Financial Institutions Overview


Nov 18, 2013 (4 years and 7 months ago)


Financial Institutions Overview

Presented by:

Andrew Knight

DFI Marketing Manager / FPC Practice Leader

Trends, Updates, Exposures and Solutions


Section I:

Sector Overview

Section II:

Key Focus Areas

Asset Management (NI 31
103 Registration)

AMP (Asset Management Protector)

Financial Institution Bonds

Private Equity

VCAP Gateway

Mortgage Lending

Mortgage Protection Insurance

Section III:

Why Chubb?

Section I:

Sector Overview

What is a Financial Institution?

An institution that is in the business of dealing or transacting third
party money.

party money can be defined as cash, stock, bonds, promissory
notes, loans or many other types of negotiable or non

Depository Institutions
: banks and credit unions which pay interest
on customer deposits and generate capital which can then be
loaned or invested to earn a rate of return from other third parties.

Depository Institutions
: those firms which sell financial products
or earn a rate of return without taking deposits. Examples are
insurance companies, brokerage firms or mutual fund companies.

Many financial institutions provide both depository and
nondepository services.

What is a Financial Institution?

1. Depository Institutions

Banks, Finance Companies, Credit Unions, Trust
Companies, Mortgage Companies, Leasing

2. Financial Management Firms

Investment Advisors, Stockbrokers, REITs, Mutual
Funds, Wealth Managers, Venture Capital Firms,
Investment Bankers

3. Insurance Providers

Insurance Companies, Reinsurance Companies

4. Service Organizations

Exchanges, Financial Intermediaries, Funds Transfer
Organizations, SRO’s

The Regulators

Investment Industry Regulatory Organization of Canada

Mutual Fund Dealers Association of Canada (MFDA)

Office of the Superintendent of Financial Institutions

Canadian Securities Administrators (CSA)

Financial Services Commissions of Ontario (FSCO)

Securities and Exchange Commission (SEC)

Provincial Regulators


Directors & Officers Liability

Fiduciary Liability


Employment Practices Liability

Financial Institutions Bonds (A, B, C)

Electronic Computer Crime


Kidnap & Ransom

Mail & Transit

VCAP Gateway

AMP (Asset Management Protector)

Mortgage Protection

General Liability



Group Personal Excess

Bankers’ Professional Liability


Automobile Liability

Multinational Capabilities

Section II:

Key Focus Areas

Asset Management

Directors & Officers are vulnerable

Rapidly evolving regulatory environment

increased scrutiny

Bill 198, Bill C

National Instrument 81

Independent Review Committee

National Instrument 31

New Registration Regime

Volatility of Returns

Merger & Acquisition Activity

Cases of Fraud, Ponzi Schemes, etc

Conflicts of Interest

Breach of Investment Guidelines

Failure to perform due diligence in selection and
oversight of sub
advisors or outside funds

Prospectus liability claims against mutual fund directors,
advisors, service providers

Asset Management Protector (AMP)

Launched in 2009

Designed for the asset management industry

Customizable to asset managers who want to structure
their insurance coverage

Able to address numerous combinations of asset
management structures and their foreign equivalents

Directors & Officers Liability (Public or Private)

Professional Liability

Investment Company

Private Fund

Employment Practices Liability

Fiduciary Liability

Asset Management Protector (AMP)

Who Is It For?

Investment advisers and consultants

Wealth management firms

Mutual funds, exchange traded funds, and closed
end funds

Hedge Funds

Funds of Funds

Real Estate Investment Trusts (REITs)

Private Real Estate Funds

Asset Management Protector (AMP)

Important Considerations:

Understanding the Organizational Chart and who is an Insured

What is the definition of Claim?

Definition of Investment Adviser Services

Investment Company vs Private Fund Coverage

Independent Directors

additional protection

Independent Review Committee (IRC)


Broad base policy wording terms and conditions

AMPlifier Endorsements

Real Estate AMPlifier Endorsements

Cost of Corrections

Asset Management Loss Scenarios

Example 1:

Failure to follow investment guidelines

Example 2:

Inadequate disclosure of risks

Example 3:

Formal regulatory investigation of possible

trading violations

Example 4:

Failure to adhere to contract provisions

Bill C

(Amendment to the Criminal Code)

Bill C
45 (Section 217.1 in the Criminal Code):

Created rules for establishing criminal liability to
organizations for the acts of their representatives.

Establishes a legal duty for all persons "directing the
work of others" to take reasonable steps to ensure the
safety of workers and the public.

Sets out the factors that courts must consider when
sentencing an organization.

Provides optional conditions of probation that a court
may impose on an organization.

