At least a few of the 365 days in 2015 will include a calamity or two for your bank.
Many will be small. A few might be large. Some that start small might morph into large.
Make sure your bank’s insurance is up to the task of protecting your assets from the calamities. Here are some insurance mistakes to avoid:
Mistake 1: Ignoring coinsurance penalties in your policies.
Coinsurance is a penalty inside many policies that can hurt you at the time of a loss. It’s a penalty assessed when your insurance company thinks you are underinsured.
Ask your agent if you have coinsurance provisions in any of your property insurance policies. If so, ask why.
I have long held that having coinsurance penalties in an insurance policy is a good indication that your agent is not looking out for your best interests. Push hard to have the coinsurance penalties removed from your insurance coverage—and take a hard look at the quality of your insurance agent.
Mistake 2: Maintaining inadequate umbrella liability limits.
Umbrella liability insurance provides protection above and beyond the coverage included in your general liability, auto liability, and employer’s liability insurance. It’s an inexpensive way to increase your level of protection against someone suing you.
Premiums can be as low as $750 per $1 million of coverage. My minimum recommended limit for any bank is $5 million. (If your bank has over $300 million in assets, consider $8 million.)
The coverage is cheap, and the exposure can be huge. The most likely cause of a multi-million dollar lawsuit for a bank is an auto accident, probably an employee of the bank driving his or her personal vehicle. Consider the potential lawsuit against your bank if a vice-president driving her personal car hits a school bus.
Mistake 3: Having inadequate data-breach/privacy mitigation coverage.
Insurance agents have been (correctly) pushing cyber-liability insurance for several years. While I want my bank clients to have cyber-liability insurance, it’s the second part of the policy—privacy mitigation—that I'm most concerned with.
If you have a data breach, you’ll have to notify your customers. Expenses in mitigating a privacy event can reach $100 to $200 per breached name. Have a breach involving three thousand names and you have just spent between $300,000 and $600,000.
I see $500,000 of coverage as a minimum. Consider $1 million.
Several insurers are now expressing coverage in terms of a number of affected people. (One insurer provides coverage to notify up to 10 million individuals.) Your agent can get you information on your coverage and the cost of higher limits.
The extra coverage is almost always worth the relatively small premiums.
Mistake 4: Inadequate extra expense coverage.
Undoubtedly your property insurance covers the repair of a building damaged by fire or windstorm.
But how about the increased cost of operations for the six to eight months it takes to get you back into the building?
• How will you pay for rental of a temporary location?
• Or the cost of bringing in a mobile banking center?
• How about the cost of fitting out your temporary office quarters with power, phone, and internet connections?
Your branches should have at least $250,000 of extra expense coverage. Your main offices may need as much as $1 million.
Mistake 5: Tracking customer property insurance yourself.
Banks can no longer afford to track customer’s insurance. Why?
The insurance is too cheap and the cost of outsourcing too low for your staff to take on this onerous task. Taking this off your plate will also make your regulators happier. (There is currently a regulatory hate-fest going on over force-placed insurance coverage.)
Talk with the insurance broker handling your force-placed insurance about alternatives to in-house insurance tracking.
Costs are as low as $6 per year, per mortgage for insurance tracking.
Mistake 6: Failure to understand the call-back exclusion in your bond.
Your bond insurer has certain expectations regarding how you will prevent funds-transfer fraud. A common policy provision is the requirement that you perform call-back verifications on transactions over a certain dollar amount. (Insurers often use your deductible as the threshold for requiring a call-back.)
Some insurers are adding additional warranty provisions. One insurer requires that call-backs be documented with a voice recording of the call-back. Understand the provisions in your policy. Talk with your agent. Negotiate the removal of onerous requirements.
Mistake 7: Not knowing about—and addressing—shared directors and officers limits.
Do lender liability or employment practices liability claims reduce your coverage for future directors and officers claims?
Many management liability policies have an aggregate limit that is equal to the limit of coverage for D&O claims. This has the effect of reducing coverage for future claims.
For example, if you have a policy with a $5 million aggregate limit, a $5 million D&O limit, a $2 million employment practices liability limit, and a $2 million lender liability limit, then a $1 million employment practices liability claim means there is only $4 million left available to pay a later D&O liability claim.
Check with your insurance advisor. Ask if your limits of coverage within the management liability insurance are separate. Show your agent this article.
Mistake 8: Not looking carefully at your bank’s own flood insurance.
Your bank’s package policy may include flood insurance. Many have an exclusion for locations located in flood zones. Some policies exclude locations where you could have purchased NFIP/FEMA flood insurance.
Ask your agent to detail for you which locations are included in flood coverage and which are not. Better yet, have your agent build a spreadsheet of your locations showing each location as a row. Columns should be the amount of property insurance, the flood coverage at that location, extra expense coverage at that location, and other coverage limitations that apply individually to buildings you use.
Mistake 9 A: Not reviewing your coverage’s employee dishonesty exclusions.
Your bond insurer expects that you will be diligent in whom you hire. Your bond includes restrictions of coverage that are automatically activated if an employee has committed a past dishonest act. These exclusions can be triggered by events many years ago that have nothing to do with employment or your bank.
I urge management to discuss known dishonest acts by any employee to assess the insurability of an employee. A shoplifting incident when a teller was in high school can mean no coverage if that teller embezzles from the bank.
Mistake 9B: Not understanding that employee dishonesty losses involve intent to defraud and personal gain.
Lately I have received a number of calls from bankers complaining that their bond did not pay for a loan officer who falsified documents so that a friend could get a loan.
You may wonder how this can happen.
The employee dishonesty coverage in your bank’s bond pays for an employee stealing from the bank for his personal gain. There must be an intent to defraud or hurt the bank—and the employee must also realize a financial gain (or expect to gain) from the fraud.
No intent to defraud, no coverage—and no actual or expected personal gain, no coverage.
Mistake 10: Failing to review your bank’s insurance annually.
You rely on your insurance agent to provide advice and insurance guidance. He is a resource you should be able to depend on. An annual review of your insurance coverage will help keep your coverage up-to-date.
Meet with your agent about 120 days before your insurance expires. Go over the coverage you have now and your agent’s plan for the upcoming renewal.
Here are a few questions that can prompt useful actions:
1. Which insurers would you suggest we consider at renewal in addition to our current insurance company? Why?
2. What coverage limits should we consider increasing? What is your basis for determining if we have the right amount of coverage?
3. What are your three most pressing concerns regarding our insurance program? What coverages are we missing that we should have?
4. What actions can we take that will make us more attractive to insurance companies?
5. What trends do you see affecting our insurance over the next three years?
Your coverage isn’t perfect—count on that
What I’ve outlined in this article are just some of the issues I find when I review the insurance coverage purchased by a bank.
I have worked with over 400 financial institutions. Not once have I seen the perfect insurance program. On average I identify over 20 insurance issues to be considered and discussed in my coverage reviews. I think the record is 65 potential gaps and overlaps.
When we do get the policies straightened out, a renewal comes up and insurers change the policies they offer you. The insurance policies you buy this year are dramatically different from those your bank bought five years ago. Coverages change. New insurers come on the scene. The insurance marketplace evolves, devolves, improves, and regresses.
Share this article with your insurance advisor. It can start the conversation towards improving your confidence in your bank’s insurance coverage.
About Scott Simmonds