Basic Concepts of Deposit Account Insurance
Aggregation of accounts held in same right or capacity
The first basic concept of deposit account insurance is that coverage is limited to $250,000 on accounts held by a person or entity in the same right or capacity at the same financial institution. [12 CFR 330.3(a)] For example, if John Doe owns two individual accounts at Bank A, the balances of those accounts are added and the total is insured up to a maximum of $250,000. This is because the two accounts are held in the same right or capacity. On the other hand, if John has an individual account and a revocable trust account at Bank A, the account balances are not added together for insurance purposes because the accounts are held in different rights or capacities. The accounts are insured “separately” from each other.
The $250,000 amount represents an increase from $100,000. The increase was brought about by the Emergency Economic Stabilization Act of 2008, which became law October 3, 2008. This increase was scheduled to expire, and the limit was to return to $100,000, on December 31, 2009. [See Section 136 of the Act.] But on May 20, 2009, President Obama signed the Helping Families Save Their Home Act that extended the temporary increase in the amount of coverage through December 31, 2013. The amount of coverage was scheduled to return to $100,000 on January 1, 2014. The $250,000 limit became permanent, however, with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. (See Sec. 335.)
Accounts at different institutions insured separately
The second basic concept is that accounts at separate institutions are insured separately from each other. This is true even if the same individual or organization holds the accounts in the same rights and capacities. However, accounts are not insured separately by virtue of being held at separate branches of the same institution. In order for the separate insurance rule to apply, the accounts must be at separately chartered institutions. [12 CFR 330.3(b)]
For example, suppose John Doe has an individual account at Bank A and an individual account at Bank B. Bank A and Bank B are separately chartered. Each of these accounts is insured up to a maximum of $250,000 since they are held at separate institutions—even though John holds them in the same right or capacity.
- Disclosing, clearly and conspicuously, on signs, in advertising, and similar materials that the facility is a branch, division, or other unit of the insured institution. The institution should exercise care that the signs and advertising do not create a deceptive and/or misleading impression.
- Using the legal name of the insured institution for legal documents, certificates of deposit, signature cards, loan agreements, account statements, checks, drafts, and other similar documents.
- Educating the staff of the insured depository institution regarding the possibility of customer confusion with respect to deposit insurance. The Agencies recommend that the insured depository institution instruct staff at the branch and any other facilities operating under trade names to inquire of customers, prior to opening new accounts, whether they have deposits at the depository institution’s other facilities or branches. In addition, during the time period soon after one institution acquires or combines with another, staff should be reminded to call customers’ attention to disclosures that identify a particular branch or facility as part of an institution.
- Obtaining from depositors opening new accounts at the branch a signed statement acknowledging that they are aware that the branch and other facilities are in fact parts of the same insured institution and that deposits held at each facility are not separately insured.
[Interagency Statement on Branch Names, May 1, 1998]
Financial institution records generally govern ownership
The third basic concept is that the records of the insured financial institution generally determine the ownership of accounts for insurance purposes. [12 CFR 330.5(a)(1); 12 CFR 745.2(c)] For example, if the financial institution records state that an account is an individual account, the FDIC or NCUA will treat it as an individual account when figuring out the extent to which the account is insured. The FDIC will not recognize claims of any other forms of ownership if the institution records do not reflect it. However, if the FDIC believes the financial institution records are unclear or ambiguous as to ownership, it has the discretion to look at evidence of ownership other than the records maintained by the financial institution. [12 CFR 330.5(a)(1)] Outside evidence is also available if the FDIC believes that the financial institution account records misrepresent ownership so as to increase insurance coverage. In such a case, insurance coverage will be based on actual ownership, rather than the ownership represented by the records of the financial institution. [12 CFR 330.5(a)(1)]
Throughout the first half of the 1990s, there was some confusion as to whether these rules applied in the case of jointly owned Certificates of Deposit and certain other jointly owned deposits. The confusion sprang from the fact that the FDIC regulations require all joint owners of an account to personally sign a signature card in order for the account to be separately insured as a joint account. The regulations made an exception to this signature card requirement for (1) Certificates of Deposit, (2) deposits evidenced by negotiable instruments, and (3) accounts maintained by an agent, nominee, guardian, custodian, or conservator on behalf of two or more persons. Owners of these three types of deposit did not need to sign a signature card, but, the regulations say, the deposits had to, “in fact, be jointly owned” in order to be treated as jointly owned.
Some courts read this phrase to mean that even if the institution’s records were clear and unambiguous that the account was jointly owned, individuals could contest that conclusion with other evidence indicating that the account was not jointly owned. The FDIC’s position in these cases was that evidence other than the institution’s own records was relevant only if the FDIC found the records to be unclear or ambiguous. Two cases in particular held contrary to the FDIC’s interpretation: Spawn v. Western Bank-Westheimer, 925 F.2d 885, (5th Cir. 1990), and Palermo v. Federal Deposit Insurance Corporation, 981 F.2d 843 (5th Cir 1993).
