Banks, like homes, cars, and people, can and should be insured for their own protection- and for the protection of their customers. During the Great Depression of the 1930s, we learned a lot about how to protect ourselves from financial ruin. It was in this period that the stock market collapsed and over ¼ of the adult population was out of work. Consequently, it was common for there to be bank runs. This would not only cause the bank to shut its doors, but people to lose faith that their money would be protected. As a direct result of this, the government created an agency to safeguard the American people, called the Federal Deposit Insurance Corporation (FDIC). This is an independent agency tasked with saving us from a similar financial disaster. This article will discuss the basics of the FDIC, bank FDIC fidelity insurance, and in particular, highlight the most common form of fidelity insurance protection, the Bankers Blanket Bond.
According to fdic.gov, the FDIC, “preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for up to $250,000 per depositor, per insured bank, for each ownership category by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.”
The coverage limits remain the same, no matter the account type:
· Single accounts: $250,000 per owner
· Joint accounts: $250,000 per co-owner
· IRAs and retirement accounts: $250,000 per owner
· Revocable trust accounts: $250,000 per eligible beneficiary named or identified in the revocable trust
So, the agency provides peace of mind to all individuals that keep their money in bank accounts with FDIC insurance. Typically, you will know if you are protected because your local banking branch will proudly display an official FDIC sign on their front door.
Seeing this sign, you can have confidence that even in the toughest economic times, like the financial downturn which began in 2008, the FDIC will deal with even the largest, most complex financial institutions. As of September 30, 2013, there were 6,891 banking institutions that were FDIC-insured. This can be further broken down into 5,937 commercial and 954 savings institutions. That’s billions of dollars currently protected by the FDIC.
Blanket Bond Insurance
When banks examine their options for managing risk, most opt for the Financial Institution Bond, Standard Form No. 24, also know as “Bankers Blanket Bond” insurance. With this type of insurance, bankers are provided with two different limits of liability:
1) Single loss limit: This is applied for an individual claim.
2) Aggregate limit: This is the total amount of all losses that are recoverable
As the name implies, the Blanket Bond is structured to cover a variety of different losses which a bank may face. The scope of the protection is described below.
1) Fidelity: This insures bank account owners against fraud caused by employees of the bank or non-employee data processors while performing services for the insured. FDIC defines fraud as, “acts committed by such employee with the manifest intent to cause the insured to sustain such loss and obtain financial benefit for the employee or another party (other than salaries or other employee benefits earned in the normal course of employment). “ In order to recover losses, it needs to be proven that the employee was working in conjunction with another party and that it involved more than $2,500.
2) On Premises: This clause protects the bank against loss of property during a robbery committed on the premises.
3) In Transit: If property is stolen while in transit, it is also covered. However, the property must be in the possession of an employee while in transit for it to be insured.
4) Forgery or Alteration: If a bank receives a forged or altered check, draft, etc., then it is protected. However, if the item is received by electronic means, that isn’t covered.
5) Securities: This aspect of the blanket bond is optional. As stated by the FDIC, it is for losses, “resulting from the insured having, in good faith, for its own account or for the account of others, acquired, sold or delivered, or given value, extended credit or assumed liability, on the faith of any original security, title document or agreement (as delineated in the bond).”
6) Counterfeit Currency: If a bank receives counterfeit U.S., Canadian, or other foreign notes “in good faith”, then it will receive compensation for its loss.
A bank might not know the amount of Blanket Bond insurance that they should purchase. There are several calculations that should be initially considered:
· The amount of money and securities held by the bank
· Property values
· Exposure level caused by routine operations
· Amount of transactions conducted on a regular basis
These factors can usually be estimated by a simple assessment and statistical calculations. However, some factors may be more difficult to predict. For example, you may not know how to estimate your potential future losses due to employee infidelity. This may not be a precise number or statistic. Therefore, the bank needs to consider additional factors determine the amount of loss protection needed and scope of coverage. These include:
· Number of employees
· Experience levels of the employees
· Authority given to employees
· Employee turnover rates
· Whether or not the bank is expanding, and at what speed
Basis for Claims
There are two ways the insurance company can write the Blanket Bond. The first is on a “discovery” basis, which means that the time of the loss doesn’t matter. Rather, when the loss is discovered, the bank can make a claim and receive full coverage. The second is on a “loss sustained” basis, which means that the bank only has protection against loses sustained which the bond was in place. Usually, the insurance company only writes a bond based on a “loss sustained” basis when the bank has been dropped by another insurance company, or they have a poor loss record, bad management, and improper control methods in place.
The general rule of thumb is the number 30. The bank has 30 days to report a loss to their insurance company and 30 days to report any legal action that has been taken against them. This is also important because once the bond has been terminated or cancelled, the bank no longer has the opportunity to report and recover losses.
