Publications & Resources
November/December 2009
Focus: Directors Issues
The Importance of Extended D&O Reporting
By Pat Corey
I obviously don’t need to waste print space with a dissertation about the current state of the community banking industry as a preface to this article. However, I do want to update you on the issues we are facing in regards to insurance policy renewals. Our agency manages the insurance portfolios of approximately 150 community banks and at least half of our client base is experiencing some form of financial difficulty or are working under regulatory orders. Both conditions jeopardize continuous insurance coverage and could lead to mid-term cancellation from certain insurance carriers or eventual non-renewal when the policies expire. Both situations require immediate attention as soon as notice of non-renewal or cancellation is received by the bank.
Professional lines (Financial Institution Bond and Directors and Officers Liability Policies) underwriting is becoming increasingly restrictive due to a significant increase in claims activity. When a bank lends a dollar it risks a dollar. When a professional lines insurance underwriter accepts a premium dollar the risk can easily exceed 50 dollars – making the task of underwriting insurance profoundly more critical than the exposure inherent in lending money. In addition, insurance rates are subject to state filings and have little room for adjustment to meet changes in risk. The long-term “soft” insurance market that just ended drove professional lines insurance rates to unprecedented low levels that were not adequate to pay the skyrocketing claims the industry is now absorbing. We will undoubtedly see markedly increased premiums for Bond and D&O policies as rate filings are adjusted to account for these losses.
Because the insurance industry has limited avenues to protect itself, it is important for you to know that most Financial Institution Bonds are cancellable by the insurance carrier if there is a material change in risk during the policy term. Cancellation by the insurance carrier is subject to state regulations requiring advance notice (usually 60 days) so the subject of the cancellation will have sufficient time to seek replacement coverage. The same conditions apply to D&O policies if the policy contains a mid-term cancellation provision or has an endorsement allowing this coverage modification. Most insurance policies do not have mid-term cancellation clauses and guarantee D&O coverage for the entire term originally offered – even if the bank fails during the policy term. All carriers reserve the right to non-renew when the bank is no longer an acceptable renewal risk, but the carriers are still required to send a notice of non-renewal to the bank to give the bank ample time to seek alternatives.
The insurance markets available to write Directors and Officers Liability Insurance for community banks typically are not willing to cover prior acts in the current economic environment. It is important that you acknowledge this change in market conditions before sending your broker or insurance administrator on a quest to find replacement coverage for your organization.
If your bank is put on notice for non-renewal or cancellation, we strongly urge the bank exercise its right to purchase an “Extended Reporting Period” (tail of coverage) on the D&O policy. Directors and Officers Liability Insurance Policies are “claims-made” insuring instruments, which means the claim must be “made” (reported to the insurance carrier) during the policy term. The “Extended Reporting Period” gives the bank the right to report claims for alleged wrongful acts that occurred before the effective date of cancellation or non-renewal for an additional period of time (usually one year) after the policy expired, was cancelled, or non-renewed by the insurance carrier. When you exercise the Extended Reporting Period you are essentially purchasing limited “past acts” coverage on your non-renewing D&O policy which mitigates the gap created when you switch insurance carriers.
Exercising the Extended Reporting Period is critically important because: 1.) it is highly unlikely you will receive “past acts” coverage through your successive insurance carrier; and 2.) the Extended Reporting Period retains the terms and conditions of the non-renewing policy, which is very important. You will likely receive restricted coverage on the successive carrier’s terms if your bank was non-renewed because it is experiencing financial or regulatory difficulties. The conditions pertaining to the purchase of extended reporting are outlined in your current D&O policy language – usually including the amount of premium required – 75% to 250% of the previous year’s D&O premium depending upon your current carrier’s policy terms.
Pat Corey is agency principal for Independent Bankers Insurance Services (IBIS). He can be reached at (480) 663-3778 or PCorey@ibisinsurance.com. IBIS’ insurance for community banks is a WIB-endorsed Value & Income Program (VIP). As a free service to WIB members, IBIS will be happy to review your current policies and give you a written opinion of your coverage (a $1,500 to $15,000 value depending upon the size of your bank).
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