What Deposit Insurance Does Not Cover

Ask a Canadian household what is insured and it will usually answer with a number. Ask what is NOT insured and the room goes quiet, which is the wrong way round, because every real failure of protection lives on that second list. Nobody is ever harmed by a deposit that turned out to be insured. People are harmed by the balance they assumed was insured and was not, by the institution they assumed was a member and was not, and by the second account they opened believing it doubled something. This article is the companion to the one that sets out what the two schemes cover. It takes the other half: the exclusions, the boundaries and the four assumptions that do the damage. Every statement below was read at the body that administers it on the day this was written, and none of it is a comment on any institution.

The list CDIC publishes, which is shorter than people expect

The Canada Deposit Insurance Corporation does not make anybody guess. On its own coverage page it sets out what is an eligible deposit and what is not, in two short lists side by side.

Eligible: deposits in Canadian or foreign currency, whether they arrived by payroll, by electronic transfer or by cheque; guaranteed investment certificates; and other term deposits. Foreign currency surprises people who remember an older rule, and it should not, because the rule changed.

Not eligible: mutual funds. Stocks and bonds. Exchange traded funds. Digital currencies, including the ones designed to hold a fixed value. That is the list, and none of it is a judgement about whether those things are good or bad to own. It is a statement about what deposit insurance is for, which is the failure of a deposit taking institution and nothing else.

CDIC makes one further distinction in its own consumer material that catches a great many people, because the products involved have nearly identical names. A high interest savings account held as a deposit at a member institution can be an eligible deposit. The mutual fund version and the exchange traded fund version of the same idea are not eligible deposits, and nothing on a statement that lists all three will say which is which.

The exclusion nobody expects

The Financial Consumer Agency of Canada maintains its own consumer page on deposit insurance, and its version of the exclusion list carries an item CDIC does not put in the same place. Deposit insurance, the Agency says, does not cover losses due to fraud or theft.

That sentence does more work than any other on this page. Deposit insurance answers one question and one only: what happens if the institution fails. It is not a guarantee that the balance shown will always be there. A household that has been defrauded has not suffered an institutional failure, and the scheme that exists for institutional failure does not reach it.

Other protections do exist for that situation, and they are not deposit insurance. They are the institution’s own liability rules, the terms of the account agreement, the card network rules where a card was involved, and the complaint route the Agency describes. Confusing the two is how a household ends up believing it is protected by a body that was never in that business.

The same care is worth taking with the word insured itself. A balance is insured against one event, the failure of the institution holding it. It is not insured against a fall in value, because a deposit does not fall in value; it is not insured against being spent, mislaid or given away; and it is not insured against the household needing more than it has. Deposit insurance is a narrow, well built instrument aimed at a single risk, and almost every disappointment in this subject comes from asking it to be a wide one.

The institution that is not a member

This is the assumption that does the most quiet damage, and it is entirely invisible from inside a branch.

CDIC insures eligible deposits at ITS MEMBER INSTITUTIONS. Membership is a status, not a marketing claim, and CDIC publishes the list of who holds it. It also says that each member institution has its own distinct coverage, though the rules are applied the same way for all. An institution outside that list has no CDIC coverage at all, whatever the sign on the door suggests.

That does not mean a household dealing with a non-member is unprotected. It usually means it is protected by somebody else. The Financial Consumer Agency of Canada states that provincial deposit insurance plans cover deposits at provincially regulated credit unions, at caisses populaires, and at provincially regulated trust and loan companies, and it adds the sentence that matters most: deposit insurance plans vary between provinces.

Quebec is the clearest case because the Autorite des marches financiers publishes its own arrangement in detail. It protects deposits at the authorised deposit institutions it names, and it applies its protection per category of deposit per authorised deposit institution, which is the same shape CDIC uses. What it protects and what it refuses are both listed. A household that has assumed the federal scheme applies to an institution that is in fact provincially covered has usually assumed the wrong limit, the wrong categories and the wrong authority to ask.

The category that is already full

The second assumption is arithmetic rather than institutional, and it costs people real money.

Deposit protection is not granted once per person. CDIC grants it separately in each of several named categories, and the categories are the ones a household already recognises: deposits held in one name, deposits held in more than one name, and deposits held in each of the registered plans, together with deposits held in trust. The Quebec regulator applies its protection the same way, per category of deposit per authorised institution.