Financial Institutions Bonds 101

SAA Forms vs Chubb Forms

Bond 14 vs Bond B

National Instrument 31
103 (NI 31

Bond 24 vs Bond A

Bond 25 vs Bond C

National Instrument 31

What does this mean?

Definition of ‘Custody’

Sections applicable to Insurance:

Section 4.21 Dealer (page 14)

Section 4.22 Adviser (page 14)

Section 4.23 Investment Fund Manager

IFM (page 15)

Section 4.24 Global Financial Institution Bonds (page 15)

Section 4.25 Notice of Change, Claim, or Cancellation (page 15)

Appendix A Bonding and
Insurance Clauses (page 54)

National Instrument 31

Section 4.21 Dealers:

Applies to Investment Dealers, Mutual Fund Dealers,
Scholarship Plan Dealers, Exempt Market Dealers, &
Restricted Dealers

Must maintain a Bond with a single
loss limit in the
highest of the following:

$50K per employee, agent, or dealing representative or $200K,
whichever is less

1% of the total client assets that the Dealer
handles, holds, or
has access to

or $25M, whichever is less

1% of the Dealer’s total assets or $25M, whichever is less

An amount as determined by the Dealer’s BOD

National Instrument 31

Section 4.21 Advisers:

Applies to Portfolio Managers (the old IC/PM category)

Must maintain a Bond with a single
loss limit in the
highest of the following:

1% of AUM that the Adviser
handles, holds, or has access to

or $25M, whichever is less

1% of the Adviser’s total assets or $25M, whichever is less


An amount as determined by the Adviser’s BOD

National Instrument 31

Section 4.21 Investment Fund Managers:

This is meant to refer to the Fund Manufacturer/Sponsor
& not the IC/PM firm/Adviser

Must maintain a Bond with a single
loss limit in the
highest of the following:

1% of AUM or $25M, whichever is less

1% of the IFM’s total assets or $25M, whichever is less


An amount as determined by the IFM’s BOD

National Instrument 31

The key take
away is how you define

“handle, hold, or have access to”
, as that

is the trigger point for the higher insurance

requirements. In the absence of this trigger,

the required limit can be as low as $50K


National Instrument 31

NI 31
103 Companion Policy (CP) has the following to
say about “Custody”:

Hold client securities or cash for any period of time

Accept funds from clients, for example, a cheque made
payable to the Registrant

Have the ability to gain access to client assets

Have, in any capacity, legal ownership of, or access to, client
funds or securities

Have the authority, such as under a POA, to withdraw funds or
securities from client accounts

Have authority to debit client accounts to pay bills, other than
investment management fees

Act as Trustee for clients

Act as Fund Manager or GP for investment funds

Venture Capital & Private Equity

What is Private Equity?

Private pooled investment fund, managed by a firm, to invest in
equity of private companies (portfolio companies), to generate
increased value out of these portfolio companies, and exit them
for a profit

Fund is typically created as a limited partnership, and the private
equity firm serves as a general partners. Most of the capital is
contributed by outside institutional investors who become the
limited partners of the fund

Value creation is generated in the portfolio companies typically
though either expansion, new produce development or
restructuring of the company’s operations, management or

Typical exit strategies for portfolio companies are: IPO; strategic
sale or merger; failure

bankruptcy or closure of portfolio

Types of Private Equity

Venture Capital

Acquire minority interest in seed/early stage companies, little or
no revenues

Equity investments only, rarely use leverage

Typically take one board seat

Make small investments in many companies

Exit typically 3
5 years

Buyout and Leveraged Buyout

Acquire and take a majority interest in mature, middle
companies with operating cash flows

Buyout vs LBO

Typically take multiple seats on the board of the portfolio

Make large investments in few companies

Exit typically 2
3 years

Venture Capital & Private Equity

Claims Trends

Mostly arise from portfolio company related transactions


M&A Activities


Claimants are typically interested third parties of portfolio




Business partners

Typical Allegations

Breach of fiduciary duties


Breach of Contract


VCAP Gateway

Chubb’s new Venture Capital Asset Protection (VCAP)
Gateway Policy is designed to respond to the evolving
needs of venture capital and private equity firms

art policy that:

Incorporates broadest coverages available

Streamlines coverage for the entire private equity model

Provides coverage for:

Everything that a Private Equity firm is;

Everything that a Private Equity firm does; and

Everyone that does those things

VCAP Gateway

Insuring Clause 1

Management Liability Coverage

Insuring Clause 2

Management Indemnification Coverage

Insuring Clause 3

Professional Liability Coverage

Insuring Clause 4

Outside Directorship Liability Coverage

Insuring Clause 5

Organization Liability Coverage

VCAP Gateway

The Firm’s People

Insured Person includes:

Advisory Board members;

More industry specific terms ie venture partner, EIR;

house counsel;

