Fully Invested: Cover for Financial Institutions

Travelers insured an investment manager based offshore. The insured’s IT team noticed some unknown files on the company server, following which a further review by the IT team revealed that a third party had obtained access to the insured’s computer systems. The insured was concerned about the theft of money or client data, as well as the risk of a subsequent regulatory investigation.

Having the right cover helped our insured investigate the problem and get back to business quickly. Our insured’s Financial Institutions insurance policy underwritten by Travelers included the option of cover for forensic investigation following discovery of a data security breach. Fortunately, the investigation had isolated the threat at an early stage and there had been no theft of money or data from the insured or any of its clients.

Travelers insured a London-based investment advisor that operated an in-house fund on behalf of professional investors. In response to market conditions at the time, the insured’s investment committee decided to reduce the fund’s equity exposure by selling a proportion of futures contracts on the S&P 500 index in two tranches. However, in the process of initiating two sales, the insured inadvertently sold twice the number of contracts intended.

A reversal was attempted but came too late. The insured aimed to rectify the error by repurchasing the extra S&P contracts on the reopening of the relevant futures market on the evening of the following day. However, in the time between the erroneous sale and the repurchase, the markets moved against the insured, resulting in a loss of approximately USD 1 million.

Financial Institutions liability insurance protects against claims of negligence or error. Following an investigation of the incident and a review of available evidence, Travelers reimbursed the insured for this loss.

Travelers insured a UK high-street bank. One of the bank’s customers (a UK-listed plc) routinely made quarterly payments to a third party of amounts ranging from £350,000 to £500,000. In respect of each payment, a director at the firm would email the bank, setting out instructions for the transaction in a pre-agreed format. The insured received a set of instructions requesting it to make eight payments of £100,000.

Even firms with controls in place can be the victims of fraud. The request for payment was discovered to be fraudulent, though not until after approximately £450,000 had been transferred. This kind of situation is increasingly common.

Sophisticated fraud requires sophisticated protection. As fraud becomes increasingly complex, financial institutions must have protections in place to prevent it, investigate it and minimise the damage it can cause. Once the insured notified Travelers of its loss under the terms of its crime policy, we paid the legal costs it incurred when investigating the extent of its responsibility for the fraud. We then reimbursed the insured after it reached a settlement with the customer.