D&O Suits Reach Historic High: Economy to Blame?

The fallout from the 2007-2010 economic downturn is behind us, right? Nope; not so for the professional malpractice community in light of the many lawsuits arising from the recent market collapse. In fact, lawsuits relating to 2007-10 bank collapses in particular have increased dramatically and the primary targets are executives. According to a February 13, 2014 report which is available here, litigation against directors and officers of failed banks reached an all-time high in 2013. To make matters worse, many of those directors were forced to reach into their own pockets to absorb the costs.

The report, which focuses on suits filed by the FDIC against failed banks, concluded that D&O lawsuits filed by the FDIC in 2013 increased by 54% compared to 2012.  Notably, the FDIC filed more lawsuits during the second quarter of 2013 than it filed in any quarter since 2010.  The study showed that executives were increasingly targeted for 2009-2010 bank failures. For example, of the 140 banks that failed in 2009, the directors and officers of 64 of those banks have been engaged in litigation or settled prior to suit.

The report also concludes that those directors and officers facing suits are paying out of their own pockets.  Of the 82 settlement agreements implicating directors and officers, almost half of those agreements involved a direct out-of-pocket contribution.  The report also reveals that the amount of those out-of-pocket contributions totals at least $42 million. Additional insight on this report can be found in an excellent piece here.

The study demonstrates that the legal ramifications of the recent bank failures continue today. Those feeling the brunt of this litigation are executives. The study also suggests that too many directors and officers are inexplicably forced to incur personal liability.  Although we cannot be certain why executives made so many out-of-pocket contributions, inadequate malpractice coverage could be to blame.


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