hen you think of the insurance business, it's probably best to describe the protection that policy coverage provides with words like "consistent," "experienced" or "reliable" rather than "cutting edge" and "innovative."

Because of the nature of the business, it's probably best that insurance companies, and the brokers and agents who sell policies to businesses and individuals, stick with assessing risks rather than taking them.

And that's where the nature of industries, in which being aggressive results in big profits, often veer from the nature of insurance carriers.

But industries like payment processing need insurance coverage, and insurance policies that cover the most loss-prone aspects of financial services are impossible to come by.

Until recently, that is.

A long-established American insurance agency has partnered with the world's best known insurance underwriter to provide coverage programs for losses in payments processing.

C.L. Frates and Co. has been selling insurance policies to businesses since 1924. Based in Oklahoma, it's not hard to see how the company got its start covering oil and energy companies.

Wildcatting in previously undrilled oil fields certainly carries a fair amount of risk. But like the payments business, when you do strike oil, the payoffs for taking that risk can be tremendous.

C.L. Frates has been a major factor in the insurance marketplace for more than 80 years, and is using its extensive and varied experience and resources to develop new programs and products in financial services.

The company's wide range of endeavors, especially its partnerships with financial institutions, has helped position it for new ventures in the acquiring industry. It has made a point of focusing on the unique coverage and service needs of its customers and delivering customized programs.

C.L. Frates has expanded its coverage markets and grown over the years to become one of the largest privately owned insurance companies in the United States, managing assets in excess of $200 million.

Through an exclusive underwriting agreement with selective Syndicates at Lloyd's of London, this family owned and operated company offers innovative insurance coverage products for banks, ISOs, acquirers and other non-bank financial institutions that want to protect themselves from fraudulent merchant activity.

With incidents of fraud increasing throughout commerce, C.L. Frates' Merchant Fraud Indemnity Policy is definitely something any business that assumes liability for transactions should consider.

C.L. Frates designed its Merchant Fraud Indemnity product, introduced in June 2004, to protect the acquiring bank or processor from losses due to fraudulent credit and debit card transactions. Specifically, the coverage is for losses resulting from fraudulent merchant activity.

The policy covers losses up to an annual aggregate of $1 million (the most the company pays for losses, although this amount is negotiable on a per case basis) with deductibles as low as $5,000 for debit/credit card transactions including Internet and card-not-present and failed chargeback recovery attempts.

Fraudulent transactions covered include those made with counterfeit cards, skimming factoring (laundering), kiting and fraudulent misrepresentation. As a family run business, C.L. Frates has been able to respond to market shifts and move into new areas of coverage through the years. Creating new divisions and employing the services of adjusters, attorneys, loss control experts, accountants, actuaries, underwriters and information technology professionals enabled the company to develop insurance products for the space industry and its related technologies, for example.

The company branched out to cover financial services in the mid-1980s, developing property and casualty products for crime and liability coverage programs for banks and banking associations across the country, leading it to insuring merchant account services.

"One of our bankers said he was starting up a debit operation for the bank and wondered what kind of insurance he'd need on it to be covered from fraud," said Thomas Mulligan, Vice President, C.L. Frates' Electronic Transactions Dept.

This is a recently formed division that concentrates on providing coverage for the financial services sector, including Internet liability, credit/debit issuers fraud, identity theft, merchant chargeback and credit card-related liability coverage. Mulligan's 30 years' combined experience in banking and insurance is a key component of this department.

"I told him, 'Sorry, you're not covered for any kind of fraud on a credit or debit card.' He asked 'Why not?' And the answer was 'Because nobody does it!'" Mulligan told his banker he would present the idea to several insurance company underwriters to see if they were interested in writing this kind of coverage.

Because of their conservative nature, the companies were cautious in approving the new product to protect credit and debit issuing banks. The research period lasted two and a half years, but resulted in the genesis of another C.L. Frates program now underwritten by Lloyd's Syndicates.

"Through our research we discovered the other side of the equation: the merchant side," Mulligan said. Originally designed for banks only, he said that a few people asked the company to write coverage for non-banks, including acquirers and ISOs. C.L. Frates introduced the new product in mid-2004.

Since introducing Merchant Fraud Indemnity last year, C.L. Frates has written several of the policies and has more than a dozen more in varying stages of the application process.

While the company writes Merchant Fraud Indemnity policies for processors or larger ISOs that accept liability for chargebacks, Mulligan said he has had a number of one- to two-man operations very interested in it. "They would like to have their ISOs purchase the policy so that they in turn can bring in more of the higher risk merchants," he said.

Of course, if you were to launch your own insurance company, you'd need a lot of capital to finance the potential coverage costs. "The more practical option to getting financing is to go to a company that's already demonstrated an interest in financial services and financial institutions," Mulligan said.

When you look for financing, the stability of your backer should be one of your main priorities. "Lloyd's Underwriters have demonstrated their willingness to be extremely committed to a long term play in the marketplace," said Bill Duckworth, C.L. Frates' Senior Vice President and Agency Executive. "They do some very imaginative things in underwriting. Everybody knows that what they do they stick with, and that's extremely important to us."

"We had contacts within a couple of Lloyd's syndicates and that worked out well for us," Mulligan said. "They were prepared to think about this program on its own merits and to partner with us as the underwriter for this program. We've had a number of people mention the coverage in regard to new and emerging types of fraud like phishing," he said.

"There seems to be more interest and concern by some of the acquirers that I've talked to. But every one of them thinks it's not going to happen to them. To our knowledge, there's no one else offering the full scope of coverage, on a full-time dedicated basis," Duckworth said.

"As people become increasingly aware of fraud, obviously people's attention to this type of product is amplified. Of course, there are limits to what the policy will cover, including several types of businesses.

"But more to the point, our issue now is simply getting the word out about this product," he said. "Now that we've built it and have it established, we're looking to be quite aggressive and visible and get the good news out there."

Attendees at any of the regional and national payment industry trade association conferences might have talked with Mulligan at the C.L. Frates booth over the past several months; he's attended many payments industry events recently and plans to be at the 2005 ETA Annual Meeting and Expo. In fact, the industry trade shows are one of the best ways the company has found for letting people know about its coverage programs.

Duckworth said C.L. Frates has established and will expand a network of identified insurance agencies that are familiar with the ins and outs of payment transactions. "We're selling it through a selective group of agents and brokers who have demonstrated an understanding of financial services," he said.

C.L. Frates is also in the process of finalizing another first-of-its-kind insurance plan for merchants, which it hopes to introduce to the marketplace by June 2005. "It's coverage that will generate income for ISOs," Mulligan said. "They purchase the policy so all of their card-not-present merchants fall under and are protected by the policy. The ISO passes the costs on through its pricing structure."

Mulligan said ISOs will implement the new coverage product in conjunction with loss prevention and fraud scrubbing or detection solutions; C.L. Frates works with providers of those services now.

"The bottom line of the whole program is that we want to make sure ISOs have a stable bottom line and that they are able to predict their losses and costs throughout the year," he said. "We can provide predictability for them based in part on the assurance of a safety net and the predictability of the product."

Duckworth agreed and expanded on that notion. "Part of that predictability is that they can trust the product that we're selling," he said.