Consent Orders for Banks: D&O Insurance Considerations

By Estela Aleksi, SPG ExecuPro

Regulatory risk is one of the most prominent risks banks face. Regulatory risk for a bank may encompass several areas, most notably compliance with rules and regulations, routine or targeted examinations or investigations, or enforcement proceedings. In this short piece we focus on the regulatory instrument of a consent order and important areas for review when considering D&O insurance.

Consent Orders for Banks: Regulatory Authority

Consent Orders are binding legal orders issued by financial regulators that force receiving institutions to formally address significant violations of regulatory standards.¹

The main regulatory agencies with authority to use Consent Orders or similar enforcement actions are the Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, Consumer Financial Protection Bureau (CFPB), and State Banking Regulators.

FDIC

The FDIC categorizes a Consent Order/Order to Cease and Desist as: “An injunctive-type order that may be issued when a banking organization or institution-affiliated party is engaging, has engaged or is about to engage in an unsafe or unsound banking practice, or a violation of law. A banking organization or an institution-affiliated party subject to such an order is required to follow the proscriptions set out in the order and can be directed to take specified actions. 12 U.S.C. § 1818(b).”²

OCC

The OCC considers a Consent Order to be a formal enforcement action. The Policies and Procedures Manual of the OCC clarifies: “Aside from its title, a consent order is identical in form and legal effect to a C&D order (Cease and Desist Order). A consent order, however, is issued with the consent of the bank’s board.”³

CFPB

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) allows the Bureau of Consumer Financial Protection to enter into administrative consent orders where violations of federal consumer laws have been identified.

Consent Orders state the Bureau’s findings concerning the identified violations and generally impose injunctive relief, monetary relief such as redress and civil money penalties, and compliance related reporting.⁴

State Banking Regulators

State Banking Regulators may issue separate consent orders for banks chartered in their respective states, or issue parallel consent orders with other regulatory authorities.

Directors and Officers Insurance Considerations

Banks take Consent Orders very seriously as non-compliance may have devastating consequences for a bank, including individual directors and officers. There are several important D&O policy provisions that banks need to consider upon receiving a Consent Order. While the list of items below is not exhaustive and policies should be read as a whole, we highlight a few key provisions:

When should a bank notify its D&O insurer about a Consent Order?

A Consent Order is the result of an investigation of the bank by a regulatory authority. Typically, consent orders attempt to resolve the matters outlined in such orders without a formal proceeding being filed. There may have been an investigation that preceded the consent order, so banks should be mindful of the definition of Claim that triggers coverage under their policy, and when notice should be provided.

Whether a bank has received a consent order due to its own banking practices or as part of a broader industry sweep, it should consider noticing their D&O carrier in a timely manner (if they have not done so in the preliminary phase of the investigation or examination leading to the consent order as discussed above). Failure to do so may result in late notice and potentially denial of any subsequent coverage.

Does entering a Consent Order require the D&O insurer’s consent?

While consent from their D&O insurer(s) is not typically required for banks to enter into a Consent Order with a regulator, keeping the D&O insurer(s) apprised would help alleviate concerns that may arise from consent to settlement clauses in the D&O insurance policies. A consent to settlement clause generally requires an insured to obtain prior written consent from the insurer to enter into a settlement or admit liability or stipulate to a judgment with respect to a claim.

Policy provisions which may be implicated by a Consent Order

Fines and Penalties

Fines and Penalties are typically excluded under the definition of loss. Some D&O policies may include a carveback for defense expenses applicable to the excluded elements that have been carved out of the definition of loss.

Bankruptcy Exclusion

Some D&O insurance carriers may seek to add a bankruptcy exclusion for a bank under a Consent Order. These exclusions are typically very broad (including broad preambles such as “in any way related to”) and depending on the situation or policy wording, may be hard to litigate.

Regulatory Exclusion

Carriers may seek to add a regulatory exclusion to a subsequent policy period or a specific matter exclusion related to the Consent Order and as such it is important to put the carrier on notice as discussed above, especially because there is a possibility that an incumbent carrier may choose to non-renew.

Considerations for insurance practitioners working with banks

Insurance implications for banks under a Consent Order are complex and require careful consideration. Banks should consult with their attorneys and insurance representatives to understand the scope of coverage under their D&O policy in the context of a Consent Order from an enforcement authority. In addition to the care that must be paid to negotiating the primary policy’s terms and conditions, the bank’s broker can consider proposing Side A DIC coverage as additional protection. It is important to take a proactive approach and discuss issues like these so the client has proper protections in place before a consent order arrives.

Do you need to speak with a Financial Lines Insurance Expert? Connect with SPG ExecuPro to review your management liability insurance policy.

This article is provided for informational purposes only. No information contained herein should be construed as legal or other formal guidance.

References

1. https://www.monticellocg.com/blog/2021/04/20/building-regulatory-resilience-a-deeper-look-into-consent-orders-mras
2. https://orders.fdic.gov/s/types-of-action
3. https://www.occ.treas.gov/news-issuances/bulletins/2023/ppm-5310-3.pdf
4. https://www.federalregister.gov/documents/2020/11/03/2020-22360/statement-of-policy-on-applications-for-early-termination-of-consent-orders