Abstract: [ILLUSTRATION OMITTED] good news is that subprime crisis hasn't been a huge direct challenge to community banks on lending side. bad news is that when a depth charge like that goes off, ripples flow far and wide, and those are affecting community banks and their insurance coverages in more ways than one. Future impact on D&O market Consider shareholder suits. As nearby box details, stockholders have sued a number of large financial players because of subprime missteps. Thus far, community banks haven't been dragged into that, according to Mike Read, regional territory manager for ABA-sponsored insurance program, underwritten by Progressive. However, Read points out that community banks are not immune from shareholder suits, and evolution of subprime-related cases is young, yet. And even though these banks aren't being sued, they stand a good chance of feeling some of pain, once removed. We're starting to hear some saber rattling, says Progressive's Read, about a hardening of directors and officers insurance market, and subprime crisis is driving that. Read thinks D&O rates may be going up in 2008, as carriers insuring larger banking companies see potential payments and future risks rising. rattling will grow louder. Koorosh Talieh, partner at Howrey LLP, Washington, D.C., specializes in insurance coverage litigation--essentially, he's one called in when carriers won't pay off. He says subprime issue is already shaping up as a significant second-tier battleground. Take matter of SIVs--structured investment vehicles. SIVs are not what D&O carriers thought they would be exposed to, and he fully expects them to fight before covering companies and executives and board members who have been sued, especially given size of claims. Typically, says Talieh, the insurance case ripens later, sometime after main case that coverage relates to. Some of claims that will be made regarding misleading lenders will wind up sparking suits between insureds and their errors and omissions insurance carriers. It always works this way, says Talieh. The moment there is a crisis, supply of coverage shrinks because insurance companies get nervous. They push up rates. Companies then either lower their coverages, or they look offshore. Local challenges Where community banks will likely be having more immediate challenges is right in their backyards, perhaps literally. As foreclosures grow, both in residential and residential construction sectors, more banks will likely find themselves holding other real estate owned, according to Ronald Summerville, president, RCS Consulting Group, Chevy Chase, Md. While typically community banks have not been holding much OREO, Summerville says industry has seen an uptick in certain states and markets, and he expects trend to spread. result of that is that bank becomes temporary owner of homes and properties they've foreclosed on. Summerville says this brings up a host of insurance-related issues. From start, unless bank regularly does enough volume that it has arranged a master insurance policy, each property foreclosed on is going to require basic coverages, much as homeowner would have had to maintain. These would be to protect lender/owner from loss from fire, broken frozen pipes, and such. bank may also have to make a claim for vandalism damage, if home is unoccupied prior to sale. bank also has to cover itself for general liability, such as slip and fall cases. policies involved resemble homeowners' coverage, Summerville says, but they are not written on homeowner's policy form. In some locales, windstorm damage coverage may be appropriate, Summerville says. Alternatively, if bank rents property while its disposition is being worked out, Summerville says that brings up more issues. …
Publication Year: 2008
Publication Date: 2008-01-01
Language: en
Type: article
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