THE MARKETPLACE RESPONDS
Most standard insurance carriers can provide the traditional property and casualty coverages that banks need: commercial property, general liability, commercial auto, equipment breakdown, computer-related inland marine coverages, accounts receivable, valuable papers, and workers compensation.
Anthony Davis, president of Anthony R. Davis Agency, lists some of the specialty coverages that banks may need:
- Mortgage Impairment Insurance (Mortgage Errors & Omissions)
- Mortgage Servicing Force Placed Fire and Flood Coverage
- Bankers REO Coverage
- Flood Determination Services
- Bankers Blanket Bond
- Bankers D&O Liability Coverage - Including Entity Coverage
- Bankers Specialized Property and Liability Coverage
- Employment Practices Liability
- Voluntary Optional Mortgage Coverage - Life, A&H, AD&D
- Credit-Related Coverages - Fixed and Revolving
- Blanket Fire (First and Second Mortgages)
- Environmental Impairment Liability Coverage
- Lender Liability
Some of these coverages are optional, but many (such as the bankers blanket bond) are required by government regulations.
This Cybercast focuses on two bank-specific coverages needed to round out an account.
Oliver Brew, vice president of Miscellaneous Professional Liability and Technology E&O at Liberty International Underwriters, provides information on cyber liability. Lisa Cooper, John Watt and Greg Shimkus at Innovative Risk Solutions provide information on forced place and bank-owned property coverages.
Cyber liability
The need for cyber liability coverage is increasing in response to the growing body of laws that are designed to protect customer privacy. Mr. Brew explains: “Community banks and other financial institutions face exposures relating to data privacy. A wide range of rules and regulations require certain security data measures to be in place, and an incident response plan is recommended in order to respond to notification obligations.”
Mr. Brew continues: “We see frequency in data breach-related claims where banks incur costs to investigate breaches and notify customers. There is the potential for severity in class action litigation. These suits are rare but are growing in number, and their defense costs are increasing accordingly.”
Evaluating management is a key to writing cyber liability coverage, Mr. Brew says. “We look at a broad range of risk management criteria, including:
- Quality of management and staff and leadership in privacy protection
- Processes such as employee awareness training
- The use of technologies such as encryption and intrusion detection systems
“One example of a red flag is lack of effective response to a previous incident or lack of an incident response plan. With regard to technology, not using encryption on mobile devices makes it much more likely that there will be serious consequences from a data breach or lost laptop.”
At present, only a few carriers offer cyber liability coverage for banks. As a result, many banks currently self-insure their cyber liability and data breach exposure.
According to Mr. Brew: “There is competition among carriers. However, products vary to fulfill different needs among clients. Pricing declined over the last few years as more carriers entered the market. However, as claims have begun to increase, pricing is now stable and some renewals are seeing an increase.”
Because many banks currently self-insure this exposure, selling cyber liability coverage will require extra effort on the part of the agent, Mr. Brew explains. “It will involve working with the client on developing effective risk management strategies and technologies that must be in place to protect privacy and security.” The agent can play a valuable role in helping the bank identify its exposures, understand its responsibilities, and choose appropriate coverages. The agent also can help the bank access the risk management services offered by the carrier.
Force placed coverage
Force placed coverage is unique to banking. According to Ms. Cooper: “Banks purchase force placed coverage on a property when the owner fails to maintain homeowners and/or hazard coverage as the terms of the mortgage require and/or when the property is in foreclosure.”
Once a property is out of foreclosure, it becomes bank-owned-property that often becomes distressed. Mr. Watt explains: “Since most bank-owned properties are vacant, there is a frequency problem due to vandalism and theft. Key targets are copper wiring and plumbing. Furnaces and central air conditioning units are also very popular with thieves. Severity is an issue, especially where arson is concerned. There is a catastrophic exposure in areas where there is a concentration of properties.”
Mr. Shimkus says: “In the past, the bank’s commercial package policy may have included these coverages. In the current market, it makes sense to insure these exposures in a separate program so that the exposures will not affect the client’s other coverages.”
In underwriting force placed coverage, Mr. Watt says, “Key factors are active property management, location of exposures, and prior loss history. Prior losses and lack of good property management and loss mitigation efforts are the biggest red flags. Geographic location significantly affects both capacity and rates for force placed insurance in terms of both real estate market conditions and exposure to natural perils like floods, hurricanes, tornados, etc.”
Mr. Shimkus adds: “Current capacity is adequate for the force placed coverage we arrange. The outlook for the remainder of 2012 is stable with regard to capacity. Pricing should continue rising to meet the growing exposure.”
According to Ms. Cooper, an issue that may have a significant impact on the market for force placed insurance is the recent announcement (March 14, 2012) by Fannie Mae of changes in its policies with respect to lender-placed insurance. “In compliance with a provision of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, Fannie Mae and other lenders adopted policies to protect consumers who are delinquent on their mortgage loans and whose lenders have insured their homes with force placed coverage,” Ms. Cooper explains.
Under a section of its Servicing Guide Announcement titled Acceptable Lender-Placed Insurance Carriers, Fannie Mae states:
“Servicers must ensure that the lender-placed insurance carriers they use are filed and admitted in every state in which they service loans for Fannie Mae. For carriers and lender-placed programs that do not meet this requirement, Fannie Mae will allow the use of excess and surplus lines coverage during the filing period, up to a maximum of 180 days from the date of this Announcement.”
Because much force placed insurance is written in the non-admitted market where rates are not filed, this requirement has serious implications for excess and surplus and specialty markets and is likely to be challenged in court.
Writing community banks can be challenging and also extremely rewarding. A number of experts are ready to help you address the many coverage issues that confront your local banks. Helping them manage their risks will not only benefit the bank but also help you and your community.
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