Everyone makes mistakes, but insurance policies can help prevent them—innocent or otherwise—from affecting the bank.
There are several human-focused policies community banks should consider. One is errors and omissions (E&O) insurance, also known as professional liability insurance, which protects community banks and employees from claims related to mistakes and negligence.
Another is a fidelity bond, which covers banks for losses incurred from acts such as employee dishonesty, theft and forgery.
Then there’s directors and officers (D&O) liability, which covers directors or officers against lawsuits.
Finally, there’s general liability, which protects community banks against incidents and accidents that happen on site, such as property damage and bodily injury to customers, vendors or employees. “Going without it could subject the bank to substantial damages and costs that may result from these incidents,” says Camie Snell, vice president of financial institutions property and casualty at Travelers.
No matter the circumstances, insurance is made to protect your bank. Here’s what you need to know about finding the right policies for your bank and using it when necessary.
Considerations and check-ins
Appropriate coverage for a community bank be difficult to determine, with costs varying widely depending on the amount of insurance, how it’s packaged, deductibles, the bank’s risk profile, loss history and the carrier.
But not having coverage—or not having enough—leaves a bank “vulnerable to a wide variety of exposures, because a loss comes with not only financial implications but often additional litigation and potentially reputational damage,” says Jerry Keup, national underwriting officer for banks and diversified financial institutions at Travelers.
Because threats change and bank needs evolve, these types of insurance are not set-it-and-forget-it products. A once-a-year review is ideal, but sooner could be warranted if, for example, the bank is on a fast-paced growth trajectory, says Jacqueline Quintal, managing director and financial institutions and digital asset leader at Marsh, a New York City-based insurance brokerage.
Avoid costly surprises
Having the right array of people-focused policies gives a community bank peace of mind. Community Spirit Bank in Red Bay, Alabama, had a customer whose approximately $200,000 check was intercepted by thieves. The $213 million-asset community bank discovered the ploy after complaints of an unreceived check were connected to a duplicate check possessing an altered payee name, says Kalee Holland, assistant vice president, human resources and holding company administrator.
An internal investigation identified nothing wrong with its protocols on the bank employee’s behalf, but Community Spirit Bank had the option to use its fidelity bond to reduce legal costs, which is important when large dollars are at stake, Holland says.
Several years ago, the community bank relied on insurance when a customer made an allegation against a bank employee. The bank determined that the employee hadn’t followed its policies and was terminated, but that didn’t stop a customer-initiated lawsuit. Ultimately, Holland says, the bank didn’t owe the customer money, but it still had to shell out significant legal fees, which insurance helped defray.
Bringing life insurance to customers
Insurance at a community bank doesn’t only have to benefit the bank and its employees. Wysh, a subsidiary of Northwestern Mutual, embeds micro life insurance directly into customers’ deposit accounts, so every saver gets automatic, no-opt-in protection that grows with their balance.
It’s a way for banks to deepen relationships, improve deposit stickiness and offer meaningful coverage to customers who often fall through the cracks of traditional insurance. The company promotes the service as a cost-effective strategy for deposit growth compared to traditional promotions.
Alex Matjanec, CEO and founder of Wysh, says the product could be especially appealing to banks that serve low- to middle-income customers. This demographic often doesn’t have life insurance or is underinsured.
Banks pay for the coverage, not the customer, and there’s a 100% approval rate due to the smaller coverage sizes. “It’s micro-protection,” Matjanec says, “but it might be the only protection [customers] can get.”
Ensuring proper coverage
People-focused insurance is especially important in our litigious world, Holland says. “Proper coverage is a practical way to help the bank mitigate risk, so we can operate with confidence that we will be taken care of if an issue arises,” she says.
To determine appropriate coverage, Marsh’s Quintal says banks often compare themselves with other banks by revenue or, more commonly, by total assets. But they may not think to compare themselves with similarly sized banks of comparable complexity, she says. Two banks, each with $2 billion of assets, could need different levels or types of coverage, depending on their business mix, for example.
Sometimes, community banks combine certain coverages into a package to save money. It’s not a bad strategy, but Quintal notes that they should be mindful of individual and blended coverage limits. If D&O and E&O are combined, for example, and there’s a claim involving a director, will there be enough coverage if there’s a simultaneous claim against an employee?
“Blending coverage can be useful from a budgeting perspective,” Quintal says, “but you have to think about total limits carefully, because you’re sharing a bigger range of potential exposures and want to make sure there’s enough.”
