Why Your Local Insurance Agent Isn’t Best for Your Community Bank

While community banks play a vital role in supporting local businesses, schools, and charitable programs, there’s a common oversight we’ve encountered time and again: relying on a local insurance agent with general knowledge to protect the bank itself. If your financial institution is currently making this mistake, you’re not alone, but it’s a risk worth reassessing.

The deep community ties that define and strengthen your bank shouldn’t come at the expense of sound risk management. A local agent may be well-meaning and connected, but without specialized expertise in financial institution coverage, they could leave you exposed to gaps in protection, or worse, inadvertently create situations that could invalidate your policies.

Conflict of Interest: Institution-Affiliated Parties

Community banks often flourish because of their strong local roots. It’s not uncommon for respected business owners, such as insurance agents, to serve on the board or hold significant shares. These relationships reinforce trust and community alignment. But they can also introduce unintended governance risks.

One related risk arises when a board member is also the bank’s insurance broker or underwriter. While the arrangement may appear efficient or familiar, it presents a clear conflict of interest—especially when it comes to something as critical as Directors & Officers (D&O) liability coverage.

Overseeing D&O Insurance: A Board-Level Responsibility

The board is charged with ensuring the adequacy, structure, and value of D&O coverage. If a board member also sells or underwrites that insurance, they’re effectively evaluating their own performance and compensation. That dual role undermines objectivity, limits independent oversight, and could mean missed opportunities to secure better pricing or broader protection.

The Bigger Risk: Perception and Governance Integrity

Even if intentions are good and the coverage is adequate, perception matters. Shareholders, auditors, and regulators often scrutinize these kinds of arrangements because they create the appearance of self-dealing or favoritism. Strong governance avoids even the appearance of impropriety.

The Federal Reserve Board has addressed this concern with institution-affiliated parties directly in SR Letter 19-12, outlining how such relationships can compromise D&O policy coverage.

If You Choose to Work with the Board Member’s Local Agency:

In some cases, the board member’s firm may still be the best candidate. If so, take these precautions to protect the bank and maintain governance credibility:

• Recuse the board member from all discussions, reviews, and votes related to the D&O coverage. This should be formally documented in meeting minutes.

• Ensure independent decision-making by documenting the evaluation process and how the final choice served the bank’s best interests.

• Solicit quotes from multiple brokers to compare both cost and coverage scope. This helps validate the selection and supports fiduciary due diligence.

• Consider a co-broker arrangement, partnering with an independent agency specializing in insurance for financial institutions, like CPIA, that can collaborate with your local agent. This structure preserves local relationships while introducing external oversight and expanded market access.

The Value of Expertise in Insurance for Financial Institutions

When it comes to insurance coverage for financial institutions, not all insurance agents are created equal. While local agents may have access to carriers offering policies for banks and credit unions, they often lack the nuanced understanding required to properly address the complex risks financial institutions face. From regulatory compliance to evolving cyber threats, financial entities operate in a unique risk environment that demands specialized knowledge. Without that expertise, institutions may end up with coverage gaps or policies that don’t fully align with their operational needs.

Additionally, you may face complex scenarios should your financial institution foreclose on an asset, thereby making the institution the temporary owner of a business that will not automatically be covered by your existing policies. This could encompass gas stations, airplanes, hotels, miniature golf courses, waterparks, storage units, etc. including potential new employees to keep these businesses up and running while in foreclosure.  Local agents may not have the experience or knowledge required to insure these unique exposures.  Hiring an agency with a tenured niche working with financial institutions provides multiple benefits on the property and casualty such as broadening endorsements, access to blanket property policies to cover all bank owned locations, and expertise with these unique additional coverages.

At CPIA, our team brings years of focused experience in securing insurance solutions specifically for financial institutions. We understand the industry’s challenges and work closely with top-rated carriers to craft tailored policies that meet your institution’s risk profile and strategic goals. Rather than one-size-fits-all offerings, we provide customized quotes backed by insight, precision, and a deep understanding of your business. Trust our team to ensure your coverage is not only compliant—but also smart, strategic, and forward-thinking.

Summary

From complex regulatory compliance to the unique risks covered under Directors & Officers (D&O), cyber, or bond insurance, community banks require more than just a generic approach. Choosing an insurance partner with industry-specific knowledge isn’t just prudent… it’s essential to safeguarding your institution’s future.

At CPIA, we specialize in insurance for financial institutions and understand the regulatory, operational, and reputational risks you face. Let us conduct a complimentary policy review to identify potential gaps or vulnerabilities before they become liabilities. Reach out today to schedule a consultation with one of our financial institution insurance specialists. Your community depends on your stability, make sure your insurance coverage does, too.