Finance companies are financial institutions that accept monetary deposits from banks and other money market sources and use those funds to make loans to individuals and businesses for a variety of installment sales such as automobiles, boats or equipment. They may be affiliated with a manufacturing firm and finance installment sales for that firm’s products. Finance companies may also service escrow accounts, may be involved in real estate services and transactions, or broker and sell loans to other operations.
Minimum recommended coverage:
Business Personal Property, Extra Expense, Equipment Breakdown, Financial Institutions Bond, Accounts Receivable, Computers, Valuable Papers and Records, General Liability, Directors’ and Officers’ Liability, Employee Benefits, Umbrella, Hired and Nonownership Auto, Workers Compensation
Other coverages to consider:
Buildings, Earthquake, Flood, Computer Fraud, Extortion, Fine Arts, Cyber Liability, Employment-related Practices, Mortgage Errors and Omissions, Professional, Business Auto Liability and Physical Damage, Stop Gap Liability
Property exposures are primarily from fire due to the electrical wiring for computers, printers and other electronic office equipment. All wiring must meet current codes and be adequate for the company’s operations. Some equipment will have circuitry easily damaged from smoke, water and heat, which will cause a total loss even with a small fire. Extra expense coverage should be considered as the finance company must continue operations after a loss.
Crime exposure is primarily from employee dishonesty, either from the theft of cash or from improper transfer of funds held for customers. Finance companies need a Financial Institutions Bond to cover these exposures. Background checks should be conducted for anyone who will have access to the accounts. There must be regular monitoring and auditing of the books by outside auditors to prevent and identify problems. All employees must take at least one continuous week of vacation a year. Controls and programming to prevent computer fraud should be reviewed. Extortion is another growing concern due to the high value of assets held by these companies.
Inland marine exposures are from accounts receivable, computers and valuable papers, and records. Backup copies of all records, including computer records, should be made and stored off premises for ease of restoration in the event of a loss.
Premises liability exposure comes from slips and falls due to public access to the premises. Floors, stairs and elevators need to be in good condition, with steps and uneven floor surfaces prominently marked. Emergency lighting, well-marked exits, and proper egress, as well as interior and exterior security while going to and from the premises, are important. Parking lots and sidewalks need to be in good repair with snow and ice removed, and generally level and free of exposure to slips and falls. There should be security in the parking lot equal to or better than the surrounding premises. Personal injury exposure arises from breaches of customers’ privacy and confidentiality of their financial records.
Product liability exposure is very low as financial products sold to customers are intangible. There may be some minor exposure if the company sells items like tee shirts or advertising novelties or offers small gifts to customers as a reward for doing business with them.
Errors and omissions exposures are possible during any loan transaction. There must be checks and balances in place to quickly catch and fix errors that are made. The background and training of all professional-level employees must be thorough and continual. Monitoring is a must.
If the finance company services mortgages, the finance company must verify that all mortgaged properties have hazard insurance. A mortgage errors and omissions policy provides blanket coverage for any inadvertent omission.
Directors’ and officers’ exposure can be substantial due to competing priorities of numerous stakeholders such as stockholders, bondholders, depositors, employees, and regulators. Directors and officers are more likely to be sued for results of their decisions in times of economic downturn and well-publicized excesses within the financial services industry. Finance companies may offer escrow fund handling and other financial activities. Directors and officers can be sued if funds from any of these are mismanaged. Officers must be thoroughly knowledgeable about the finance business, able to operate competitively while maintaining profitability, and able to oversee ongoing operations effectively. Directors should include representation from a wide variety of business interests with no conflicts of interest.
Automobile exposures may be limited to hired and nonownership for employees running errands. If vehicles are provided to officers or key employees, policies should be in place for personal and permitted use of the vehicles. Any driver must have a valid driver’s license and MVRs must be run regularly. Ongoing maintenance should be documented.
Workers compensation exposure exposures will depend on the type of operation and the amount of cash on hand. Finance companies are generally less visible and less attractive for holdups than other financial institutions. Clerical employees are exposed to repetitive motion and carpal tunnel syndrome. All workstations should be ergonomically designed to reduce the chance of such injury.