The trap is on the other side of that sentence. Two accounts in the SAME category at the SAME member institution are one pool, not two. A household that opened a second chequing account at the same place believing it had doubled its protection has doubled nothing at all. Two accounts at two separate member institutions are an entirely different matter, and so are two accounts in two different categories.

Deposits held in trust are their own category and carry their own administrative rules about how the trust and its beneficiaries must appear on the institution’s records. Those rules are exacting and CDIC sets them out. A trust arrangement that was never recorded the way the corporation requires is not the arrangement the household believes it holds.

What Assuris does not reach

Now the other scheme, and the same discipline applied to it. Assuris is the compensation association for life and health insurance in Canada, and it is precise about the edge of its own protection.

Take segregated funds, because they are where the misunderstanding usually lives. A segregated fund contract carries contractual guarantees: an amount guaranteed at maturity and an amount guaranteed at death, and in some contracts guarantees attaching to withdrawals or to an income benefit. Assuris protects THOSE GUARANTEES, expressed as the higher of a floor and a proportion of the guaranteed amount. It does not protect the market value of the fund underneath.

Read that twice, because it is the general rule dressed as a special case. No compensation scheme in Canada insures an investment result. CDIC does not cover a mutual fund at all. Assuris covers the promise the insurer wrote into a segregated fund contract and leaves the market to the market, exactly as the contract itself does.

Assuris is also not a government guarantee, and it has never claimed to be one. It describes itself as an independent, industry funded, not for profit compensation association, designated by the federal Minister of Finance under the Insurance Companies Act. The money behind it comes from the industry. What gives it reach is that membership is compulsory: every life and health insurance company authorised to sell insurance in Canada is required by the federal, provincial and territorial regulators to be a member, and a member cannot terminate its membership while it still has active business in Canada.

And what happens on a failure is a transfer rather than a cheque. Assuris describes the court declaring the company insolvent and appointing a liquidator, who will typically seek to transfer the policies to a stable insurance company. The intention is that a contract continues, which matters enormously when the person insured has aged since it was written and could not buy the same cover again.

The Quebec list worth reading, whichever province you live in

The Autorite des marches financiers publishes an exclusion list for deposit protection that is unusually explicit, and it is instructive well beyond Quebec because it names in one place the things households most often mix up.

Not protected by deposit protection, on the regulator’s own list: shares. Mutual funds. Bonds and debentures. Mortgage backed securities. Treasury bills. Life insurance contracts. Segregated funds. Digital assets.

The last two entries are the ones to sit with. A life insurance contract and a segregated fund contract are named expressly as things deposit protection does not reach, and that is not an oversight or a gap. They were never in scope, because they are not deposits and they are not issued by a deposit taking institution. The body that stands behind them is Assuris, on the terms described above, and a household that knows which scheme answers for which holding has already done most of the work this page can do.

The list is also a useful corrective to a habit of speech. People say a holding is safe when they mean several different things at once: that the issuer is unlikely to fail, that a scheme stands behind it if the issuer does, that the value cannot fall, and that the money can be reached when it is wanted. Those are four separate properties and almost nothing has all four. Splitting them apart is the beginning of an honest conversation about any holding, and a regulator’s exclusion list is the cheapest way to start splitting them.

What the answer is actually for

None of this is a reason to choose or avoid anything, and a page that used it that way would be doing something it is not entitled to do.

A compensation scheme is the floor under a decision, not the decision. What a contract does, what it costs, whether a household can sustain it, and what happens if circumstances change are the questions that decide whether it belongs in a family at all. The scheme behind it decides only what happens in the rare event that the issuer fails.

What the answer is for is a list. Not a total: a list, of every place money sits, what kind of thing it is in each place, which institution holds it and which scheme answers for it. Most households have never written that down. Writing it down takes an afternoon and it is the single most useful piece of homework anybody can do before a meeting about anything else.

A household that has that list can ask better questions of anybody it meets, including this firm. Which of these is a deposit and which is a contract. Which institution is a member of which scheme. Which lines share a category and which do not. Where does the protection stop and what sits above the line. Those questions have answers that can be checked at a public authority in an afternoon, which is more than can be said for most of what a household is asked to believe about money.

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The companion page, what deposit insurance covers, sets out the positive half of the same question. For the contracts named above, read how segregated fund guarantees work and segregated funds and mutual funds compared. The registered accounts explains what each wrapper is for, and the price of liquidity takes up what it costs to reach any of it. Transparency and compensation sets out what this firm is paid and by whom.