FIDELITY AND OTHER INDEMNITY PROTECTION
Introduction
Risk management/insurance management intended to minimize pure risk
- Pure risk – chance that a financial loss will incur without the opportunity for financial gain
- Three categories of pure risk
- Property
- Liability
- Personnel
- Three stages in the risk management process
- Risk identification and analysis
- Requires a review of all aspects of the bank’s present and prospective operations to determine where the bank is exposed to loss
- Risk control
- Dependent upon the strength of internal controls, policies, and procedures
- Risk treatment
- Choosing the appropriate steps or methods to deal with a particular risk
- Several options in treating a particular risk: implement additional controls, transfer the risk to another party (insurance) or a combination
- Potential or catastrophic or significant loss should not be retained if avoidable
- Board is responsible for risk assessment, should be conducted annually
Fidelity Insurance Protection
- May be required under Section 18(e) to have adequate fidelity insurance coverage, and if not complied with, FDIC may contract for such protection and add the cost thereof to the bank’s deposit insurance assessment
- Bank should not furnish insurance companies copies of Report of Examination
- External Hazards
- Possibility of dishonest, fraudulent, and criminal acts committed against the bank and its employees by the general public
- Part 326 aimed at preventing external crimes
- Internal Hazards
- Fraud, crime committed by the bank’s own personnel
- Chances of internal crime is far greater than external crimes
- Internal routines and controls aimed at preventing internal crimes
- Blanket Bond Insurance
- Two different limits: single loss limit and aggregate limit
- When the aggregate limit of liability is exhausted, the bond automatically terminates
- Single limits are included in the aggregate limit (example if total policy is $1,000, two single claims of $500 apiece would exhaust the aggregate limit)
Scope of Blanket Bond Coverage
- Fidelity - covers losses as a result of dishonest or fraudulent acts by the bank’s officers and employees, attorneys retained by the bank, and non-employees data processors while performing services for the insured
- On Premises
- In Transit
- Forgery or Alteration – Optional (items received as a transmission through an electronic funds transfer system are not covered
- Securities – Optional
- Counterfeit Currency
Holding Company
- When the bank is a member of a HC or other group of affiliated banks, one fidelity bond is usually purchased to cover the parent and all affiliated banks
Basis for Claims
- Discovery Basis – insurance company is liable up to the full amount of the policy for losses covered by the terms of the bond and discovered while the bond is in force, regardless of the date on which the loss was actually sustained by the bank
- Loss Sustained Basis – company is liable only to the extent of the coverage for losses sustained during the period the bond is in force
- Blanket bonds require losses be reported within 30 days after discovery
- Coverage as to any employee automatically cancels when the bank has knowledge that the employee has been dishonest or committed a fraudulent act
- Bank must notify company within 30 days of receiving any notice of legal action being brought against the bank which could result in a claim under the bond
- Banks may not longer purchase the right to extend the discovery period
- Bond is immediately terminated once the FDIC (any regulatory liquidator or receiver) takes over the bank
Riders and Other Insurance
Used to personalize coverage by adding or deducting particular features
- Electronic Data Processing Coverage
- Deductible and Self-Insurance Riders
- ATM Riders
- Kidnapping and Extortion Rider
- Computer Systems Rider
- Excess Employee Fidelity Coverage – FDIC strongly recommends that all banks acquire to protect against the possibility of catastrophic fidelity losses
- Combination Safe Depository
- Registered Mail and Express Insurance
- Transit Cash Letter Insurance
- Valuable Papers and Destruction of Records
Liability Insurance
- Directors and Officers Liability – provide for the indemnification of directors, officers, and other employees against legal and other expenses incurred in defending lawsuits brought against them by reason of the performance of their official duties
- Protect against:
- Expense of defending suits
- Does not cover criminal or dishonest acts
- General Liability – personal injury, medical payments, comprehensive – covers all risk except specific exclusions
- Automobile and Property Damage
- Umbrella Liability – provides excess coverage over and above existing liability
- Fixed Assets Physical Damage
- Fire or Extended Coverage – coverage of building contents is additional, extended coverage protects from windstorm, hail, explosion, riot, civil commotion, aircraft, vehicles, and smoke
- Boiler and Machinery – boilers, heating and cooling systems
- Fine Arts
- Extra Expenses – business interruption, reestablishing operations
- Rental Income
- Bank Owned/Leased Automobiles
Key Man Insurance
- Purchased by the bank for the benefit of the bank on the life of an officer when the death of such officer “key man” would be of such loss as to affect the operation of the bank
- Key man – any bank officer who participates in major policy making functions of the bank and whose loss to the bank wold be of consequence because of knowledge, experience and related qualification
- Also used as a fringe benefit for employees
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