(September 20)
|
Collapsible Menu Insuring Agreements |
Financial Institution
Bond–Standard Form No. 24 is used to insure banks, savings banks, and savings
and loan associations against losses caused by employees, bank officers, and
outsiders.
Rules and rates for this
bond are under the jurisdiction of the Surety and Fidelity Association of
America (SFAA). The bond is continuous and is subject to an overall aggregate
limit of liability over its entire life and is cancelled when this limit is
exhausted.
This analysis is based on
the 05 11 edition. Changes from the previous edition are in bold print.
Insuring Agreement A.
covers loss that involves a dishonest or fraudulent act by any employee. These
losses are covered regardless of where they are committed and whether they
occur due to one employee acting alone or one employee acting in collusion with
other employees or outsiders. The employee must intend for both of the
following two very specific results:
|
Example: Nicole is a wonderful teller who is loved by both her
management and her customers. She always arrives early, leaves late, and
never takes vacation. She is rushing to work one day when a car strikes her, resulting
in a two-week hospitalization. An experienced replacement from another branch
notices some irregularities and notifies her superiors. Nicole has misplaced over
$1,000,000 during her faithful service. Scenario 1: Nicole was
incompetent. She would move money between accounts whenever a customer
notified her of a mistake and hope that no one noticed. Everyone enjoyed her
so much that they never reported her “little slip ups.” There is no coverage
because Nicole did not gain any financial benefit other than her regular
salary. Scenario 2: Nicole was
masterful at moving money between real and fictitious accounts. If a customer
and superior noticed an error, she quickly made corrections and took money
from other accounts. Her ill-gotten gains were in a number of offshore
accounts waiting for her. This loss is covered because Nicole’s intentional
actions caused a loss to the insured and she
obtained a financial benefit. |
This insuring agreement
has two limitations:
When the term “improper
financial benefit” is used in this insuring agreement it does not include any
employee benefit earned by the employee such as salary, commission, promotion,
awards, or other benefits. Similarly, the term “loss” used in this insuring
agreement does not include any type of employee benefit paid to an employee by
the employer. Examples of employee benefits are commissions, fees, bonuses,
promotions, awards, profit sharing, pensions, and salaries, but the term is not
limited to only these.
|
Example: Hard Hitting Savings Bank offers $10,000 to the first
loan representative who writes 100 loans for the business year. Mary really
wants the bonus and is very close to the goal. She notifies her sister (a
realtor) of her plan and tells her that she will approve loans to the next ten
customers she sends in regardless of their credit history. She receives the
$10,000 bonus but the bank loses $250,000 on the loans. This loss is not
covered, even though Mary colluded with someone else to cause the loss,
because the only benefit she gained was a bonus. |
Note: The bank is not required to inform the surety of new or
terminated employees. While this bond does not require applications or even
names of employees, most banks require individual applications on all new
employees. Some banks also require that every employee complete a regular
fidelity application every year. They do this to raise the level of consciousness
of employees as a reminder that a bond covers them. On the other hand, an
application completed by an employee already inclined to steal might have the
opposite effect and let him or her rationalize the dishonest act.
Losses that result from
internal irregularities are still more costly to banks than any other type of
crime. Dishonest acts by officers and employees create many of these losses.
The insured should be educated on the need to constantly maintain effective
safeguards against dishonest acts. While loss prevention measures are
important, the safeguards that a bond such as Standard Form No. 24 provides do
much to alleviate the financial impact of employee dishonesty.
Related Court Cass:
Fidelity Insurer Held Not Liable for Embezzlement by Owner-President of
Corporation
Fidelity Coverage Ended
When President Discovered Loan Officer’s Dishonest Act
Insuring Agreement B
covers losses to certain types of property. Those types of property are listed
in a table in the definitions section of this bond. Other types of personal
property are not covered. The loss must be caused by robbery, burglary,
misplacement, mysterious disappearance, damage, or destruction.
Loss due to larceny,
theft, or false pretense is also covered but only when the person committing
such crimes is actually at an office or on the insured’s premises at the time
the property is handed over.
The losses described
above are covered only if the property is actually at or deposited in the office
or premises. The office or premises where the loss occurs can be anywhere. This broad territory can be reduced by
making an entry under item 7. on the declarations that lists the specific
offices where coverage does not apply.
|
Example: The Excellent Bank has 15 locations. Its underwriter is
concerned about one location. Excellent agrees to exclude the one location in
order to receive a lower premium for the entire account. It places that one
location in a surplus market at a higher deductible. The premium for the two
policies is less than the premium that would have been charged under the
single policy that covered all locations. |
This insuring agreement
also covers loss of or damage to the office and its furnishings as a result of
larceny, burglary, robbery, theft or attempts thereat. The insured party must
either own the premises where the loss occurred or be legally liable for it.
