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As indemnification disappears.

Now you have it, now you do not. Puzzlement has percolated on the part of some in the industry over the insistence by the NCUA that indemnification and coverage of legal fees incurred by the onetime WesCorp officers it is suing are not owed. That is, the defendants (now down to onetime CEO Robert Siravo and onetime chief financial officer Todd Lane) are on the hook for their own legal fees and any other costs, according to the NCUA.

Those matters remain under litigation and final results are yet to emerge.

But third-party legal experts, who declined to comment on the WesCorp specifics but who did offer insights into how indemnification and traditional directors and officers insurance are supposed to work, said that it is common for policies to have restrictions that invalidate any coverage after certain triggering events. They also indicated that regardless of news that may be grabbing headlines, these coverages for top executives and inrectors at credit unions continue to function as intended in the majority of instances. "People are running scared, but there is no reason for alarm," said Michael Lozoff, chair of the credit union practice group at Miami law firm Shutts & Bowen.

Lozoff stressed that there is one basic way to nullify indemnification. "If an officer or director does anything that borders on criminality, the coverage may be voided. They stand alone and naked before the law."

Lozoff, in a recent memorandum he authored, offered more clarification. "In keeping with the enactment of NCUA Rule 701.4, NCUA amended Rule 701.33, the rule which governs your right to reimbursements and which permits you to indemnify yourselves and to purchase insurance for that purpose. The amendment specifically prohibits the availability of the indemnification protection when a court determines that the indemnified party has committed 'gross negligence' with corresponding damage to the fundamental interests of the membership."

There is an important footnote, however, said Scott Hecht, a partner in the Kansas City, Mo., office of Stinson Morrison Hecker and an expert on directors and officers insurance. "In the credit union context, indemnification is only allowed for a civil proceeding, not criminal. But D&O coverage can provide coverage for criminal proceedings."

The devil, said Hecht, is in the details. "The specifics of D&O policy coverage vary enormously." He added that where matters typically get murkiest, and most fraught with acrimony, is when the institution has become insolvent.

Of course exactly that is the situation with WesCorp.

As for confusions about indemnification versus insurance, Lozoff said that, generally, indemnification amounts to an agreement by the institution to cover certain defined expenses, such as legal fees or losses incurred in a lawsuit. Typically, the credit union pledges its own assets toward that end, although, said Lozoff, it is common for all but the largest to supplement that coverage with thirdparty insurance.

Asked to comment for this article, CUNA Mutual, whose CUMIS unit had been the insurer for WesCorp principals until the NCUA cancelled coverage after it put the institution into conservatorship, had not responded by press time.
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Title Annotation:LITIGATION
Author:McGarvey, Robert
Publication:Credit Union Times
Date:May 2, 2012
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