Building an Effective Bank Liability Insurance Program

In a business environment fraught with lawsuits, regulatory scrutiny and cyberattacks, a strong liability insurance program is an essential risk management tool that can protect the bank’s balance sheet and the personal assets of the bank’s directors and officers. With that in mind, consider these practical tips for building a strong bank liability insurance program.

Retaining a Good Broker
Choose a well-regarded, experienced insurance broker focused on insurance for banks. Selecting the right broker sets the tone for the overall quality of the insurance program, both during the policy negotiation and placement phase, and later in the event of a claim.

Typical bank insurance programs cover a wide variety of both corporate governance and operational risks, often integrated into one master policy. A good broker will advise the bank as to which coverages are needed or recommended to fit the bank’s risk profile.

Knowing Your (Policy) Limits
A common way to determine appropriate limits for the various insurance coverages is through the benchmarking process, in which a broker will generate a suggested range of insurance limits by comparing the limits of peer institutions. Bank-specific factors such as market capitalization, regulatory requirements, the nature of lending activities, geography and amount of deposits, as well as market trends such as recent settlement and judgment data, are typically considered in the analysis. In most policies, defense costs are within the limits of liability, so benchmarking needs to account for those costs in addition to potential judgments and settlement amounts.

Given the various coverages that may be contained in the policy, the bank should consider whether the limits of liability for each coverage section should be separated or be part of one overall aggregate limit. Separate limits in key coverage areas will mean higher premiums, but won’t reduce the limits of coverage available in the others.

Filling the Gaps With Side A DIC Coverage
Banks often consider purchasing Side A DIC (difference-in-condition) coverage for the dedicated benefit of directors and officers, to sit on top of more traditional directors and officers (D&O) insurance coverage. These policies are triggered when all other available insurance and indemnification has been exhausted or becomes unavailable. Side A DIC policies also have fewer policy exclusions and offer broader coverage than the underlying policies, so they can fill the gap when the underlying insurance or indemnification fails to provide coverage.

Picking the Right Insurer
The bank insurance market is generally competitive, and there are a number of reputable insurers competing on the basis of price, retention, coverage enhancements, and other features. Although premiums are an important factor, the bank should also ask its broker and coverage counsel about the insurers’ reputation for handling claims. It is crucial that the insurance comes from well-rated and experienced insurers that are knowledgeable about the financial services industry and willing to partner with the bank in the event of a claim. This is particularly true for the primary insurer, which has responsibility for the approval of the insured’s engagement of defense counsel and the payment of defense costs at the outset of a claim.

Negotiating the Policy
Bank insurance policies are often heavily-negotiated contracts, so starting the negotiation process early is key. Each insurer typically uses its own unique policy form, often modified by various endorsements that can improve the scope of coverage. Proposed policy materials should be carefully reviewed and negotiated by the broker and coverage counsel to ensure that the policy language is market-competitive and that different coverage components work well together.

Re-assessing Coverage
Bank insurance coverages should be carefully re-assessed on a periodic basis, generally in conjunction with the policy renewal cycle, to maintain competitive coverage tailored to the bank’s needs. For example, banks that did not purchase cyber coverage in the past may find that the premium and product offerings have improved. In a year’s time, policy enhancements, insurance markets, and regulatory and litigation climates, as well as the bank’s business, geographic footprint and risk profile, can all change and warrant a fresh evaluation of the bank’s insurance needs.

Reporting Claims
Once the coverage is placed, the bank should be on the lookout for any reportable claim. Bank liability insurance policies are “claims-made” policies, and timely claim reporting within the policy window is usually a precondition for coverage. Late notice is one of the most common ways to jeopardize the bank’s coverage rights.

Building, maintaining and effectively using bank liability insurance requires specialized knowledge and collaboration between the bank and its advisors. In our experience, there is no such thing as a one-size-fits-all policy, and bank liability insurance should be reviewed and tailored to the bank’s needs.