Author: Walker Newell
In the post-Dodd Frank era, banks and non-bank lenders have carried heavy regulatory and litigation burdens.
Bank Secrecy Act (BSA), anti-money laundering (AML) and know-your-customer (KYC) standards rose. Compliance costs increased — and increased again.
Banks frequently settled BSA/AML enforcement cases, often for eye-popping amounts.
The primary federal bank regulators — the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of Currency (OCC) and the Federal Reserve — imposed civil money penalties on numerous banks.
And the Consumer Financial Protection Bureau (CFPB) actively enforced its broad authority to police perceived unfair practices, bringing dozens of enforcement actions against large and regional banks.
Over the same period, plaintiffs' lawyers have repeatedly extracted large class settlements for lending- and fee-related issues. These same issues have also driven follow-on securities litigation against publicly traded banks, which often end in seven- to eight-figure settlements.
In the past year, however, the regulatory landscape has changed significantly.
While litigation over CFPB funding remains ongoing, the agency's leadership has reportedly paused enforcement activities. It seems highly unlikely that — for the next few years, at minimum — we will see the types of CFPB investigations and enforcement actions that have been typical over the course of the agency's history.
Enforcement activities at the Federal Reserve, OCC and FDIC also appear to be in flux. Similarly, case statistics for the Securities and Exchange Commission (SEC) — which has jurisdiction over securities-related activities at banks — declined significantly in 2025.
At the same time, the private litigation environment remains fraught. Risks from AI disruption and evolving crypto implementation (with still-developing regulatory frameworks sprinkled on top) are top of mind. Cyber-related private litigation continues to be a thorn in the side of financial services companies that experience data breaches or other security lapses.
And many commentators are predicting that some state regulators will become more aggressive even as federal regulators conduct less regulation by enforcement. State regulators have fewer resources than federal counterparts, but they often make up for the gap with enthusiasm and vigor for the cases they pursue.
Making [insurance] hay while the [regulatory] sun shines
Continued risks from private litigants and state government actors notwithstanding, it's reasonable to think that banks and other financial institutions are generally facing a more favorable regulatory risk environment in 2026.
How does this more favorable regulatory environment intersect with trends in the financial institutions insurance marketplace? From an industry-agnostic perspective, the directors and officers (D&O) insurance market continues to be generally competitive, though perhaps less so for banks than for other industry participants. The Bankers Professional Liability (BPL) market is firm, with underwriters focused on AI exposures, financial risk and claims history.
To summarize, banks are facing:
- A more constructive federal regulatory posture
- Ongoing high litigation risks and potentially increased state regulatory risks
- Competitive to firm market conditions for D&O and BPL insurance policies
With this gentler backdrop in mind, it's a great time for banks and non-bank lenders to examine and optimize the regulatory and litigation-related coverage on their D&O and BPL insurance policies.
Here are some key regulatory coverage considerations to think about.
D&O entity investigation coverage
D&O insurance coverage is meant to cover (1) non-indemnifiable claims against directors and officers (Side A); the company's indemnification obligation to directors and officers when they are individually named in claims (Side B); and securities claims against the company (Side C).
The base form of most modern public company D&O policies doesn't typically insure the corporate entity for defense costs incurred during government investigations. In the current D&O soft market, carriers competing to win business have increasingly offered "entity investigation" coverage endorsements to potentially address defense costs incurred in connection with SEC investigations.
This coverage is tricky. It would be nice to have full entity coverage for government investigations, which are often very expensive to defend even if no charges ultimately result. However, public company D&O entity investigation coverage typically includes several limitations, most significantly:
- The investigation typically must arise out of potential securities law violations and/or the same set of facts or conduct as a covered "securities claim" (i.e., a federal securities class action). Depending on policy language, this might confine coverage to SEC investigations and rare investigations by state securities regulators.
- In some endorsements, coverage is only triggered if you experience a very specific sequence of events: Namely, first a securities class action is filed and then an SEC investigation begins. If an SEC investigation begins and then a securities class action is filed a year later, some entity investigations endorsements wouldn't pay for the year of SEC defense costs.
- Similarly, in some endorsements, investigative defense coverage goes away if the securities class action is dismissed. So, if your securities class action is dismissed but a related SEC investigation persists for years, a carrier could say that the post-dismissal defense costs aren't covered under the policy.
If the carrier adds entity investigation coverage to a public company D&O policy for zero or de minimis cost, these limitations don't really matter — free expanded coverage is always a good thing! An experienced broker may also be able to negotiate coverage enhancements to address the above items.
If the carrier requires substantially higher premiums, some companies may decide it's not worth paying more for relatively limited coverage.
BPL entity investigation coverage
As a reminder, public D&O policies address securities claims against the company and other claims against individual directors and officers; BPL policies, in contrast, are intended to address claims arising out of lending and other banking services.
BPL endorsements covering entity investigative defense costs may be negotiated with carriers under some circumstances. This coverage may be broader than the relatively limited coverage available under many public company D&O endorsements. At the same time, keep in mind that securities and other exclusions may limit the effectiveness of these BPL endorsements, which may not cover a variety of regulatory exposures. Talk to your experienced broker.
Overarching coverage considerations
Here are a few evergreen issues that often pop up in connection with regulatory investigation coverage:
- Some endorsements include specific and limited triggers for an "investigation." For example, subpoenas might trigger coverage, but other types of document requests may not.
- Another common issue is the requirement that an investigation must involve allegations of wrongful acts. This requirement makes sense in the context of litigation — but investigations are fact-finding exercises, where the government will often take the position that it hasn't accused anyone of wrongdoing. If you do have entity investigation coverage in one of your policies, your broker must manage claims carefully and educate your carrier partners where necessary, so the policy performs as intended.
- Keep in mind that this coverage is focused on investigative defense costs — not on potential financial remedies that a company may pay to the government to resolve a matter. (As an aside, coverage may exist for defense costs incurred in active litigation against the government — but, as everyone knows, it's very rare for financial services companies to fight the government actively in court.)
- Commercial insurance policies routinely exclude fines and penalties imposed on corporate entities. Your broker should be able to map the specific type of government sanction at issue to the specific language of your policy and explain what is likely covered — and what is likely not.
- When directors and officers are subpoenaed in government investigations, look to your D&O policy for potential coverage. Also, talk to your broker about potential coverage for individual penalties imposed upon directors and officers.
Again, if we are indeed in a more constructive regulatory moment, it's a great time to ensure that your insurance policies are fully optimized from a regulatory coverage perspective.
