E-Banking Risk Liability Coverage

The first edition of my book on bank insurance included a dismissal of many of the coverage provisions and the general format of the e-banking insurance policies in place at the time.

In fact, the e-banking section of the book began, “I am not a big fan of the current crop of e-banking insurance policies. While these policies have their place, I question the value of the insurance contracts for most community banks, given the breadth of coverage available in the bond, directors’ and officers’, and package policies.”

Over the past two years, my opinion of e-banking insurance has changed. It is now a vital part of a bank insurance program. Insurers have built the policies to mesh with the bond and directors’ and officers’ insurance. Exclusions and coverage limitations have been added to the basic bank policies, making e-banking insurance a necessity. Buy it. If you don’t have it, buy it now.

Suppose that your computer system is hacked and private data is breached. Customer information is in the hands of the bad guys. Lawsuits will be filed based on your failure to protect customer privacy, breach of duty, and lost business opportunities.

This section is concerned with liability claims that come from computer systems, Internet banking, and electronic commerce.

First, recall that your financial institution bond provides coverage for your loss of money due to computer theft and fraud losses.

The “injuries” to third parties and subsequent legal actions triggered by Internet and computer use are the realm of e-banking liability insurance (EBLI).

As with most bank specialty insurance policies, EBLI policies are unique to each insurance carrier and must be studied carefully. The following are some common coverage sections and considerations.

Loss Event Liability

The basic policy includes coverage for liability that arises out of any unauthorized use of, or unauthorized access to, electronic data or software within your covered electronic business systems. Coverage is also usually included for liability claims of spreading a virus or malicious code, computer theft, extortion, or any unintentional act, mistake, error, or omission made by your employees or your subcontractors in the course of their duties for your bank.

Policy Aggregate

Most policies include a limit per claim and an aggregate limit that caps your total coverage for the combination of all claims.

Business Income Loss

In the event that your e-banking system goes down, you may (so the theory goes) lose income or incur extra expenses in advertising. This section provides coverage for such losses.

Dependent Business

Provides loss of business income protection for the loss of services provided to you by others for Web services, e-banking support, and the like.

Intellectual Property

Indemnifies the bank from the liability caused by the inappropriate use of the intellectual property of others on a website or e-banking facility. Can include copyright infringement, theft of ideas, and trademark misuse.

Public Relations Expenses

Provides payment for the use of public relations firms and advertising to mitigate the damage to public perception should an e-banking breach occur. (Note: Your bank faces enormous risks for events that cause a loss of reputation. Public relations expense coverage in your e-banking liability insurance funds a relatively minor part of your overall reputation risk exposures. How’s your risk management plan?)

Privacy Breach Remediation Expenses

A hacker gets into your computer system. Private customer data is released. Your bank’s e-banking insurance will/should provide coverage for lawsuits that come from the breach. How about the expenses of informing customers of the breach and providing credit tracking services?

Simply put, there is usually no coverage in most bond, D&O, or e-banking insurance policies for these expenses. Some insurers add coverage by endorsement (and separate charge). Some offer coverage within the package policy (Chubb and OneBeacon, namely). I have seen coverage endorsed to the bond and to the D&O policy. Talk with your insurance adviser to see how your insurance responds to these issues.