Shareholder Representative;

The foreign equivalent; and

Automatic coverage for any nature person (including independent
contractors) who has a written indemnification agreement with an
insured organization

VCAP Gateway

The Firm’s Activities

Private Equity Venture Investing includes:

The creation, management and dissolution of a Private Fund or
Investment Holding Company by an Insured;

Any act by an Insured for Portfolio Company related to a loan;

Advisor/other activities by an Insured for an Organization or
Portfolio Company;

An Insured’s sale or purchase of securities issued by a Portfolio

Investment/portfolio management or asset allocation services for
a Private Fund;

Selection/oversight by an Insured of outside service providers;

Activities by an Insured or others (for whom the Organization is
legally liable) as a Shareholder Representative;

Acts by an Insured as Controlling Shareholder

Mortgage Protection Insurance

Who Buys It?

Banks, Lenders, MICs,

Why Buy It?

Primary purpose of coverage is to protect the mortgagee in the event
that the collateral is damaged and there is no insurance to repair or
replace the building

In event of a significant uninsured loss, the borrower may be unlikely
to continue making mortgage payments

If the mortgage goes into default, the owner of the mortgage has the
right to recover their outstanding mortgage balance

If there is damage to the property, the value of the collateral may not
be adequate to pay off the mortgage balance

Mortgage Protection Insurance

Mortgage Holder’s Interest Insurance

Mortgage Impairment

borrower’s responsibility to

place insurance

Mortgage Errors & Omissions


responsibility to place

Mortgage Holders’ Liability Insurance

ie. Seller/Servicer Liability

ie. Real Estate Tax Liability

Foreclosed Property Insurance

Forced Placed Property Insurance

Mortgage Protection Insurance



or E&O


hazard insurance is in
force and that it
protects their interest.

it’s not or it

Valuation is
“Mortgage Holders’

knows that
hazard insurance
is not in force or it
does not cover
their interest.



Lender has taken
action and
exercised their right
to take title or take
deed in lieu

should be

replacement cost.

Mortgage Protection Insurance

Mortgage Protection Insurance

Mortgage Impairment Valuation

The most we will pay for loss or damage in any one
occurrence is the lesser of the following:

The amount of loss or damage (minus other
insurance proceeds);

The amount of your mortgage holder’s interest; or

The applicable Limit of Insurance shown in the

NOTE: This goes for Mortgage Holder’s Interest
Insurance and Mortgagee Errors and Omissions

Mortgage Protection Insurance

Forced Placed/Foreclosed Valuation

Subject to the Limit of Insurance for
Foreclosed Property

shown in
the Declarations, Foreclosed Property is valued at the lesser of:

a. the full cost to repair the Foreclosed Property at the time of the loss
or damage, at the same location and for the same use or occupancy,
without deduction for physical deterioration or depreciation; or

b. your Foreclosed Property Financial Interest (as defined

which also
takes into account an adjustment to appraised market value).

Subject to the Limit of Insurance for
Forced Placed Property

in the Declarations, Foreclosed Property is valued at the lesser of:


replacement cost; or

b. the unpaid principal balance on the mortgage or loan

Mortgage Protection Insurance

Fire damage to vacant residence

Homeowner Vandalism

mortgagor is in process of
defaulting/vacating residence and decides to damage the property
first ie arson, taps are left running or damage to walls, cabinets,
bathrooms, etc

Resultant mould subsequent to water damage that was not attended

Lack of Winterization

water damage and subsequent freezing due
to expansion and bursting of frozen pipes due to absence of heating
in winter months



attractive nuisance

Vagrants living in and vandalizing vacant homes

Grow Operations

*Note the above are examples of typical loss scenarios and
coverage may not necessarily apply in some cases

Section III: Why Chubb?

Why Chubb?

Dedicated Financial Institutions Underwriters

Financial Strength

A++ AM Best Rating

class Product Offerings

Local and Global Claims expertise and

Market Knowledge


Consecutive year as #1 Crime/Fidelity
Underwriter (SAA) and one of the largest
writers of Financial Institutions locally and

3222 ext. 4507

Product Information and Applications:

Contacting Chubb

Legal Disclaimer

Chubb refers to the insurers of the Chubb Group of
insurance Companies. This literature is for informational
purposes only. Whether or to what extent a particular
loss is covered depends on the facts and circumstances
of the loss and the actual coverage of the policies as

Claims examples are based on actual cases, composites
of actual cases, or hypothetical situations.

The information provided herein should not be relied
upon as legal advice or a definitive statement of the law
in any jurisdiction. For such advice, an applicant,
insured, listener or reader should consult their own
independent legal counsel. No liability is assumed by
reason of the information contained herein.