In February of 1995, the FDIC amended its regulations in an attempt to clarify the issue. The amendment eliminated the “in fact, jointly owned,” language and added new language emphasizing that if the FDIC determines that the institution’s records are clear and unambiguous as to the joint ownership, no other evidence may be used to counter that conclusion. Only if the FDIC determines that the records are unclear or ambiguous could other evidence be used. [12 CFR 330.9(c)(2)] Assuming the courts interpret the new language as the FDIC intends it to be read, deposits will be found to be jointly owned if the institution’s records clearly and unambiguously indicate that they are jointly owned, regardless of other evidence to the contrary.
Another instance where records other than those of the financial institution might be used to determine ownership is where the financial institution records reflect a fiduciary relationship that might allow for additional insurance coverage. If the financial institution records do not show the details of the relationship and the interests of the other parties in the account, then that information can be gotten from records maintained by the depositor or someone maintaining records on the depositor’s behalf. However, before the FDIC or NCUA will consider such outside records, the records have to have been kept in good faith and in the regular course of business by the depositor or the other person. [12 CFR 330.5(b)(2);
12 CFR 745.2(c)(2)]
Outside evidence may also be considered if, in the FDIC’s sole discretion, the account title and underlying records indicate a fiduciary relationship. For example, if the account title or records indicate a title company owns the account, the FDIC might consider evidence other than account records. [12 CFR 330.5(b)(1)]
FDIC regulations (but not NCUA regulations) go on to say that if there are multiple levels of fiduciary relationships, then there are two alternative ways in which the record-keeping requirements can be met. First, all of the details of the relationships, at all levels, can be recorded in the records of the financial institution. [12 CFR 330.5(b)(3)(i)] Or second, the financial institution records can simply state that there are multiple levels of fiduciary relationships. Then, the FDIC will accept records maintained in good faith and in the ordinary course of business by parties at subsequent levels. These records must show the names and interests of all parties on whose behalf the party at a particular level is acting. [12 CFR 330.5(b)(3)(ii)]
In some circumstances, the agencies will recognize an owner’s interest in funds even if the interest is not shown on the financial institution’s records. First, a person who holds a negotiable instrument (such as a negotiable Certificate of Deposit), which is an obligation of the financial institution, does not need to be shown as the owner of the instrument in the records of the financial institution. However, this rule applies only if the negotiable instrument was negotiated to the holder before the date of default of the institution and the holder can prove that. [12 CFR 330.5(b)(4)(i)] Second, the owners of items (such as checks) forwarded to the failing financial institution by another financial institution acting as an agent need not be shown as owners in the records of the failing financial institution if the failing institution has become obligated to pay the items. The FDIC or NCUA will treat the owners as if they were shown as owners in the records of the failing institution. [12 CFR 330.5(b)(4)(ii)]
Insurance of accounts when institutions merge, or one assumes the deposit liabilities of another
Another basic concept is one that comes only from the FDIC regulations. When one insured institution, for whatever reason, assumes the deposit liabilities of another, a depositor with fully insured deposits at both institutions prior to the assumption can end up afterwards with uninsured deposits. For example, suppose John Doe has a $160,000 individual account at Bank A and a $175,000 individual account at Bank B. He is fully insured, since neither account exceeds $250,000. But if Bank A and Bank B merge, the normal rules of insurance coverage would require that the balances of the two accounts be added together and insured up to $250,000. This would leave John with $85,000 of uninsured deposits. This seems unfair, since John had nothing to do with the merger and probably had no advance notice of it. So, the regulation allows a six-month grace period following the merger so that depositors in this situation can rearrange their deposits to protect their insured status. [12 CFR 330.4(b)]
For non-time deposit accounts, the grace period is simply six months following the assumption. For time deposits, the rule is slightly different. For time deposits that do not mature within this six-month grace period, the grace period is extended until the first maturity date following the expiration of the grace period. For time deposits which do mature during the six-month grace period, are renewed at the same dollar amount (with or without accrued interest), and for the same term as the original deposit, the grace period lasts until the first maturity date after the expiration of the six-month period. Time deposits that mature during the six-month period and are renewed on different terms, or that are not renewed at all, are separately insured only until the end of the six-month grace period. [12 CFR 330.4(b)]
Grace period after depositor’s death
Suppose that A and B have a joint survivorship account with a balance of $245,000. Suppose also that A has an individual account at the same institution with a balance of $50,000. As we will see later in this chapter, when we look at the joint account rules, both accounts are fully insured, assuming neither A nor B has any other accounts at the institution.
Should B die, A would, in many states, immediately own the entire balance of what was the joint account. The $245,000 balance of that account would be insured as an individual account belonging to A. The balance would be added to the balance of A’s other individual account, with the total being insured up to $250,000. Since the total would be $295,000, $45,000 would be uninsured. Should the institution fail after B’s death but before A could rearrange his/her accounts, A could suffer a real hardship.
That’s why, in 1998, the FDIC added to its regulation a six-month grace period in which persons like A would remain insured in the same manner they were prior to the death. Specifically, the grace-period provision says that the death of a deposit owner does not affect the insurance coverage of the deposit for a period of six months following the owner’s death unless the deposit account is restructured. The operation of the grace period will not, however, result in a reduction of coverage. Once the six-month grace period runs, coverage is again determined according the usual rules described in the remainder of this chapter. [12 CFR 330.3(j)]
With these basic concepts in mind, we’re ready to look at the specific coverage rules.