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The Green Sheet Online Edition

December 14, 2015 • Issue 15:12:01

Risk encompasses far more than chargebacks

By Kevin Mendizabal
Frates Insurance and Risk Management

During the financial crisis, finding an insurance carrier that would offer regulatory coverage for a struggling bank was nearly impossible. Banks were willing to pay any premium for even sub-limited coverage for the simple reason that they did not want to end up in the same situation that numerous executives of the payments industry have found themselves in recently.

There have been numerous well-publicized regulatory suits within the last few years in which both the companies and individual executives were named. For example, last year, the Federal Trade Commission sued the ISO CardFlex Inc., its agents and officers, which demonstrates the regulatory risk in the payments industry, as well as the liability executives face of losing their personal assets.

In another example, discussed at the 2015 Midwest Acquirers Association conference, the regulatory issues of Newtek Business Services Corp. and iStream Financial Services were highlighted. Interestingly enough, Newtek did not indemnify one of its former executives after he was individually named, leaving him to absorb all of the costs. Similar regulatory suits have been increasing in frequency and not just limited to the FTC. What all of the suits have in common is that the inquiry, defense and even settlements could have been covered by a well written insurance policy. Moreover, these cases have brought the issue of lacking or poorly written bylaws to light.

CardFlex was nearly bankrupted by a $3.3 million judgment by the FTC, in addition to one of its principals being forced to pay $150,000 and liquidate $1.2 million of his own personal assets. Also named in the complaint was a manager of Blaze Processing LLC and Mach 1 Merchanting LLC, who settled for over $328,000 and was barred from payment processing in any capacity.

But why would the FTC go after an individual's assets if the person is part of a corporation? Because it can. When a company cannot indemnify its directors or officers, it will rely on its management liability insurance. Numerous types of suits with respect to managerial liability could impact an organization; the regulatory arena just happens to be the one with the headlines as of late.

In many sectors, one would be hard-pressed to find an individual willing to serve on the board or as an officer of an enterprise without first seeing evidence that he or she will be indemnified by the company, in addition to examining the company's insurance. Indemnification becomes meaningless in the event of financial insolvency, hence the need for such insurance.

Stories like this are increasing in frequency and financial impact, poking additional holes in the notion of "no liability" and the relatively nonexistent risk management in the payments industry. All too often in payments, liability is associated with chargebacks only. Although financial products exist to cover those types of losses, numerous other kinds of liabilities could dwarf any chargeback loss.

But just as a successful organization in the payments industry is built with industry veterans, it can be properly protected with the aid of experienced industry attorneys and specialists in risk management. end of article

Kevin Mendizabal, Director of Financial Institutions at Frates Insurance and Risk Management, specializes in the electronic payments industry. Prior to joining Frates, Kevin was part of the Financial Institution division at AIG. Previously, he held underwriting and leadership roles in the mortgage banking sphere, as well as at Bank of America. Kevin has a degree in computer science from Rutgers University. You can reach him at kevin.mendizabal@fratesinsurance.com or at 405-290-5610.

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