“My word is as good as a bond” was a once popular adage. Essentially, it meant that the person could be faithfully counted upon to do as they promised. Well, faith is not the primary basis regarding the use of financial bonds. Such tools rely upon their contracted language.

This month’s case involves a dispute over a bond. The client who purchased the bond sued after the bond company denied a claim that involved fraud. So, as commonly happens, a court was asked to decide the matter.

Click below and read whether a bond’s exclusion applied to the loss caused by a transfer of funds that turned out to be made by a fraudulent party.

Bonds are particularly valuable in providing protection to financial institutions. Banks, entrusted with handling their customers’ assets, face many risks involving substantial financial amounts. The case we review in this newsletter certainly is an example.

A bank believed that it had completed a legitimate customer transaction. It was a request that came in two parts. Initially, a party, believed to be a current customer, requested a change to their account’s phone number. Days later, a separate request was made to transfer more than $270,000 to a different bank located in another country. The bank complied with both requests. The bank had a huge problem. They discovered that the actual account holder never requested either a number change or a funds transfer. The loss was not covered, even after a lawsuit, because the bank failed to comply with a safety protocol required under its bond.

Click here for valuable information on a standard financial bond designed to protect banks and other financial institutions. It is from P&C Insurance by Gordis found in Advantage Plus.

Contracts, such as insurance policies and financial bonds, are only effective to the policy or bond holder when they adhere to provisions. It is important to be familiar with such contracts, especially when provisions change. That was a step missed by the bank victimized by a bad actor.

In the bond renewal that occurred before the errant account handling and transfer, the issuing company made an important revision. Unlike the preceding annual bonds, the latest renewal contained a requirement that the bank had to implement and use a callback procedure when performing fund transfers. The bond issuer sent letters to the bank notifying it of the change (including details on how to comply with the procedure) well in advance of the change taking effect. There was also documentation that emailed information sent to a half dozen bank employees was received and opened. In the eyes of the courts where the matter was litigated, no coverage was owed. The bank was left to handle the loss on its own.

Click here to view a tool for identifying sources of loss that financial institutions must address. It is from the Commercial Lines Survey found in Advantage Plus.

Coverage was sought, and the bank had been protected for years against the type of loss they suffered from a fraudulent act… and then they weren’t. The coverage gap was due to a failure to practice the necessary level of risk management. So, an operational lack of diligence thwarted the coverage they paid for and hoped to collect.

This error is an expensive lesson that insurance policies and bonds aren’t guarantees of protection when coverage requirements are missed. Insurance is but a subset of risk management. In this case, a bank suffered a serious loss when it didn’t fully recognize the importance of updating its risk avoidance (or at least mitigation) efforts. The consequences of their failure included the expense of prolonged litigation, which compounded the financial loss.

Regardless of whether your client is a large or small business, it is in their best interest to consider the various ways they can minimize their exposure to loss. As an insurance professional who also embraces risk management, you can be instrumental in guiding your clients to maximize their ability to guard against unnecessary financial harm.

Click here to read an article on the importance of risk management. It is from Emarketing for Agents found in Advantage Plus.