Claims Scenarios

D & O — Bankers Professional Liability

Claim description
D & O Liability from BIA on Vimeo.
A college freshman opened her first checking account with her bank and received 10 temporary checks from a teller. Unfortunately, the teller forgot to encode the account number on the checks. The teenage customer, being inexperienced in financial matters, did not recognize that an account number was missing from her checks. She then used one of her new checks at the college bookstore to pay for her first semester’s books. By coincidence, the student had opened her account at the same bank used by the college. The college deposited the student’s check into its account at the bank along with the other checks made out to the school’s bookstore. When the bank was processing the check received for deposit, a bank employee realized that the account number was missing. This bank employee, seeing the college’s name written on the check as payee, mistakenly decided to encode the college’s checking account number onto the check as if the check was being drawn on the college’s account. Thus, the funds to pay the check were drawn from the college’s account while being simultaneously deposited back to the college’s account. Sometime later, as the college treasurer’s office was reconciling the college’s checking account, the treasurer noticed the odd transaction. The treasurer examined the check and saw that it was not one of their own, nor was it signed by anyone authorized to sign on behalf of the college. He identified the check’s signer as a student at the college and thought that she had criminally written a check drawn on the college’s account. College security guards were sent to the student’s classroom to escort her from her class. The college held her at the security office for several hours and fingerprinted and photographed her as they investigated her story. When they ultimately verified her story, she was released.

Resolution: The student filed a lawsuit against the college AND THE BANK alleging, among other injuries, wrongful arrest and detention and negligence. The case has not yet been resolved. The bank continues to vigorously defend its innocence, an expensive process for which it turned to its insurer for help.

Commercial Package

Question: Banker Bob is quite proud of the bank's BBQ smoker/cooker embellished with the bank's name and logo. They loan it out to various civic groups in their town. Last weekend, a child accidentally touched the smoker causing a severe burn. The bank received the medical bills for the child's injury and fearing a possible lawsuit, turned it into their insurance carrier. Why was the injury claim denied?

Answer: The claim was denied because the bank's insurance carrier didn't know they owned a smoker and no premium had been charged for coverage. When the bank loaned out the smoker, they didn't require the civic organization to provide liability coverage to protect the bank while they used it.

Moral of the story — this scenario can be insured if your agent fully understands your unique banking exposures like smokers, hunting leases, sponsored events and has the proper insurance coverage in place. Visit with your agent to discuss your specific exposures and insurance needs.

Question: Banker Bob's bank building was built in the 1930s. Over the years, they made improvements but they wanted to keep some of the original features in the bank. It still had marble floors, brass teller cages and an old vault. They increased their building value a little each year. A fire caused extensive damage. Why did the insurance company only pay a portion of the loss?

Answer: At the time of the claim, the property was insured for $750,000. Due to the unique materials, the adjuster calculated the bank building was significantly underinsured. The replacement cost was $1,200,000. The insurance carrier invoked the coinsurance clause and only paid 62% of the loss!

Most commercial property policies have a coinsurance clause. In simple terms, it means that the bank MUST insure their buildings to replacement cost value. By definition, replacement cost is considered "like kind and quality of material" and cost of labor. When calculating replacement cost, include costs for debris removal, demolition, complying with new building codes, city ordinances and the removal of any hazardous material; i.e., asbestos.

Moral of the story is to review your property values each year. As a guideline, we typically use $250 per square foot to calculate a building's value. Depending on your property's construction and geographic location, your dollar per square foot could be higher. Don't forget to adequately insure contents and computer equipment too. It's not always wise to use real estate values or tax appraisals for building values. If you are unsure, have a contractor give you an estimate for replacement. One option is to purchase blanket property coverage for all locations. It may be a bit more expensive but provides a safety net for an error in the value of one of your locations. Contact us for more details.

Question: After a major fire to Banker Bob's building, the bank had to empty all the safe deposit boxes because customers would not be able to access them for several weeks. Why weren't these damage-related costs covered?

Answer: Most bank commercial property policies have extra expense coverage. In banking terms, this is your disaster recovery monies. Extra expenses are those costs the bank may incur over and above normal operating expenses to get back in business after a covered claim.

Banker Bob did not purchase adequate extra expense coverage. Due to the property damage, the bank's customers could not be given access to their safe deposit boxes. The bank had to drill the safe deposit box locks, inventory the contents on video tape with an armed guard present, then rent boxes in a competing neighboring bank. The additional cost was nearly $46,000! Unfortunately, the bank had only $25,000 of extra expense coverage.

