Even the best risk management controls won’t prevent every fraud loss. Which got us thinking: how does insurance coverage fit in to the picture for payment facilitators?
Are there unique pitfalls that PFs face when obtaining liability insurance for their businesses? And are there considerations they need to understand to help make sure that – if they do experience loss – they can rely on their insurance policies?
So we talked to Kevin Mendizabal, CEO of Payment Insurance Network. He told us that yes – PFs require insurance policies that meet their unique needs. Simply getting quotes for off-the-shelf insurance policies or working with a broker who doesn’t understand the payments industry could easily result in coverage gaps, which could mean denied claims down the road.
Fortunately, there are signs you can watch out for as you shop for insurance that will let you know if you’re headed in the wrong direction.
Having to repeatedly clarify your operations. Continually having to explain what you do to the broker or insurance carrier indicates that neither understands what they’re underwriting, Mendizabal said. The same goes for a broker who simply forwards an email from the underwriter without any discussion.
Brokers should be expected to communicate what each policy does and how they arrived at their recommendations, he said. And any lack of understanding leaves your company in danger of receiving a poorly written insurance policy that will not cover claims.
“If you tell the broker you’re a PSP, make sure they don’t think you’re referring to PlayStation,” Mendizabal said.
Receiving a proposal that is priced drastically lower than that of other competitors. Price should not be the primary factor when choosing an insurance policy for several reasons, Mendizabal said.
To begin with, if one company comes in far lower than the others, it’s fairly likely that the carrier does not fully understand your business.
“We’ve seen policies in the past with language that specifically stated that all claims related to operating in any capacity within merchant services would be excluded, which would render the policy worthless to a merchant services provider,” Mendizabal said.
He also warns against “fly by night” carriers that attempt to gain market share by pricing their policies at a fraction of what other carriers would charge. While this may gain them clients in the short term, it’s unsustainable and many such carriers go bankrupt, leaving insured companies unprotected because they are unable to pay claims.
And finally, relying on carriers that are priced well below the market can prevent PFs from being able to do what Mendizabal describes as “building an insurance tower.”
He explains that many PFs have vendors, clients or partners that require them to carry insurance with substantial limits. If a PF is required to carry, for example, a $20 million policy, they may need to get multiple carriers to write “excess policies” – policies that sit on top of the primary policy – to achieve that limit.
If excess carriers believe the primary policy is underpriced for the risk involved, they may refuse to offer insurance to the PF, making building the tower difficult if not impossible.
Being promised better terms from the same carrier by switching brokers. Brokers sometimes promise PFs that they can get them better terms than quotes they have already received from the same carrier through another broker. The new brokers will request a “broker of record” letter, which would authorize the carrier to recognize the new broker.
The idea that carriers will alter their terms just because a different broker approaches them is a “100% fraudulent statement,” Mendizabal said. “It’s used by many unscrupulous brokers in an attempt to win business.”
While different brokers could provide better terms from different carriers, insurance carriers will not change their pricing or other terms simply depending on the broker who approaches them, he said.
Having gaps in your insurance policies and language that does not adequately address the business you’re in can have real-world financial consequences, Mendizabal said.
He shared the story of a PF he worked with that handled payments between tenants and property owners. Despite the controls the PF had in place, criminal actors used the platform to defraud tenants, leading to losses that ran into seven figures.
Fortunately, in that case, the PF had customized language in its policy that covered just such a scenario – language that would not have been in any general liability policy. Its claim was ultimately paid.
So how can PFs set themselves up with insurance policies that are more likely to cover what they need to?
Know that your business requires specialized expertise, Mendizabal said. Payment facilitators are more complex than many other kinds of businesses, and not all insurance carriers will consider underwriting payments companies, he said. The subset of the companies that do it well, with well-written policies, is even smaller.
Plan to spend some time discussing your operations with your broker and making sure you understand the language within your policy, rather than simply asking multiple companies for quotes.
Also, consider looking for a broker with underwriting experience. A broker with this expertise will have a better grasp on policy language and be able to communicate with the underwriter more effectively, he said.
And finally, remember that there are insurance requirements for your third-party providers as well, Mendizabal said. It’s imperative that you require evidence of insurance from any third party that provides a service for you, including processors, acquirers, gateways, and the like. Be sure to discuss that and any other third-party insurance requirements with your attorneys when drafting contracts.
“This is crucial, since the indemnification provisions afforded in their contracts could effectively become worthless if they are financially unable to back them,” he said.
Not all insurance is created equal. But fortunately, it is possible to protect your company with well-written policies created with your business in mind.