Losses that fire causes are not covered.
Insuring Agreement C is
the off-premises version of Insuring Agreement B. It insures against robbery,
larceny, theft, misplacement, mysterious disappearance, damage, or destruction
of the defined property while being transported.
Coverage applies only if the
property is in the custody of one or more of the following:
Coverage begins when the
messenger or transportation company receives the property. It ends immediately
when it is delivered to the designated recipient.
|
Example: A customer entrusted the manager of location one at
Excellent Bank with a $25,000 deposit while they were having Saturday brunch
together. The manager gave the customer a receipt and took the deposit home
with him because the bank was closed for the weekend. A burglar broke into
his home and stole the deposit. This loss is covered because the deposit was
in the process of being delivered. |
This optional insuring
agreement covers loss that results from forgery or alteration of any of the
following:
Standard Form No. 24 covers
the loss when the insured pays money or transfers property because it accepted
written originals of the items listed above as true. The document must contain
a forged handwritten signature or an alteration. Coverage is limited to only
the amount of loss caused by the forgery or alteration.
The insured must have
physical possession of the listed items as a precondition to it relying on the
signature.
A reproduction is treated
the same as a handwritten signature. However, electronic
or digital signatures are not.
|
Example: Oscar is a teller at Perryville Bank. Lindsey gives him a
signed withdrawal order for $10,000. The order is for the account of Crib to
Cradle. Oscar gives Lindsey the money. Three days later the bookkeeper at
Crib to Cradle contacts Perryville to ask why $10,000 was withdrawn from its
account. Scenario 1: Geraldine
Miller, the owner of Crib to Cradle, signed the withdrawal notice. Upon
further review, it is determined that the signature is a reproduction of her
signature, not her actual signature. This claim is paid. Scenario 2: The
withdrawal notice was signed by an electronic signature of Geraldine Miller.
This signature is not considered a reproduction and the claim is denied. Scenario 3: The
bookkeeper called again because she noticed that another $10,000 had been
withdrawn. Oscar, the bank teller, was hoping that no one would notice his
taking advantage of this situation to take $10,000 for his own benefit.
Oscar’s action is not covered in this insuring agreement but could be covered
in Insuring Agreement A. |
Listed Securities:
·
Certificated securities
·
Certificates of deposit
·
Documents of title
·
Certificates of origin or title
·
Deeds, mortgages, or other instruments that
grant title to, create, or discharge liens on real property
·
Security agreements
·
Evidences of debt
·
Corporate, partnership, or personal guarantees
This optional insuring
agreement applies to any of the following three types of losses that occur but
only if the insured was acting in good faith at the time of the loss. The loss
can be for its account or for the account of others.
1. A loss occurs when the insured has faith in the written original
of any of the listed securities so that they were acquired, sold, delivered,
credit was extended, or liability was assumed and one or more of the following happens:
2. A Loss occurs because the insured provided a written guarantee
or a witness of signature on any of the listed securities or on any other
transfer, assignment, bill of sale, power of attorney, guarantee, or
endorsement.
3. A loss occurs when one or more of the listed securities above
are counterfeit. The insured must sustain the loss because it acquires, sells,
delivers, gives value to, extends credit, or assumes liability believing that
the security is real. The loss is limited to the extent of the financial loss resulting
from the item being counterfeit. This coverage does not apply to the corporate,
partnership, or personal guarantee, evidences of debt,
or to the security agreement securities.
In order for coverage to
apply, the insured must have actually possessed the listed securities that
result in the loss. This proves that the insured was involved in a good faith
transaction.
A reproduction is treated
the same as a handwritten signature. However, electronic
or digital signatures are not.
Insuring Agreement F
covers loss caused by an insured that accepts in good faith counterfeit money
of the United States or Canada. However, there is no coverage for loss because
it accepted counterfeit money from any other country. The one exception to this
limitation is when the insured the insured maintains a branch office in another
country; in which case, the counterfeit money from that country is covered.
|
Example: Indemnity Bank is located in the United States. A teller
accepts $10,000 in Costa Rican money and exchanges it for $10,000 in United
States money. Indemnity Bank discovers that the Costa Rican money is
counterfeit. Scenario 1: Indemnity
does not have any branch offices outside the United States. There is no coverage
for the counterfeit loss. Scenario 2: A number of
Indemnity Bank’s customers winter in Costa Rico. As a result, Indemnity
opened a branch in the country to provide exceptional service. This
counterfeit loss is covered. |
This optional insuring
agreement protects the financial institution against losses that occur as a
result of its accepting fraudulent mortgages, deeds of trust, or similar
instruments. The loss may also be as a result of a fraudulent assignment of any
of the above. The instruments must be accepted in good faith as a part of
normal business practices and later be found defective. The defect must be due
to the signature on the instrument or the assignment
being obtained fraudulently, such as by deception, trick, or false pretense. Coverage
also applies if the defect is on the recorded deed.