Once the claim is made, the insurance agent assesses its legitimacy, accuracy, and honest representation of facts. If this is not done, then the bank may not be able to recover its losses and/or be defended by the insurance underwriter in a court of law.
Banks face a regular onslaught of potential risks. So, if a bank is concerned that the Blanket Bond is not sufficient enough coverage, they can choose to add on riders. eHow provides this helpful tip:
“An insurance rider provides the policyholder extra protection beyond the provisions contained in a standard insurance agreement. Before purchasing the additional coverage, the buyer should read the coverage outlined in the standard policy and ask questions about any terms or clauses that he does not understand. A buyer should determine if the additional coverage enhances the overall policy and if it meets his needs.”
There are four types of rider options provided by the FDIC which can be added to the Blanket Bond:
1) Deductible and Self Insurance Riders: This allows the bank to customize its premium and deductible payments based on past losses. When a bank has a history of losses, it can choose higher premium payments in order to have a lower deductible. If a bank has had few losses, it can select to pay lower premiums in order to have a higher deductible. While this may be the cheaper option in the short run, it is also the riskiest in the long run. It depends upon the ability of the bank to absorb potential risks.
2) Automated Teller Machine (ATM) Riders: In the age of technology, ATMs are used in harmony with regular banking branches. However, technology is never perfect, and mistakes can occur. If the machine disburses the wrong amount of money, records a deposit wrongly, or incorrectly cashes a check, the bank is protected against losses.
3) Kidnapping, Ransom, and Extortion Rider: This covers any cases of extortion in which a person(s) is in danger, or believed to be in danger.
4) Computer Systems Rider: Again, technology isn’t perfect. If a person enters the data wrong into the computer system, or the data or computer system changes and this results in losses, the bank would be protected.
Other Bond Options
If you are a banking institution seeking something different that the Blanket Bond, there are other bond forms available which cover more specific applications.
No. 14- Financial Institution Bond: This can only be purchased by stockbrokers and investment bankers, but is similar to commercial crime insurance. There are six insuring agreements including employee dishonesty, loss on premises and in transit, forgery, loss to securities, loss to counterfeit money.
No. 15- Financial Institution Bond: This is only available to finance companies, smaller loan companies, mortgage banks, title insurance companies, holding companies, and real estate investment trusts, but is similar to commercial crime insurance. This has the same six insuring agreements as No. 14.
No. 23- Credit Union Bond: This is only available to credit unions and is similar to commercial crime insurance. It covers employee dishonesty, loss on premises and in transit, as well as redemption of U.S. savings bonds.
No. 25- Financial Institution Bond: Available to insurance providers, but similar to commercial crime insurance. This form has five insuring agreements: employee dishonesty, loss on premises and in transit, forgery, and loss to securities.
No. 28- Financial Institution Bond: This can be purchased by national and state commercial banks as a form of extra protection against dishonest employees. It can be applied over and above the Blanket Bond (No. 24), but only applies to losses due to employee dishonesty.
Other Types of Coverage
Most of what has been discussed in this article relates to crime. However, there are other coverage options available.
A) Property Coverage: This coverage excludes money and securities on the premises, but does protect the building and personal property that might have been stolen or damaged as a result of a robbery. Banks may also purchase protection against weather (floods, earthquakes), inept landlords, equipment breakdown, etc.
B) Time Element Coverage: A bank can be covered against unexpected additional expenses incurred during the year which have affected their business. They can also protect against the bank as a building tenant. Meaning, if the rent being paid is higher than rent levels within the area, or rent is still paid after the building is damaged, the coverage helps with payments. Other options: losses due to time needed to rebuild to comply with building codes and disruptions due to electricity, water, and communication outages.
C) Surety Coverage: These often relate to legal procedures or actions, such as court and fiduciary bonds.
D) Commercial Liability Coverage: Banks are like any other office building. They need protection against losses from bodily injury, employee benefits liability, and property damage liability.
E) Professional Liability Coverage: This provides protection against errors and omissions by employees providing professional services for the bank.
F) Commercial Auto Coverage: This is protection against private passenger automobile fleets exposures.
G) Workers Compensation Coverage: This is coverage against workers who are injured on the job.
H) Excess and Umbrella Coverage: Excess liability provides limits higher than the general liability options. Umbrella coverage is supplemental to the general liability insurance.
I) Aviation Coverage: If the banking institution owns or leases an aircraft, appropriate insurance should be purchased.
J) Life and Health Coverage: This includes health benefits for employees, loss compensation when a key employee dies, or when employees are traveling on authorized trips.
K) Miscellaneous: accounts receivable, commercial article floaters, contractors’ equipment, difference in conditions, electronic data processing equipment, fine arts, mail, scheduled property, signs, transportation, valuable papers and records.
Other Enhanced Insurance articles related to Bank Insurance:
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If you’d like to find out more regarding bank insurance, check out the following links:
 Coverages Applicable, (2010) The Rough Notes Company, Inc.