank director positions.
- Time commitment was the second most common reason given for refusal to accept bank director positions.
The AABD believes that fear of personal bank director liability is largely driven by federal banking agency lawsuits, enforcement actions, threats of enforcement actions in reports of examination, and responsibilities placed on bank directors by laws, regulations and guidance that specifically target bank directors. In some instances, a bank's inability to obtain sufficient coverage under a director and officer liability insurance policy was a contributing factor.
In light of an increasingly rancorous regulatory and shareholder environment, bank holding companies, banks, savings and loan holding companies and savings institutions should review director standards of conduct under applicable state corporate law and federal and state banking laws and regulations (as applicable) and such entities' governing documents, as well as the limits of available limitation of liability and indemnification provisions. This review should include an analysis of standards of conduct, scope of coverage, and policy exclusions under existing director and officer liability insurance policies.