The Insurance Application
How It’s Completed Can Make a Difference
At least every three years, and now just about every year, the community bank must apply for renewal of its Financial Institution Bond and/or a Directors and Officers Liability Policy. This sometimes requires filling-out a very lengthy application. How the bank completes these applications ultimately may determine whether it is successful in obtaining a competitive premium or in securing coverage at all.
In most cases, the Directors and Officers (D&O) Liability Policy application, like the life insurance application, becomes part of the policy. This fact is significant because the statements you make on this application are “true to the best of your knowledge” and can be “expressed warranties.” Should these statements be incorrect, coverage may not exist for losses that occur.
However, in reality, a misstatement must be material and be related directly to the specific loss. In other words, it would be difficult for the insurance company to deny coverage for an alleged discrimination loss if the bank incorrectly stated its classified loan percentages on the application.
Offering Detailed Explanations
It is important to know those areas of the application that need further amplification or explanation. Explain all previous losses in great detail and tell the insurance company the steps you have taken to ensure that such losses will not happen again. Poor financial information may appear in a better light if the insurance company knows that the bank already has implemented a specific program and/or plan to put the bank on a more favorable financial footing.
It is obvious that there is not enough room on the application to write such lengthy explanations. Attach additional typewritten sheets of paper with the necessary information. Usually, the application makes it clear that all “no” answers are to be explained in full on a separate sheet of paper. It is, therefore, in the bank’s best interest to explain ALL answers you believe may need clarification.
Attention to Details
Take great care when completing the Financial Institution Bond application as well. As most bond applications are “to the best of your knowledge types,” there are still “warranty” bond applications out there. Should a loss occur in an area where there is a material misstatement on the application, the insurance company has the full right to deny coverage. Make a misstatement on a Warranty application, and the policy could be voided regardless of whether it is material or not.
Like the D&O applications, when in doubt-explain fully. However, not too fully. Too much information may tend to confuse or irritate an underwriter.
Include Relevant Information
Both applications require certain financial information to accompany them for the bank to be considered for coverage. It is imperative that all financial information is sent to the underwriter at the same time as the application. Not only will the underwriter not consider your bank as a potential client until it has the financial information, but if he receives an application without the full-required information attached, he may not consider your application at all.
In this day and age of bank failures, it’s a good idea to anticipate questions about your bank’s financial picture. Explanations concerning low equity, high number of non-performing assets or low profitability need to be addressed. Be proactive in this area, and give the insurance company your plan for corrective action.
Submit in a Timely Fashion
Finally, be sure to give the underwriter ample time to look over your application. Even when the application is completed fully, with all the financial data attached, it is of no use if the underwriter does not have enough time to analyze the data. Most bond underwriters now require at least 60 days and preferably 90 days to consider the information prior to renewing the policy. In short, bank management needs to commence the application process at least 90 to 120 days prior to the renewal of the insurance program.
The care with which an application is completed cannot be over-emphasized. There are very few Financial Institution Bond and Directors and Officers Liability markets left. Those that are still active seem to be extremely choosy about whom they insure. Obviously, a carefully completed application, with all necessary financial information included, in the underwriter’s hands 90 days prior to renewal will put the bank in a more favorable light.