Are the client funds in IOLTA accounts covered by FDIC insurance? The short answer is that these funds likely are covered, subject to some important conditions.
The Federal Deposit Insurance Corporation provides “pass-through” insurance coverage on deposits in fiduciary accounts, including IOLTA accounts. If the account and deposits are properly documented, each client’s deposit should be insured up to the FDIC limit of $250,000.
However, to qualify for coverage it is critically important that the fiduciary nature of the account is disclosed in the bank’s account records, and that the name and ownership of the deposited funds can be ascertained from the account records maintained by the bank or the attorney. In the IOLTA context, it must be clear from the bank’s account records that the account is an IOLTA account, and each client’s ownership of relevant deposits must be clear from a record maintained by the attorney or bank.
Second, the coverage limit of $250,000 applies to the amount of funds the client has at the same financial institution. This means that if a client also banks with the institution where the lawyer has their IOLTA account, the other funds the client has on deposit at the institution will be counted toward the coverage limit along with the amount of the client’s funds in the IOLTA account.
The Lawyers Trust Fund encourages lawyers with questions about FDIC coverage to access an FDIC insurance booklet that briefly covers IOLTA and Fiduciary accounts here: https://www.fdic.gov/resources/deposit-insurance/brochures/insured-deposits/.