The global insurance industry is undergoing a period of "bigness." Major insurance companies are merging with or acquiring other insurance companies; large international brokers are joining forces; and, in this time of possible financial services deregulation in the United States, banks are contemplating moving into the insurance business with abandon.
A popular myth that is being accepted as fact by some doomsayers is that the rise of the giant financial conglomerates will mean the demise of the smaller entrepreneur. In a few years, they say, there will be four or five monolith financial services firms serving the financial needs of the entire population.
Especially in the banking arena, some believe that the "bigness" that we have come to accept as inevitable will mean small community banks will become obsolete. One person who disagrees with this scenario is David Hebbeler, assistant vice president of the Financial Institutions Group of National Union Fire Insurance Co. of Pittsburgh, Pennsylvania. National Union is a member of American International Group, Inc. (AIG). Hebbeler, in fact, maintains that community banks in the United States are continuing to grow in number. Moreover, he says, independent insurance agents could profit from this emerging market if they can satisfy the risk management and insurance needs of community banks.
"There are approximately 9,500 community banks around the country and, despite all the publicity of large bank mergers and the onslaught of financial giants, there are new community banks being created every day. The reason is that there will always be a need for local community service." And, who can better serve the insurance needs of those banks than the independent agent?
However, Hebbeler points out that independent agents must understand the changing exposures that community banks face in today's litigious environment. Says Hebbeler: "The greatest risks facing community banks today are not from fire, accidents or even theft, but increasingly from management and professional liability exposures. As banks have expanded the scope of financial services they offer, they must now take a broader view of risk. As a result, bankers must closely examine the potential exposures created by the actions of their management and employees that can lead to litigation from shareholders, employees, customers, creditors, competitors and government agencies."
Hebbeler says that it is not only the giant financial conglomerates that are looking at the new world of full financial services. Community banks, as well, are actively embracing the cross-selling of financial services by providing a vast array of products and services and by operating in realms once reserved for insurance companies, broker/dealers' investment banks and mutual funds. This dramatic growth and change has added complexity to the industry's professional liability exposures.
Moreover, he maintains that agents who wish to provide insurance and risk management services to the growing number of community banks must understand the exposures that exist.
"Bankers professional liability insurance provides coverage for claims and lawsuits brought by customers and clients alleging that the bank or its employees failed to render a professional service or committed an error or omission in rendering such a service. As community banks seek to increase fee income, the range of professional services they offer will increase. These professional services may include trust department services, real estate management/brokerage, securities brokerage, loan servicing, tax planning, selling mutual funds, insurance brokerage, custodial IRAs and wire transfer. Each of these services could result in a claim against the bank."
Hebbeler says that, with community bankers rapidly expanding their scope of services, agents should know that "broad form" policies are now available to provide blanket coverage for professional liability exposures. These policies may be better suited to a bank's needs than the more traditional "menu-driven" policy that covers claims arising out of the specific professional services identified by the bank when purchasing the policy.
--David Hebbeler, assistant vice president, National Union Fire Insurance Co. of Pittsburgh, PA (AIG)
Another area of exposure that agents must consider, says Hebbeler, is directors and officers. "Directors and officers of community banks are under increasing scrutiny as many find themselves involved in lawsuits that threaten the financial stability of the bank as well as their personal assets. Directors and officers insurance (D&O) has become essential for community banks, because the coverage addresses claims such as alleged or actual breach of duty, neglect, error, misstatement or omission that have caused injury to the bank.
"An increasingly important issue for directors and officers at all organizations, including community banks, is Year 2000 compliance," continues Hebbeler. "D&O insurance is now available for publicly traded entities that directly addresses claims related to an insured's failure to achieve or properly disclose Year 2000 compliance. Such a policy would cover the bank and its directors and officers for claims brought by shareholders alleging a failure to properly manage the bank's Year 2000 compliance efforts as well as claims by vendors or suppliers alleging that the bank's failure to be Year 2000 compliant caused the bank to breach its contract with them."
Another area of exposure for banks, says the National Union executive, is employment practices liability. Given the recent stream of highly publicized sexual harassment, racial discrimination and wrongful dismissal lawsuits, all businesses, regardless of size or operational focus, are recognizing that employment practices liability is a significant exposure, and community banks are not removed from this risk.
Says Hebbeler: "Employment practices liability insurance (EPLI) has become more common, as it provides coverage for corporate entities, directors, officers and other employees and responds to a wide spectrum of claims brought by employees and third parties such as customers or suppliers."
But Hebbeler emphasizes that loss prevention is a critical element of employment practices risk management, and some insurers provide services to policyholders that can help minimize the potential for an employment practices claim. These services can be valuable to smaller organizations that may not have the legal or personnel staff, resources or expertise in employment practices issues.
"Agents can inform community banks that insurers which they represent may provide, as part of the insurance program, informational materials and seminars," says Hebbeler. "Another service which we provide is to put these banks in touch with law firms in their area which focus on EPL issues and loss prevention, thus helping to mitigate the possibility of lawsuit in these areas."
Yet another area in which agents and the insurers they represent can provide assistance to community banks is ERISA liability exposures which relate to claims alleging breach of fiduciary obligations as set forth in the Employee Retirement Income Security Act of 1974. Fiduciaries can include the sponsor organization, the plan and anyone exercising any discretionary authority or control over the management or administration of a pension or benefit plan or its assets.
"For example," says Hebbeler, "a failure of a fiduciary to diversify or choose prudent investments, monitor the investment manager's performance or properly select or replace an investment manager are frequent allegations in ERISA liability suits. Coverage is available for a community bank to address this exposure."
Continues Hebbeler: "Making loans and extending lines of credit are the foundation of any bank's business activities. Unfortunately, such activity is frequently the source of claims against the bank. Lenders liability coverage addresses claims related to any act performed by a bank for a customer in connection with the granting of, or refusal to grant, a loan or extension of credit."
In the past, community banks had to purchase a number of different insurance policies to address each of the above exposures. Now single policies are available to community banks that incorporate multiple coverages, enabling the bank to unify its exposures under one policy, says Hebbeler. "These multiline policies are flexible because the bank may desire coverage for any or all of the major exposures. In addition, the bank has the option of having a single aggregate limit of liability that would apply to all of the selected coverages or individual limits of liability to apply separately to each such coverage. Additionally, the multiline policy can be tailored to address the specific exposures of a community bank and is available via a single application, which helps streamline the policy application and renewal process and simplifies claims reporting."
Of course, community banks are not limited to management and professional liability exposures. For example, fidelity bond coverage is available to provide financial protection in the event of theft or other financial dishonesty by bank employees. Environmental coverages are available to banks that address their exposures in the event a borrower defaults on a loan, making the bank a responsible party for a contaminated property. Community banks also may require other property/casualty insurance lines including property, general liability, workers compensation and commercial auto liability.
"The point is that community banks represent an excellent opportunity for independent insurance agents to provide assistance to a market that is ripe for growth. In turn, the agent will benefit from this new, emerging market," says Hebbeler. *
©COPYRIGHT: The Rough Notes Magazine, 1998