The failures of Silicon Valley Bank and Signature Bank have resulted in claims against them and the possibility of claims against other entities which have suffered setbacks as an indirect result. However, entities with desirable features in their public company Directors and Officers (D&O) liability policies are likely (subject to compliance with policy terms and conditions) to find coverage for the vast majority of the anticipated third-party exposures.
The last few days have been tumultuous for the U.S. banking industry, particularly for banks with deep ties to the high tech sector. As a result of “runs” on the banks which could not be promptly satisfied, on Friday, March 10, 2023, California state regulators shut down Silicon Valley Bank (SVB) and on Sunday, March 12, 2023, New York state regulators shut down Signature Bank. The U.S. Treasury Department’s joint announcement, with the Federal Reserve and Federal Deposit Insurance Corporation (FDIC), that all deposits in both banks would be available on Monday, March 13, alleviated many of the most pressing concerns arising from the bank failures. In the UK the regulators have approved the sale of the UK subsidiary to HSBC
However, attention must still be paid to the situation, since many types of fallout are still likely, plus prudent companies and their directors and officers may want to take proactive steps at this point in relation to the risk of further shoe drops.
Against SVB’s directors and officers: There is already at least one 10b-5 securities fraud class action filed against the bank’s parent, SVB Financial Group, and its CEO (Greg W. Becker) and CFO (Daniel Beck). There are also U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) investigations.
Against Signature Bank’s directors and officers: There is also at least one 10b-5 securities fraud class action filed against Signature Bank and some of its officers and directors. Note that, while the SVB suit has a purported Class Period of almost 2 years, the alleged Class Period for the Signature Bank is only 10 days and could result in limited damages.
The FDIC and/or its designee is likely to also file a lawsuit against the directors and officers of SVB and Signature Bank, as might other creditors, and further government investigations are likely. Also, as with any big bankruptcy, such as Enron, Madoff, etc., there will likely be claims brought against lawyers, accountants and other advisors to SVB and Signature Bank.
There may be similar risks to the directors and officers of other banks whose stock prices also have been going down, although those claims may be very defensible as arising from possible overreactions fueled by social media as opposed to being the result of any wrongdoing. There could also be investigations and/or litigation against companies, particularly tech startups, who arguably had too much cash deposited with SVB; the guarantee of all the deposits lowered the stakes on this issue, but if stock prices go down and don’t recover there still could be lawsuits.
We anticipate increased regulatory scrutiny and that regulators will review D&O policy provisions. If we look back, the Federal Reserve issued a statement in July 2019 which cautioned depository institutions to pay close attention to the exclusions and protections contained in the D&O policies. The FDIC issued a similar statement in October 2013.
The biggest potential exposures to the various entities affected or potentially affected by the situation are likely to be bankruptcy, securities fraud class actions, FDIC and/or creditor claims, and government investigations (note that if the deposits hadn’t wound up being fully guaranteed, then there could have been various state law exposures for scores of companies arising from missed payroll deadlines).
In relation to bankruptcy risk, U.S. directors and officers can take substantial comfort. D&O policies are designed with an intention to respond to claims against directors and officers while the organization is insolvent or has filed for U.S. bankruptcy law protection. Bankruptcy exclusions are rare, and policy provisions that have the potential to be relevant include the following:
Securities fraud class actions are the bread and butter of public company D&O policies, and are generally fully covered for defense and indemnity, subject only to minor limitations such as the remote theoretical possibility of a non-appealable final adjudication finding deliberate fraud in an underlying action. Even in such a unlikely situation, many policies would still provide coverage for insureds without such findings and some policies would not require repayment of defense costs.
Derivative claims and FDIC/creditor claims are also generally provided broad coverage under current public company D&O policies. Whether because of bankruptcy/receivership or state law restrictions on indemnification for derivative settlements, indemnity on these matters is generally paid off Side A coverage without applying a retention. As mentioned above, in relation to FDIC and creditor claims, it is desirable that Entity v. Insured exclusions have bankruptcy-related exceptions.
Government investigations against individual insureds are generally covered for defense, even at early informal stages, while government investigations against entities (to the extent that the relevant entity still exists) are generally not covered unless a client has negotiated and paid for such additional coverage. However, actual government litigation generally triggers a defense obligation. Amounts sought by government entities may be covered as a default, but depending on how those amounts are characterized carriers might seek to exclude them as fines or penalties or otherwise uninsurable amounts.
While the banking sector appears to be stressed and the overall economic future is uncertain, directors and officers who have worked with their brokers to secure state of the art public company D&O policies are likely to find the coverage that they need. In anticipation of potential additional economic turmoil, insureds should proactively check in with their brokers to make sure that they have the latest and best features available.
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
