Will Your Bank Be Covered When Fraudsters Strike?

With fraud on the rise, directors should know the ins-and-outs of their bank’s insurance bond so their institution can be reimbursed for losses.

Laura Alix
Director of Research

One of the most overlooked elements in the industry’s fight against fraud losses could be the bank’s insurance bond. 

Fraud has mushroomed in recent years as bad actors have taken advantage of digital channels. Criminals have also targeted the mail to steal and alter checks, despite a decline in check usage. According to the Treasury Department’s Financial Crimes Enforcement Network, depository institutions filed nearly 1.4 million suspicious activity reports related to fraud in 2022, nearly double the number filed in 2019. Reports of possible wire fraud rose 63%, suspicious activity reports related to ACH fraud increased by 107% and reports of check fraud increased 119% over that time frame. 

Against this rapidly changing threat landscape, proactive boards could review their bank’s insurance policy to understand what it does and doesn’t cover when it comes to fraud losses — and the actions the bank needs to take to ensure they’re reimbursed. Losses can be especially painful for smaller institutions. 

​​“If a bank director really wants to have as close to zero as they can get on a reasonable basis for fraud losses, the best place to look is going to be their [insurance] bond,” says Sarah Beth Felix, founder and president of Palmera Consulting. An insurance bond doesn’t prevent fraud, but it can cover much of the bank’s losses when fraud does happen. Boards should regularly review that policy and understand its limitations, as well as any steps a bank may be required to take to be compensated. 

Questions about the bank’s insurance coverage should be part of a broader conversation around risk management and oversight of fraud prevention efforts, says Ken Achenbach, a partner with the law firm Bryan Cave Leighton Paisner. In some cases, legal counsel could be brought in to advise the board about effective controls or methods to ensure the bank is appropriately covered. 

“It’s far better to not suffer the loss, but you want to have reasonable ways to make yourself whole if you do,” Achenbach says. 

When reviewing the bank’s insurance coverage, distinguish between aggregate coverage and single event coverage, and ask about limits; that can make a big difference in how much a bank is able to recoup, Felix says. For example, a bank might end up assuming all the losses resulting from a counterfeit check scheme if each check comes in around $3,000 and a bank’s single event coverage kicks in once losses hit $5,000. 

Covering those losses could be a simple matter of phoning the bank’s insurance agent and adjusting the monthly premium. “It’s easy, but most banks don’t do that,” Felix says. “That’s the best rock to look under.”  

In some cases, an insurance policy may require the bank to hire an outside investigator; the policy will sometimes cover those fees. 

Banks seldom pursue litigation against employees who have committed fraud, fearing reputational blowback if the bank is perceived to be vulnerable, says Bob Sprague, a managing director with the accounting firm Forvis who is often called into banks to investigate internal fraud. Specifically, he says, insurers want to know that the fraud has taken place and that it’s been investigated, and that the bank tried to mitigate losses. Investigators often have to submit this documentation to the insurance company.  

For fraud tied to instant payments services like FedNow, policies often require that a bank take proactive measures. “There are specific steps that a bank has to take in order for them to have a single claim covered by their bond,” such as multi-factor authentication or a call-back procedure to verify that a customer has indeed authorized a payment, she says. An insurance bond might not cover losses incurred through FedNow if those requirements aren’t met, so it’s important for banks to talk with their insurance carrier if they’re moving forward with a real-time payments solution. 

Understanding what the bank’s insurance bond will and won’t cover, and the steps a bank must take to be reimbursed for losses, are vital in a bank’s effort to battle fraud losses. Effective fraud prevention often requires introducing friction points to slow down and deter bad actors — additional steps that may create a worse experience for bank customers. 

“A call-back procedure is a little bit of transactional friction,” says Achenbach. Customers may not love it, he says. “You’re balancing that against all the problems that didn’t happen.”


Laura Alix

Director of Research

Laura Alix is the Director of Research at Bank Director, where she collaborates on in-depth strategic research for bank directors and senior executives, including Bank Director’s annual surveys. She also writes for BankDirector.com and edits online video content. Laura is particularly interested in workforce recruitment and retention strategies, and environmental, social and governance issues facing the banking industry. Previously, she covered national and regional banks for American Banker, and before that, she covered community banks for Banker & Tradesman and The Commercial Record. Based in Boston, she has a bachelor’s degree from the University of Connecticut and a master’s degree from CUNY Brooklyn College. You can follow her on Twitter or connect on LinkedIn.