Less than a year after first offering merchant chargeback insurance to credit card transaction processors, Lloyds of London has paid its first claim.

The insurance, offered through Minneapolis-based London Market Associates, covers merchant banks, processors, or independent service organizations against fraudulent or excessive chargebacks.

Rather than absorbing these losses as a cost of doing business, banks are fighting back with increased fraud prevention and insurance like the merchant chargeback policies. Credit card fraud accounts for approximately $1 billion in losses worldwide each year.

"The speed of transactions today leaves processors with millions of dollars of potential risk if merchants are unable to settle transactions," said Christopher L. Kittler, managing agent of London Market Associates.

"We fully expected a claim," he added, "in fact, we believe by paying this claim, we leave little doubt that this type of policy works."

The insurance agent declined to name any of the parties involved in the six-figure claim. Twenty merchants were involved, though the bulk of the claim involved a single merchant, according to the company.

The policy invoked in the claim is a bond that protects banks against infidelity, said Mr. Kittler.

Lloyds' Merchant Chargeback bond covers credit card processors, much in the same way that the Bankers Blanket Bond covers risk of exposure to a bank's capital base. The Bankers Blanket Bond, however, does not cover merchant chargeback exposure.

The merchants involved in the claim were traditional retailers, to the surprise of London Market officials.

When merchant. chargeback protection was introduced last year, London Market touted it as a response to the increased risk financial institutions due to the growth of nontraditional merchants.

"Catalogs and TV commercials: these nontraditional, non-face-to-face transactions increase the risk of illegitimate charges," said Mr. Kittler.

London Market officials believe the demand for this type of policy will increase as on-line shopping and other alternative delivery channels proliferate.

"When we first introduced this policy, we had only three takers," said Mr. Kittler. "Now we have a lot more clients, and it's picking up steam. And we have a 100% renewal rate. That proves the policy fills a legitimate need."

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