In another claim scenario, one of our banks near the Texas coast got hit by both hurricanes Katrina and Rita. Each hurricane caused significant damages to the bank. Both times, they had to call in the use of temporary buildings, paid overtime wages to employees, rented bank equipment and purchased additional advertising. The total cost each time was over $150,000. We had insured the bank with $250,000 for extra expense insurance and the qualified claims costs were covered by insurance.

Financial Institution Bond

Question: A fraudster hacked into your commercial customer’s email. Using the CEO's email, he sends instructions to the CEO's assistant to wire $250,000 to another bank. The assistant emails your bank requesting the wire transfer. The bank calls the client to confirm the wire. The assistant verifies she requested the wire and the money is released. A week later and back from his vacation, the CEO finds out about the fraudulent wire and contacts your bank asking for reimbursement for the lost funds. Is this covered under the blanket bond?

Answer: In this scenario, the bank did exactly what it is required to do. The employee called back and verified the transaction. And, in reality, this wasn't a fraudulent wire transfer. It was authorized by the customer who was named in the wire transfer agreement with the bank. So, in this case, there is no coverage under the financial institution bond. The policy responds to "fraudulent wire transfer instructions transmitted to the insured through telefacsimile, telephone, or electronic mail … purportedly originating from the customer…" So, in this case, it wasn't from a fraudster but actually came from the customer.

The D&O policy may provide defense coverage in the event the bank does not make the customer whole and is subsequently sued. However, some policies today exclude this type of suit due to the huge number of reported losses. Remember, the insurance company is covering YOUR computer system. They are not insuring your customer's computer. Your customer should have a computer crime and employee dishonesty coverage.

Question: Due to an impending hurricane, one of the bank branches has run low on cash. There are no armored cars available to transfer money from the main bank to the branch. Banker Bob throws $250,000 in cash into the trunk of his car. On the way to the branch he has a serious auto accident. When he awakens, the money is gone! Is this loss covered?

Answer: Under most policies, yes, Banker Bob can transport money in his vehicle to a bank location or ATM. Under most bond policies, "Coverage C" will define "Loss in Transit." It should state something to the effect that a "natural person" acting as a messenger for the bank is covered for robbery, common-law or statutory larceny, theft, misplacement, mysterious unexplainable disappearance, being lost or made away with and damage thereto or destruction thereof. The bank's loss of $250,000 should be covered less any policy deductibles.

Question: Banker Beth learns that some 20 years ago, one of her best tellers was arrested for shoplifting. Beth recalls an insurance article that stated if convicted of a crime; a teller may no longer be bondable under the bank's financial institution bond. Is the teller covered under the bond?

Answer: It depends on your insurance carrier's definition of employee dishonesty. Some companies have an outright exclusion for all dishonest acts. Others have some wiggle room, stating that if the dishonest act was not employment-related and was less than a certain dollar amount, the employee is still bondable. To know for sure, read your policy.

Question: Banker Bob is splitting his insurance coverage between two local agents. While driving a bank vehicle an employee has a serious at fault accident. The bank is sued. Why was the bank required to pay $500,000?

Answer: The first agent was asked to insure the building, contents, automobile, and workers’ compensation coverage. The second agent wrote the Financial Institution Bond, Directors and Officers and the Commercial Umbrella coverage. Unknown to the second agent, the bank's automobile liability limit was only $500,000. The Commercial Umbrella policy required a $1,000,000 limit on all underlying coverages (general liability, automobile and Workers’ Comp). Since the automobile liability limits were inadequate, the umbrella carrier did not pay the $500,000 gap! The bank paid the $500,000 difference.

Moral of the story — It is best to keep your Commercial Auto, General Liability, Workers’ Comp and Umbrella with the SAME insurance company. If you must use different agents, make sure you verify there are no gaps in coverage.

Question:
Employee arrest record from BIA on Vimeo.
Banker Beth learns that some 20 years ago, one of her best tellers was arrested for shoplifting. Beth recalls an insurance article that stated if convicted of a crime; a teller may no longer be bondable under the bank's financial institution bond. Is the teller covered under the bond?

Answer: It depends on your insurance carrier's definition of employee dishonesty. Some companies have an outright exclusion for all dishonest acts. Others have some wiggle room, stating that if the dishonest act was not employment-related and was less than a certain dollar amount, the employee is still bondable. To know for sure, read your policy or contact us for more information.

