By Bankston, Karen
When members step up to serve as directors, their credit union agrees to protect them from personal liability for carrying out their board responsibilities a promise that takes the form of directors and officers insurance as part of the organization's management liability coverage.
But with the incidence and costs of litigation on the rise in the financial services industry, according to a recent survey by the law firm Norton Rose Fulbright (www.nortonrosefulbright. com), how can directors ensure that adequate protections are in place? Specialists recommend regular reviews of the risk exposures facing your credit union with a special focus on regulatory and business expansions to ensure that your liability coverage is up to the task.
Credit unions are immune to the most common type of lawsuit filed against directors-the sort filed by stockholders unhappy with investment returns, notes insurance consultant Scott Simmonds (www.ScottSimmonds.com), Saco, Maine. And credit unions are unlikely to face legal action from regulators, like the Federal Deposit Insurance Corp.'s suits against shuttered savings and loans a quarter-century ago and against big banks rocked by securities losses more recently. A notable exception was the National Credit Union Administration's lawsuit against officers of the failed Western Corporate Federal Credit Union (WesCorp) in 2010; board members were not named in the complaint, and the case was eventually settled before going to trial.
As a director, you should be familiar with the indemnification provisions in your credit union's bylaws and other legal documents, says Jay Isaacson, director of product management with CUNA Mutual Group (www.cunamutual.com), Madison, Wis. These provisions specify under what circumstances the credit union can protect its directors and officers from legal claims associated with fulfilling their responsibilities to the organization.
Under Rule 750 of the NCUA Rules and Regulations, credit unions may indemnify directors as long as they fulfill their fiduciary responsibilities: the duty of care (e.g., attend meetings regularly, engage in board discussions, assess and understand financial reports, and make the best possible decisions for the organization), the duty of loyalty (consider the credit union's interests and avoid conflicts of interest), and the duty of obedience (comply with laws and regulations in carrying out their board responsibilities), Isaacson explains.