Covering “small” items may save your bank from bigger problems later
Here’s a tip. It makes more sense to insure all bank buildings under
one policy provision than to insure each building separately. To learn
why, read point 1 below.
• • •
By Scott Simmonds, bank insurance consultant. For more about the author, see the section after the article.
In insurance, sometimes little things become big things when they aren’t addressed properly.
Often banks focus on the “big things” when reviewing their insurance coverage. But when banks call me to review their coverage, I offer two choices.
Option one is to review their bank specialty insurance policies--the bond, the executive risk (also known as D&O), and cyber coverage. That’s what most bankers are interested in--the big, complicated, and expensive insurance policies they buy.
These policies may be the policies that their local insurance agent is less comfortable with. It is the insurance your board of directors is concerned about.
However, I also offer clients a second option: a review of all
a bank’s insurance--bond, D&O, cyber, property, liability, auto, mortgage impairment, workers’ compensation, and umbrella liability.
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In other words, the works. Two-thirds ask me to review everything.
Every bank that has me review their “other policies” is surprised at the issues discovered. But it’s good to find them before you have a loss.
After a loss, the small stuff becomes big stuff.
Be on the lookout for these points
Here are some coverages and coverage designs to consider in your bank’s property insurance.
1. Blanket coverage—Insure all your property in one amount of insurance instead of specific coverage on each building and the contents of each building. Having $5,000,000 of insurance on five buildings is more flexible than five buildings, each insured at $1,000,000.
2. Agreed amount—This clause removes the coinsurance penalty from your property insurance policy. Yell at your agent if you have coinsurance on your policy. Yell long and loud. Coinsurance means your agent is not looking out for your interests.
3. Backup of sewers and drains—Your property insurance excludes damage by water that rises up from flooding or comes from underground. However, you can usually get $25,000 or $50,000 of coverage for damage from water that comes up from drains and sewers (Yech!). You have to ask for it, though.
4. Valuable papers—This coverage section pays for the re-creation of paper records (think about your loan department) after a fire or other covered cause of loss. I recommend that $150,000 is a minimum for any bank building. Some banks need at least $250,000.
5. Debris removal
Point 8: Many banks would insure this sign, but fail to cover the costly one out by the road, where it could be hit by truck.
—Most property insurance policies pay to remove the damaged part of the building after a fire or windstorm. Coverage is limited (usually) to 10% of the loss to your building, plus $10,000. Get that bumped to 10% plus $50,000.
6. Fine arts & antiques—Do your offices contain any valuable furniture or artwork? Insure it for its market value. Obtain appraisals of unusual items.
7. Additional perils—Most property insurance policies exclude earthquakes, in addition to the exclusion of floods mentioned earlier. Get quotes on such coverages, and make an informed decision regarding whether you really need these coverages. If the events are unlikely, the premium will be cheap and could save your bank from a catastrophic loss.
8. Freestanding signs—Many banks I review have coverage for signs attached to their buildings, but little for that expensive sign by the road. Buy enough to replace the sign if it is destroyed.
9. Loss of rents—Are you renting out a building or part of a building? Loss-of-rents insurance covers that income should you have a fire and the tenant has to move away for a while. Buy 100% of your annual rental income for each location.
10. Extra expense—This is a big deal that is often overlooked--or under-insured. Extra expense coverage pays for the cost of relocating employees, renting temporary office space, or renting a temporary bank trailer. Here is my rule of thumb for extra expense: Take the number of employees at a location and multiply by $5,000. Add $100,000. If it’s your computer center we are talking about, add another $50,000. Use the result or $300,000, whichever is highest.
11. Extra expense for flood—If you buy flood insurance, make sure you have extra expense coverage triggered by flood.
12. Extra expense for earthquakes—Ditto earthquake. This is often left off. Make sure your property insurance is complete. It should pay for the damage and pay for the increased expenses of staying in business.
13. Extra expense for off-premises loss of utilities—A branch without electricity is closed. Your town may have a disaster that shuts off power--without damaging your building. This coverage section pays for the costs of renting a generator (or running one) during the weeks it might take to get power back up and running.
Point 14: Your building may have been grandfathered, but after a disaster reconstruction may trigger code upgrade requirements.
14. Ordinance or law
—Your local or state laws may impose additional costs on you after a disaster. You may have been “grand- fathered” previously for the new sprinkler codes, or for other ordinances. This coverage section pays to get you up to code. It can also pay for the demolition of an undamaged portion of your building when such is mandated by your local fire department.
These are just some of the issues I see in my review of bank insurance policies and in the policy that most agents call the “easy” stuff. Can you imagine what tiger-traps exist in the more complicated policies?
About the author
Scott Simmonds, Chartered Property and Casualty Underwriter and Associate in Risk Management, is an insurance consultant with a specialty practice in bank insurance issues. He does not sell insurance. He can be reached at Scott@ScottSimmonds.com or 207-284-0085. His bank insurance website is www.BankInsuranceConsultant.com
[This article was posted on March 9, 2012, on the website of ABA Banking Journal, www.ababj.com, and is
copyright 2012 by the American Bankers Association.]