Question: Due to an impending hurricane, one of the bank branches has run low on cash. There are no armored cars available to transfer money from the main bank to the branch. Banker Bob throws $250,000 in cash into the trunk of his car. On the way to the branch he has a serious auto accident. When he awakens, the money is gone! Is this loss covered?

Answer: Under most policies, yes, Banker Bob can transport money in his vehicle to a bank location or ATM. Under most bond policies, "Coverage C" will define "Loss in Transit." It should state something to the effect that a "natural person" acting as a messenger for the bank is covered for robbery, common-law or statutory larceny, theft, misplacement, mysterious unexplainable disappearance, being lost or made away with and damage thereto or destruction thereof. The bank's loss of $250,000 should be covered less any policy deductibles. Contact us for more information.

Question: Most bankers feel that if an employee steals from the bank, it will be covered under their Financial Institution Bond. For the most part, this may be true if a teller steals cash. But if the loss involves a loan, bonds definitions will differ significantly. What are some of those differences?

Answer: We often explain to bankers that Financial Institution Bonds do not pay for bad loans. In most losses involving loans, the bank must show that the loan officer KNEW that the loan was bad, he/she had some personal financial gain and there is usually third-party involvement. This part of the policy can vary greatly from company to company. READ your Coverage A "Dishonesty" coverage definition. Contact us for more information.

Commercial Auto

Claim description: A bank’s president flew to another city to investigate a potential acquisition. While there, he rented an automobile. Driving to the appointment, he was involved in an accident that resulted in damage to the rental vehicle.

Resolution: If the bank had hired car physical damage coverage on their commercial automobile policy, payment could be made for the physical damage to the vehicle up to the limit purchased for, in accordance with policy terms and conditions.

Claim description: While parked in the bank’s parking lot, a repossessed vehicle was damaged during a hail storm.

Resolution: If the bank had repossessed auto physical damage on their Commercial Automobile insurance policy we would have paid for the physical damage to the vehicle up to the limit purchased for, in accordance with policy terms and conditions.

Crime Fidelity Bond

Claim description: “Mountain River Bancorp” was a typical, rural, community bank, providing highly personalized service to its business and individual customers. As it grew, the bank decided to organize itself into branch clusters managed by area presidents. One of the bank’s area presidents was approached by her brother, a key financial officer in several affiliated area businesses with which the bank had commercial loan and deposit relationships. The president’s brother convinced her to help him bolster some “temporary” cash shortages at his companies by providing him with a cashier’s check that he could deposit to pay expenses. He promised to provide funds to cover the check within a few days. The area president agreed to the arrangement; after all, the prospect of local companies unable to meet payroll did not bode well for her friends and neighbors, and she trusted her brother to cover the transaction quickly. She obtained and issued a cashier’s check and held the paperwork at her desk. A few days after issuing the cashier’s check, she received funds from her brother to cover it. She then submitted the paperwork through the normal process without incident. Over time, this scenario was repeated many times, with the check amounts becoming increasingly larger and the associated activities becoming bolder. At times the area president would obtain a check, forge her brother’s endorsement, and then present the check to be cashed, saying that she would deliver the cash personally. At other times she deposited the check into the company’s account, and then processed debit memos against the same account with the offsetting deposit made to her own personal account. A total of 294 cashier’s checks were floated in the scheme, totaling $5.9 million.

Resolution: When the bank discovered the scheme, the area president was terminated, along with another employee whose collusion in later months came into play. Almost $1.2 million of outstanding cashier’s checks had not been paid for. Copies of these checks were subsequently found in the former area president’s desk. The bank notified the family of companies on whose behalf the cashier’s checks were issued. The companies terminated the employment of the brother who had been involved in the scheme. Despite their verbal commitment to make full restitution, the financial ability of the businesses to do so was far from certain. The Federal Bureau of Investigation was notified.

Crime Fidelity Bond

Claim description: A bank vice president/loan officer purchased a home from one of the bank’s construction borrowers for less than half of its market value. He then proceeded to falsify construction reports on other properties under development by the borrower, allowing the borrower to draw down loan proceeds when no construction progress was actually being made. Subsequently, the loan went into default and the bank foreclosed on the undeveloped properties. The loan officer is also alleged to have solicited unqualified and rather naïve friends and relatives and approved loans for them to purchase and develop properties in the same area. He is alleged to have taken (skimmed) consulting fees from these other, unsophisticated borrowers.

