UNIQUE INSURANCE EXPOSURES FOR BANKS
There is no doubt that the Bond and Directors and Officers Liability policies are uniquely specific to a financial institution. So much attention is spent on these two policies that little attention is given to the other insurance policies purchased by a bank. This article will focus on just a couple of other areas of particular concern to a bank, namely: Personal Injury Liability, Mortgage Errors & Omissions, Earthquake Damage, and Extra Expenses.
Personal Injury Liability
Personal injury liability is probably one of the most misunderstood exposures if for no other reason than its name, PERSONAL INJURY. The first thing most folks think is this has to do with the liability for physically hurting another person. This is not what it is.
Liability for physical injury to a third party (other than that involving an automobile) is covered in the bodily injury liability area. Personal Injury is for liable, slander, defamation of character, and sometimes, Discrimination and false arrest – assault.
Should a loan officer falsely defame a borrower or another employee utter a defamatory remark about a third party, the bank could be held liable for such statements. Insurance companies are VERY aware of this exposure and may sometimes slip in an exclusion for this liability.
One prominent bank insurer routinely excludes “customers” from this coverage leaving a major exposure for the bank. The good news is that most bank insurers readily include this coverage in their General Liability coverage area at a very reasonable cost.
While Mortgage E&O sounds like liability coverage (and there is some small coverage within most forms that is for some liability) it is really a property policy. The policy is designed to cover the bank’s interest in collateralize real estate for a loan.
Should the mortgaged collateral be destroyed and somehow NOT be insured, this policy protects the bank’s interest. Insurance companies usually require the bank to have a policy for checking on the insurance each year but there are even policies, Mortgage Impairment Insurance, that only require the bank to confirm coverage at the beginning of the loan.
At first glance, it would appear that the earthquake exposure is not particularly unique to the banking industry. After all, aren’t all buildings subject to this type of loss? It is particularly important to a bank because of the construction of most of its buildings.
Most bank buildings are constructed of Brick or stone to emphasize the stability of the institution. Unfortunately, these substances don’t bend very well! Get a crack in your foundation and you will end up having to destroy the entire building.
The Earthquake exposure is routinely excluded on Property policies and has to be added back by endorsement. If your bank is located in an earthquake zone, you may find it difficult to obtain and/or very expensive to obtain.
Extra Expense Coverage
Banks don’t really have a business interruption exposure. People have to pay on loans whether there is an office or not. But, customers want access to their Safe Deposit boxes or ATM machines i.e., their cash.
Have a branch down for any length of time and see how fast your customers start going to another bank! It is imperative for a bank to get back into operation as soon as possible and this will require extra expenses to be paid to get back in working order.
The need for these extra funds is immediate. It is therefore expedient for the bank to get the funds as soon as possible. I have seen too many bank insurance policies that have a 30/60/100 limitation. Should the bank have $100,000 of Extra Expense coverage under this form, the first month it could receive only 30% of its limit.
The second month it would receive up to 60%, and finally, in the third month, the rest of the funds would then be available. Make sure your form allows for 100% of the limit to be available the 1st day! Most banks have all of their extra expenses in the first 2 WEEKS after a loss.
Bank management needs to understand that their bank has loss exposures that are unique to their industry. These are but a few of the particular loss exposures for a bank. Make sure you insurance policies fit your needs.