How to optimize your bank’s D&O insurance

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Directors and officers (D&O) liability insurance is a must-have risk mitigation tool for banks regardless of their asset size or geography. Here’s what community banks and bankers can do to make sure they’re covered.

By Susan Thomas Springer

Wherever we are in the economy cycle, the need for directors and officers liability insurance is a constant. This must-have policy, commonly called D&O, protects banks and individual directors and officers from alleged wrongful acts. The key to being properly covered is choosing a policy that fits your community bank’s unique needs. “What you’re looking for is not necessarily to avoid loss,” says Craig M. Collins, president of OneBeacon Insurance Group, a member of Intact Financial Corporation in Plymouth, Minn., that offers professional, and property and casualty coverage to the financial industry. “You’re looking to assess risk.”

Whether a community bank is shopping for a new policy or renewing an existing one, the best place to start is with peer review. Ask your agent to analyze banks with similar geographies and asset sizes to determine if your coverage limit is above or below that of your peers. Experienced agents who specialize in covering banks can offer a thorough peer comparison, along with a national perspective. For example, they can provide a reference point on what average D&O limits are for banks in your asset class.

Second, discuss what’s unique about your community bank. If you have a large farm equipment leasing operation, offer trust services or focus on a specific industry, those nonstandard products and services need to be adequately covered with an additional endorsement.

Next, share the composition of your bank’s board of directors. In today’s litigious climate, banks with well-known or influential directors must consider additional coverage to protect those individuals who could be visible targets. Collins says the best protection for a bank comes from a diverse group of board members who offer a variety of outside perspectives, because that results in better guidance and increased ability to make informed decisions. “As an underwriter, I’m looking for a board of directors that is representative of the community they serve,” he adds.

Last, check what may be excluded in the policy. In July 2019, the Federal Reserve stated it was vital for financial institutions to understand the risk that comes with exclusions in D&O policies. The Fed said there had been an increase “in terms or provisions contained in these policies that exclude from coverage a wide range of” D&O liabilities. Exclusions can potentially limit coverage and leave banks without insurance in the event of a claim. While the Fed called D&O policies “an important risk mitigation tool,” it recommended that directors and senior executives fully understand protections and limitations.

Common D&O claims

Under a community bank’s general liability policy, a predictable claim is slipping and falling in a branch lobby. In contrast, a D&O policy has little pattern to the claims a bank receives. However, there are still common claim categories.

Banks need to be protected against regulatory risk, from borrowers or customers with a soured loan looking for wrongdoing from their bank, and from current or former employees, stockholders and other banks.

In the case of pandemics, hurricanes, terrorism or other world events that affect the economy, banks can reduce lender liability by staying current on SBA or other government programs, extending credit or working out other plans to help borrowers from defaulting.

“It’s not so much the economic slowdown, but the decision to act or not act is big, because wrongful acts are what you’re really buying coverage for in a D&O policy,” says Ryan Hartzell, an agent with Hagan Hamilton Insurance Solutions in McMinnville, Ore. Once banks have taken the time to select the right policy, an all-too-common problem is a failure to actually use that policy. Banks that receive a potential claim may not use their coverage because they plan to defend themselves, worry the cost of their insurance will increase, don’t realize their current legal trouble is covered or miss the reporting deadline.

“When you receive a written demand for money from an attorney, normally it’s like a hot potato,” Hartzell says. “You need to do something with it fast.”

Policies commonly allow 60 to 90 days prior to the next renewal to report claims, yet Hartzell recommends notifying insurance carriers within 30 days. Also, any potential claims must be reported prior to a policy renewing for the opportunity to have it covered.

Keep your policy current

Review your community bank’s D&O policy regularly and inform your agent of any changes in your bank’s structure or operations. Check in every six months to keep the policy up to date with the bank’s operations. Share anything new, such as starting new subsidiaries, offering new products, or creating a holding company or new sources of income to ensure that they are properly reflected in the D&O policy. When policies renew every three years, talk more in depth with your agent or underwriter to evaluate risk and document any new coverage and address any new exposures.

“If a bank is growing quickly,” Collins says, “you may need to assess asset size and consider increasing limits mid-term in your policy, because you don’t want to be out of line with your peer group.”

“If a bank is growing quickly, you may need to assess asset size and consider increasing limits mid-term in your policy, because you don’t want to be out of line with your peer group.”
—Craig M. Collins, OneBeacon Insurance Group

Susan Thomas Springer is a writer in Oregon.