Marsh launches insurance against bank pay seizure

Thu Apr 21, 2011 9:00am EDT

* Coverage protects against FDIC clawbacks

* Pays for both legal fees and lost compensation

* Marsh says will not cover illegal behavior

By Ben Berkowitz

NEW YORK, April 21 (Reuters) - Insurers are giving bankers a new tool to fight back against regulators.

Last year's financial reform law allows regulators to seize up to two years of pay from reckless bank executives, but now insurers are offering coverage that can reimburse bankers whose compensation is confiscated.

Insurance broker Marsh said on Thursday it is launching such a program, which it calls the first of its kind. It did not name the insurers underwriting the policies.

The policies will not protect bankers who are found to have committed fraud, but can help executives who claim to be wrongfully accused.

Marsh said the program is a response to the FDIC's broadly increased powers under the Dodd-Frank reforms, including the right to recover pay -- or "claw back" -- from executives who are deemed to be at fault for an institution's failure.

Even before the FDIC gained those expanded powers, it was aggressively pursuing cases against bank officials for crisis-era losses. As of mid-April, cases against 187 people had been authorized to recover $3.8 billion. [ID:nN15284152]

The FDIC's highest-profile case so far came last month when it sued Kerry Killinger and two other Washington Mutual Bank executives who were accused of pushing reckless home loans on lenders with ultra low rates, while ignoring warnings about the housing bubble. [ID:nN17230252]

Marsh's new policy is meant to be an attachment to a company's existing directors and officers insurance, which generally does not cover lost pay from asset seizures.

"Typically policies have excluded this compensation element," said Mark Cuoco, managing director of Marsh's financial and professional liability practice. "It's just hard for the insurance companies to get their arms around what their exposure is to compensation."

As with any other insurance, policies have to be underwritten -- in other words, banks cannot just call and sign up, the insurers will have to vet them and the potential policyholders to make sure they are appropriate for coverage.

"Fraud is not insured. The policy is intended to protect and help individuals, executives who find themselves in this situation, and it basically provides a resource for them to hire attorneys and possibly give them some indemnification for these clawbacks, again if they're insurable under the law," Cuoco said.

"The basic premise, of course, (is that) you're not going to be able to insure something that the law says is not insurable," he added.

Marsh is a unit of Marsh & McLennan. (MMC.N) (Reporting by Ben Berkowitz, additional reporting by Dave Clarke in Washington, editing by Matthew Lewis)

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