Resolution: Construction loan risk management begins, as with all lending, with a sound knowledge of the client, a clear division of internal responsibilities, adequate operational controls, and an independent audit function.

General Liability

Claim Event: Children were playing at a residential property recently foreclosed upon by the bank. The porch of the residence collapsed, injuring the children. The parents of the children sued the lender, claiming the foreclosed property was not secured and properly maintained.

Resolution: As the owner of the foreclosed property, the lender was found liable and ordered to pay damages in the amount of $75,000.

Umbrella

Claim description: A loan officer, driving his own vehicle to a client meeting, ran a red light and hit an oncoming vehicle. The operator of the oncoming vehicle suffered multiple permanent injuries and sued the bank for pain and suffering. The bank was found liable for $1.7 million.

Resolution: If the bank had Umbrella Liability, the umbrella policy would respond (in accordance with policy terms and conditions) to pay the amount of loss in excess of the primary auto liability policy.

Cyber Security

Question:
Cyber Liability from BIA on Vimeo.
Criminals put skimming devices on 10 remotely located ATMs operated by a community bank. When customers swiped their debit cards, the skimming devices recorded the data and a hidden camera above the ATM keyboard recorded the customers’ PINs as they entered them. This information was then sent via radio to the criminals, who used it to create fraudulent debit cards. They then used the fraudulent debit cards to loot the customers’ accounts.

Resolution: After performing forensics to determine the extent of the fraud, the bank notified 600 customers and issued new debit cards. In addition, the bank indemnified the customers for their lost funds. Total forensics and notification costs were $100,000, and the cost of issuing and mailing new cards was an additional $3,000. Finally, the cost of indemnifying the customers for their lost funds was $727,000.


Question:
A fraudster hacked into your commercial customer’s email. Using the CEO’s email, he sends instructions to the CEO’s assistant to wire $250,000 to another bank. The assistant emails your bank requesting the wire transfer. The bank calls the client to confirm the wire. The assistant verifies she requested the wire and the money is released. A week later and back from his vacation, the CEO finds out about the fraudulent wire and contacts your bank asking for reimbursement for the lost funds. Is this covered under the blanket bond?

Resolution: In this scenario, the bank did exactly what it is required to do. The employee called back and verified the transaction. And, in reality, this wasn’t a fraudulent wire transfer. It was authorized by the customer who was named in the wire transfer agreement with the bank. So, in this case, there is no coverage under the financial institution bond. The policy responds to “fraudulent wire transfer instructions transmitted to the insured through telefacsimile, telephone, or electronic mail … purportedly originating from the customer…" So, in this case, it wasn’t from a fraudster but actually came from the customer.

The D&O policy may provide defense coverage in the event the bank does not make the customer whole and is subsequently sued. However, some policies today exclude this type of suit due to the huge number of reported losses. Remember, the insurance company is covering YOUR computer system. They are not insuring your customer’s computer. Your customer should have a computer crime and employee dishonesty coverage.

If you have any questions about this claim scenario or any insurance matter, call Brien O'Connor at Bankers Insurance Agency at 512-334-0971.

Reputational Injury

Claim description: One of the nation’s largest banks was sued for allegedly selling thousands of unauthorized consumer credit reports to entities that were unaffiliated with the bank. The suit alleged that two bank employees obtained the reports from a credit agency and sold them to an individual outside the bank. Less than one-quarter of the plaintiffs in the case were bank customers.

Resolution: The suit sought damages for alleged violations of the Fair Credit Reporting Act, a violation of a person’s right of privacy.

Employment Practices

Claim description: An employee was terminated by an investment adviser as part of a company-wide reduction in force. The former employee later sued the investment adviser and her former manager, alleging sexual harassment, intentional infliction of emotional distress, wrongful termination, and sex discrimination. She sought $375,000, plus reimbursement of legal fees. The company responded by stating the ex-employee’s termination was justified and proper: Her personnel file showed she had regularly been tardy for work, had conflicts with managers, performed erratically, frequently talked openly about her sex life, and made vulgar comments at work. However, it also came to light through discovery proceedings that management had not sufficiently addressed previous inappropriate remarks and jokes made by several other employees because management had assumed no one had been offended.

Resolution: A court ruled against the company and ordered it to pay the plaintiff $300,000 plus her legal fees. In addition, the company accrued $85,000 in defense costs.