Can a financial institution be held liable for defamatory comments of its employees? Absolutely. And it could cost you millions.

Plaintiffs’ lawyers are continually seeking new and novel theories in which to pursue claims against defendants with deep pockets. Financial institutions, which possess some of the deepest of deep pockets, are always a target.

Recently, a number of courts have been faced with defamation, slander, and libel claims against financial institutions arising from actions of employees of the financial institutions. The success of some of these cases has financial institutions nationwide reconsidering their internal policies and procedures related to loan applicants and customers in general.

In one recent case arising in the State of Arkansas, a punitive damage award in excess of $3 million dollars against a bank was upheld by the Court. In that case, the plaintiff alleged a series of incidents by officers of the bank which purportedly damaged the plaintiff’s reputation.  The incidents included advising a customer of the plaintiff that the plaintiff was not on the bank’s (non-existent) approved builder list, improperly returning checks for insufficient funds where such funds existed, characterizing the principal of the plaintiff as “incompetent”, and advising other banks that the plaintiff was a credit risk.

While only one of the incidents was deemed to be defamatory, the court concluded that the remaining incidents were evidence of a pattern of behavior by the bank and relevant to a determination of the bank’s intent and to the issue of punitive damages.

The jury found in favor of the plaintiff and against the bank, awarding over $700,000 in compensatory damages for defamation and promissory estoppel, and $5,000,000 in punitive damages. The compensatory damages were subsequently reduced to $385,000, and the Court reduced the punitive damages to $3,000,000. In doing so, the Court concluded that the willful and malicious conduct of the bank’s employees warranted such an award.

The lesson to be learned from this case and others is that financial institutions, big and small, urban and rural, must be cognizant that the actions of their officers and supervisors are, in fact, deemed to be the actions of the financial institution itself in most circumstances. As such, every financial institution should have detailed policies that are implemented, and enforced, regarding the sharing of information or statements about customers or potential customers of the financial institution.

Moreover, financial institutions should consider the possibility of conducting training for all supervisory employees (up to and including the executive officers of the financial institution). Finally, in certain circumstances a financial institution’s insurance policies or bonds will contain exclusions for intentional acts, such as defamation or slander. When faced with even the threat of litigation, financial institutions should review all insurance policies to determine whether coverage exists.

Rhoads & Sinon regularly drafts policies and procedures on all aspects of employment for financial institutions and conducts training for employees on a wide range of topics. For more information, contact Robert J. Tribeck, Esquire at 717.237.6701 or rtribeck@rhoads-sinon.com.