Unique Liability Risks of Banks – or – Sneaky ways you can get sued!
Financial Institutions have their own unique exposures when it comes to lawsuits. Our legal friends seem to like to pick on banks for the same reason John Dillinger went after them, “that’s where the money is!” The modern banker needs to be aware of these unique risks and how to protect their bank from loss. Here are just a couple of the less obvious exposures peculiar to a bank.
Foreclosed Property LIABILITY- With the downturn in the real estate market and construction industry, many banks are finding their foreclosed property assets schedule larger than all their bank operations property. In trying to protect these assets from damage or destruction the larger loss exposure of the liability created from the ownership of this property is often ignored. All too often in my audits of the insurance for a foreclosed property I find that it is insured for physical damage but not for lawsuits resulting from ownership. A lawsuit by the parents of a child who was injured while playing on the property can be catastrophic not only from a financial point of view, but it could be a public relations nightmare.
If this property happens to be a commercial operation and the bank decides to continue the business until it can be sold, it has just picked up all the liability exposures of the foreclosed-on business. Unless the banker informs the insurance company of their actions AND gets confirmation of insurance coverage, the bank’s liability policy will NOT respond to a lawsuit. What might be worse is that the liability might not come to light for several years. For example, should a bank decide to become its own contractor on a foreclosed building project, it would be subject to any future Construction Defect lawsuit. If you don’t think that is much of a problem, ask a contractor!
Workers Compensation laws and lending activities- I know what you are thinking. What kind of employee problems could I have in lending money? There are two Federal Employment Acts (remember, Workers Compensation is mandated by the States) that come into play upon occasion. The laws I am referring to are the Longshoremen and Harbor Workers Act (LSHWA) and the Jones Act. LSHWA applies to workers who are injured on, or around, a federal navigable waterway. The Jones Act refers to benefits due the crew of an “ocean going vessel”. Now bear with me here. The key to all of this is a “federal navigable waterway”. TVA lakes and the Mississippi River are just two federal navigable waterways you might not have considered. Do you have any boats, lake front property or marinas as collateral on loans? Might a loan officer inspect these properties from time to time? If they are injured while doing one of these inspections, you might have a LSHWA loss. Oh, did I mention that you have to have a specific endorsement to your Workers Compensation Policy for this coverage?
The Jones Act is a little more obscure, but I actually had a client that operated a float boat on a TVA lake for entertainment purposes for its commercial customers and prospects. There was an employee whose sole job was to operate the float boat. You guessed it. He is the “crew” for an ocean going (on federal navigable waterway) vessel.” Ocean going vessel” is never defined in the Act. Again, this coverage must be added by an endorsement to the policy.
These are just a couple of the unique liability issues a bank can face. The very nature of the lending activity exposes a bank to a Pandora’s Box of lawsuits. Covering the physical collateral for a loan is important but don’t forget the liability exposure. I assure you our legal friends haven’t!