What You Don't Know Can Hurt You: A Primer to Help Small Banks Evaluate Their Insurance Programs

By Simmonds, Scott | The RMA Journal, November 2010 | Go to article overview

What You Don't Know Can Hurt You: A Primer to Help Small Banks Evaluate Their Insurance Programs


Simmonds, Scott, The RMA Journal


** Is your bank's insurance anemic or vibrant? You can find out by reviewing your bank's program-and then get the maximum from it by taking advantage of a competitive insurance marketplace.

BUYING INSURANCE--and thereby transferring risk to an insurer--is a common approach used by banks to manage operational risk. A bank's insurance program is determined by risk appetite, loss exposures, and the coverage available in the current insurance marketplace. It's essential to review your bank's program, particularly in terms of coverage and pricing. Here are some issues that are commonly found.

Check Your Buckets and Aggregates in Directors' and Officers' Insurance Directors' and officers' insurance includes several sections--directors' coverage, lender liability, entity coverage, employment practices, and trust department protection.

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Many policies are structured so that a claim in one area reduces the amount of coverage available for future claims in other areas.

To simplify the discussion, let's think of coverage limits as buckets of protection. You can maximize your coverage by maximizing the buckets your policy allows. For example, push for coverage that keeps trust claims from reducing coverage available for employment practices and that keeps entity claims from restricting directors' coverage.

Policies often include an aggregate limit of coverage for all claims that restricts coverage for multiple events.

Review What's Included in Your Bond

Look at your banker's bond (also called the financial institution bond). You will find a laundry list of cove> age sections: fidelity, off premises, counterfeit currency, safe depository, debit card, and others. Some policies have more than 20 different coverage areas. Ask your insurer to describe coverage options you currently don't purchase. Get optional quotes that increase current limits and for areas not covered. Beware of low aggregate limits on your bond, too.

Add a "Per Location Aggregate" Limit to Your General Liability Policy

Your bank's general liability insurance provides coverage for bodily injury and property damage. The policy contains an aggregate limit of coverage--the most the policy will pay for all claims at all locations. Adding an endorsement to the policy that applies the aggregate limit to each location expands your coverage at very little cost. In many cases, your insurer will add the coverage at no additional premium.

Consider Your Umbrella Liability Limits

Umbrella liability insurance provides protection above and beyond what's offered by your general liability, auto liability, and employer's liability insurance. It's an inexpensive way to increase your level of protection against lawsuits. Premiums can be as low as $750 per $1 million of coverage. Consider doubling whatever coverage you have now. Get proposals from your insurance agent and make your decision based on the value of the extra coverage and the cost of the additional premium.

For banks, the most likely catastrophic liability loss (a multimillion-dollar loss) is an automobile accident. For example, a bank officer is driving to see a customer. She spills hot coffee on herself and crashes into another car, causing serious injuries. Even if your officer is driving her own car, the bank will be named in any lawsuit. Umbrella liability insurance is inexpensive protection against such catastrophic losses.

High Deductibles Can Save on Your Premium

If your bank is willing to handle smaller claims and let the insurance company take care of larger ones, you could consider a property deductible of $10,000 or more. Look at your auto policy's collision insurance. Review your directors' and officers' insurance and your bond. Ask your insurance agent what the premium savings would be if you doubled or tripled your deductibles.

Review the Perils Included in Your Mortgage Impairment Insurance

Mortgage impairment coverage pays for a loss to a building on which you hold a mortgage if the mortgagee has no insurance. …

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