The greatest risks facing community banks today are not from fire, accidents, or even theft, but increasingly from management and professional liability exposures.
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 by cross-selling a wide array of financial services, they increase the likelihood of lawsuits from shareholders, employees, customers, creditors, competitors, and government agencies.
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.
"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.
As for management liability, directors and officers of community banks are under increasing scrutiny; many find themselves involved in lawsuits that threaten the financial stability of the bank as well as their personal assets.
And an increasingly important issue for directors and officers at all organizations, including community banks, is liability for failure to comply with year-2000 mandates.
D&O insurance now available for publicly traded entities directly addresses claims related to failure to achieve or properly disclose year- 2000 compliance.
Such a policy would cover the bank and its directors and officers for shareholders' claims, as well as any year-2000-based breach of contract claims brought by vendors and suppliers.
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.
Employment practices liability insurance has become more common, as it provides coverage for corporate entities, directors, officers, and other employees and responds to a spectrum of claims that might be brought by employees and third parties such as customers or suppliers.
Loss prevention is a critical part of risk management, and many insurers provide services 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.
ERISA liability exposures 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, 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.
Making loans and extending lines of credit are the foundation of any bank's business. Unfortunately, such activities are frequently the source of claims against the bank. Lender-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 different insurance policies to address each of these exposures. Now, single policies are available that incorporate multiple coverages.
These multiline policies are flexible, and the bank may select coverage for any or all of the major exposures.
In addition, the bank can have a single aggregate limit of liability that would apply to all the selected coverages, or individual limits of liability to apply to each coverage area.
The multiline policy can be tailored to address the specific needs of a community bank. It is available through a single application and is flexible and convenient. This may be the best product to serve the changing needs of today's community banks.
Of course, community banks are not limited to management and professional liability exposures. Fidelity bond coverage provides financial protection in the event of theft or other financial dishonesty by bank employees.
Environmental coverage applies when a borrower defaults on a loan, making the bank a responsible party for a contaminated property. Community banks may require other property/casualty insurance lines, including property, general liability, worker compensation, and commercial automotive liability.
Local insurance agents or brokers can help community banks develop a risk management program that matches the exposures related to the growing list of products and services they provide.