New Firm Would Offer Banks Lower Insurance Rates
Independent bankers, like other professionals, have found it tough in recent years to obtain liability insurance for their directors and officers. And if they do stumble across an underwriter, they’re finding that they often must pay drastically higher premiums for much less coverage, says banking consultant Gerry Findley.
Now Findley, an independent bank specialist in Brea and one of the first to sound the insurance alarm four years ago, is awaiting federal approval for his unique insurance-like company that would provide broader coverage than carriers now offer and provide it at a cheaper premium.
“About 30% of the independent banks in California are going bare--without insurance--because they can’t get it or they can’t afford it,” Findley said. “We’re losing good outside directors because they don’t want to open themselves up to personal liability.”
A bank in Reno, for instance, recently was offered a new policy calling for a $100,000 deductible and an annual $87,000 premium for $1 million worth of coverage for its directors and officers, he said. And the policy excluded the big-buck claims arising from regulatory actions, securities matters and mergers and acquisitions.
Findley’s Interbank Trust Co., which would be owned by 25 banks that would provide $40,000 each in start-up capital, would provide key insurance coverage for member banks in California and six other Western states. It would cover directors and officers for everything except violations of the law and insider suits--those brought by shareholders or other directors.
Interbank is one of a number of ideas proposed recently to help banks get insurance, but Findley’s plan is unique primarily because it is self-funded and does not look to outside reinsurers. In fact, it’s not technically insurance because, while it provides each member up to $1 million in coverage, any payments would be taken out of a so-called shared-risk pool that would be funded equally by each member-bank.
“There’s no other charter with this kind of operating plan,” said Tim Sullivan of the U.S. Office of the Comptroller of the Currency.
The review by the comptroller’s office began in January. “Because of its unique nature, it presents legal and policy issues the comptroller has to deal with. The whole question of commercial banks associating with the insurance business, for example, is an area of concern,” Sullivan said in explaining why the review has taken more than seven months
If the plan is approved by the comptroller, Interbank would set up three self-insurance trusts, would provide other trust services for member banks and would act as a clearinghouse for independent banks for such common needs as supplies or temporary help.
“It’s a good idea, a good concept,” J.B. Crowell, president and chief executive of Eldorado Bank in Tustin, said about the plan. “Right now, deductibles are unreal, premiums are high and by the time you read all the exclusions, you wonder what kind of insurance you’ve got.”
Findley and his son, banking lawyer Gary Findley, have been working on the plan for 18 months. The elder Findley said he expects an answer from the comptroller in the next few months.
Banks Would Get Profits
Any profits from the company would go to the 25 banks that put up the initial capital, totaling $1 million.
The Findleys said they won’t profit directly from Interbank. Gary Findley said he has his own practice and won’t join Interbank’s legal staff, and Gerry Findley said he will turn over the chief executive position to a banker as soon as the company is operational.
The elder Findley said he will remain on the company’s board for about a year and then return to his consulting work full time. The Findleys said they expect, at most, $30,000 to cover part of their fees and expenses in setting up Interbank.
“We’d gain through our own investments because we own stock in 231 independent banks,” Gerry Findley said. “So we’ve got a helluva lot at stake.”
A potential Interbank competitor is the American Bankers Assn., which plans to offer directors and officers insurance and blanket bond insurance, covering all employees, from a yet-to-be-formed Bermuda subsidiary. Setting up the subsidiary in Bermuda enables the association to put together its insurance plan with more speed and less regulation than would be possible in the United States.
The trade group now has one carrier ready to provide primary insurance but still is negotiating with other carriers for tough-to-get reinsurance, which effectively insures the original underwriter against some of its claims losses.
“Our idea is to provide long-term stability . . . a market for our members,” said John Wolfe, an ABA staff member. “We are not saying we’ll provide the lowest price or the broadest coverage.
B of A Self-Insured
The California Bankers Assn. also had planned to offer insurance but now is putting its plan on hold, deferring to the ABA, said Dale Hatfield, vice president of Bank of California in San Francisco and head of the California association’s insurance task force.
And a number of major banks, as well as some states, have gone to self-insurance--alone or in groups. Bank of America, for instance, is self-insured. Six Midwestern states have formed a bank insurance pool based in Oklahoma.
Some companies, like insurance broker Johnson & Higgins in New York, are offering new policies--but primarily for larger banks with $3 billion or more in assets.
In Gerry Findley’s view, however, few of the plans offer much to protect outside directors, especially at the numerous small banks, from the risk of losing their personal fortunes.
“We’re firm believers of joint help,” Gary Findley said. “The notion of being independent is no longer viable. The only way to be successful in the future is through joint help--smaller banks helping each other out.”
One aspect of the Findleys’ novel plan is Interbank’s intensive pre-membership investigation. The results would allow the company to vouch that a bank’s management was engaged in prudent and reasonable performance of its duties. Such an opinion, said Gerry Findley, would be an added defense in any lawsuit and would prompt insurance carriers to provide wider coverage at lower rates for amounts over the $1 million in coverage that Interbank would offer.
The elder Findley said that about 285 banks in California, Oregon, Washington, Idaho, Utah, Nevada and Arizona want to join Interbank’s directors and officers self-insurance trust, which the Findleys have shortened to DOSIT.
Fee for Investigation
To become a member, a bank would pay a $5,000 fee for the pre-membership investigation of its legal and banking condition and internal controls systems. Once accepted, a member bank would face--and pay for--a similar investigation each year.
If approved for membership, a bank would put $100,000 into the Interbank DOSIT fund. Interbank, in turn, would invest the $100,000 in a certificate of deposit at the member bank, getting $8,500 interest a year at current rates and giving the bank a tax deduction and its own money back to lend out at higher rates. With 285 banks, the DOSIT fund would have $28.5 million in trust.
That fund should be enough to cover all the members, the Findleys said, because most judgments against directors and officers have been in the $200,000 to $750,000 range, including legal fees. Interbank would have its own attorneys on salary to handle cases, the Findleys said.
Interbank’s other trusts would provide bond protection against employee and customer embezzlement and fraud and would provide bank employees with medical disability benefits. The medical disability plan would let smaller banks enjoy the premium savings of $100,000 to $150,000 per year that banks like Eldorado and Landmark are getting with their self-insurance plans.
Such savings would lower the non-interest costs of Interbank’s members, a profit-enhancing necessity Gerry Findley has been preaching to bankers for years.
Eldorado Bank’s Crowell said he likes the other services Interbank is proposing to provide. Among them are trusts allowing members to sell securities backed by loans that they pool and to offer pension, profit-sharing and retirement plans.
“It’ll be a small trust correspondent bank we can deal with rather than being whipped around by the large banks at their whim,” said Jack R. Barnes, president of Mission Viejo National Bank. Independent bankers long have complained that large banks charge stiff fees and leave little room to negotiate terms when selling their trust services.
