Silicon Valley Bank: Canary in the Coal Mine or Tempest in a Teapot?

MARCH 21, 2023

The collapses of Silicon Valley Bank (SVB) and Signature Bank (SB) have stunned more than just the banks’ depositors, shareholders and regulators. Insurance companies that underwrite the banking sector and other impacted industries have started evaluating potential direct losses due to litigation against — and investigations of — those specific banks and executives. Underwriters are also quickly trying to anticipate any broader impact, particularly on directors and officers (D&O) liability risk.  

The good news? The U.S. government has taken quick action to stem the tide of these failures. Unlike past financial sector systemic meltdowns (including the 2008 economic calamity, the mutual fund and investment banking crises a few years before that, and the savings & loan crisis of the 1980s and early 1990s), a strong argument could be made — for now — that this one will be contained.

The bad news? The unknown. The levels of interbank reliance and the tentacles of the overall global financial system can surprise even the experts. And like the equities market, “unknown” in the insurance world typically means more bearish behavior. Time will tell.

What can risk managers do at this point? Start to refresh themselves on all the potential issues that may arise in securing D&O liability insurance and related lines of coverage. They should also consult with insurance experts to make sure that the true impact to their firm is understood by underwriters, particularly if that impact is not significant.

Prepare for Underwriting Questions  

For banks, underwriters will inquire about what risk management protocols are in place to avoid a similar situation to what happened to SVB and SB. More specifically, expect questions including:

• “What withdrawal activity has occurred post-3/13/23?”
• “When was your last regulatory audit?”
• “How is your asset quality (e.g., Tier 1 and Tier 2 assets)?”

For non-bank financial institutions, prepare to answer questions about what exposure the institution has to SVB, SB, or any other banks that may be impacted, whether in the U.S. or globally.  

For most commercial organizations, expect questions including:

• “Do you have any money in excess of $250,000 deposited with SVB or Signature (or any other banks exposed)?”
• “With the current concerns in the banking sector, can you comment on any exposure this may present?”

These questions will undoubtedly be more pressing for “Silicon Valley” and related companies.

D&O Liability Coverage Implications

D&O liability coverage is typically secured and renewed on an annual basis. Therefore, the policy must be useful in both good times and in bad. Proper limits of liability, manageable self-insured retentions, and broad, flexible coverage terms are all needed to protect D&O’s personal assets comprehensively. These D&O liability policies must:

• Respond to claims (including government enforcement body investigations and inquiries) against past, present and future directors and officers.
• Provide the necessary severability (where the wrongful acts of one insured do not impute to another insured) to protect innocent insured parties.
• Protect D&Os in the event that indemnification by their companies is not available or permissible.    

Dealing With Bankruptcy and Insolvency

If insolvency and/or a bankruptcy filing looms for any organization caught up in this crisis, key insurance protections must be reviewed for possible changes. In these scenarios, organizations and their D&Os typically have a heightened risk of litigation from shareholders, creditors, trustees, vendors, employees and/or government regulators (i.e., U.S. Securities and Exchange Commission, Department of Justice).

A critical D&O liability insurance checklist includes, but is not limited to, the following:

• Does filing for bankruptcy trigger a “change in control” within my D&O liability policy?
• Does my D&O insurer(s) have the right to rescind the policy, in whole or in part?
• Does my D&O liability coverage have an Order (Priority) of Payments clause to protect individual D&Os by paying any Side A loss (a loss that is not indemnified by the organization) first, before the organization’s loss is covered?
• Does the definition of “organization” or equivalent in my D&O liability policy include a debtor-in-possession (DIP)?
• Does the “insured versus insured” exclusion have the proper carve backs (allowing for coverage) for claims brought by a bankruptcy trustee, examiner, receiver, or any comparable authority?
• Is there an option to pre-pay for “runoff” coverage, to protect past D&Os after emergence from bankruptcy?
• Does my D&O liability coverage have any dedicated Side-A-only (covers only individual insureds’ loss due to lack of indemnification) coverage? Does my Side A coverage offer a reinstatement of limits for future, unrelated claims?
• Is my Side A coverage written by a financially strong insurer(s)? Does it provide difference in conditions (DIC) coverage, meaning that it will drop down or infill coverage under certain circumstances?

To learn more about the various risk management services available through USI, contact your USI representative or email pcinquiries@usi.com.