|
Example: Giles and Tawny, his wife, separate. Giles is offered
$250,000 for his commercial building and the surrounding land. Both Giles and
Tawny are named on the mortgage. Giles plans to sell the land, take the money,
and start a new life. Before the closing, he explains that Tawny cannot
attend but he will have her sign the papers, bring them with him, and then he
will sign all paperwork at the actual closing. Tawny signs the paperwork
because Giles tells her that the paperwork is merely a refinancing in order
to get an improved interest rate. Giles leaves and Tawny
refuses to relinquish the building and property to the purchaser because her
signature was obtained under false pretenses. |
Only the insured named on
the declarations is covered. This means that a partnership, corporation, or
proprietorship not named on the declarations is not an insured even if the
insured owns, controls, or operates it. There is one exception. If the
insured’s employees make up the partnership, corporation, or proprietorship in
its entirety and its only purpose is to handle certain of its business
transactions, it is covered provided it is not a holding company.
An insured can grow by
adding new offices or by merging with other entities. The method of growth
determines the amount of insurance available.
Additional offices the
insured gains are covered from the date they are added
and coverage applies for the remaining premium period. There is no additional
premium charged and the insured is not required to notify the underwriter.
The insured may grow through
merger or acquisition. In that case, there is no coverage for the result of
such actions unless and until the underwriter is notified. After the
notification is received, the underwriter can agree or not agree to cover the merged
or acquired entity. If accepted, the insured must pay any additional premium.
Note: This
difference in approaches is justified. In the first situation, growth involves
the party the underwriter originally evaluated and accepted. Unless the new
office added is unusual or extraordinarily large, the nature of the insured's
operations does not usually change. In cases of merger or acquisition, the
insured's operations now include the operations of another distinct and
separate entity that the underwriter has not yet examined. It is reasonable to
require notification, written authorization, and additional premium charges in
cases of merger or acquisition.
Underwriting is based
largely on the insured's management. Therefore, any time there is a significant
change in management, the underwriter must be notified. The policy requires
that when10% or more of stock ownership or partner/member
ownership interest changes hands, written notification must be provided
within 30 days of the change or coverage ceases for that new interest holder.
|
Example: First Bank is a three-member
partnership. A new partner is added on an equal basis and each partner now has
25% ownership interest. The new partner is covered for only 30 days after the
transfer unless First Bank informs the underwriter of the new partner. |
The application the
insured completes is attached to the bond and coverage is written based on that
information. The insured represents that all information on the application is
true, complete, and correct. The bond may be rescinded if there is any
concealment, incorrect statement, or omission of information considered
material.
Note: The prior edition stated that a misrepresentation, concealment,
incorrect statement, or omission had to be intentional in order to rescind the
bond. The 05 11 edition eliminates the words intentional and representation.
If the bond covers two or
more insureds, the first named insured acts for all others. Payments the underwriter
makes to the first named insured fully release the underwriter. If the first
named insured is no longer covered for any reason, the next named insured
assumes the position of first named insured. This provision makes working with
more than one insured more practical. Having multiple insureds on the bond does
not increase the underwriter's liability.
The insured must notify
the underwriter of any legal proceedings against it related to an incident that
may result in a covered loss as soon as practicable. The notification can be no
later than 30 days after the insured knows about a legal action. The insured
must give the underwriter copies of all information that relate to legal proceedings.
Note: While this provision requires notifying the underwriter as
soon as practicable, it does not allow the insured the latitude to freely
interpret what that really means. This provision requires notifying the
underwriter not more than 30 days after the insured first becomes aware of any
legal action.
|
Example: Indemnity Bank received a lawsuit from Unhappy Customer.
The mail clerk placed it in the wrong mail slot and the error was not
discovered until more than 30 days had passed. The insurance company can deny
coverage on this particular claim. |
The underwriter can
assert its right to handle the legal defense that involves a legal proceeding
that may affect coverage (including choosing attorneys) but is not obligated to
do so. If the underwriter decides to provide a legal defense, the coverage
provided includes all related costs. The insured must cooperate with the
underwriter in any defense. Failing to do so could result in the underwriter
terminating any defense.
When the insured does not
provide the underwriter with notice of a claim or an event within the 30-day time
period, the underwriter is not obligated to do anything with respect to the
claim or event that binds it in any way. A settlement agreement the insured
enters into is not binding on the underwriter. If the insured defends the claim
or event, the underwriter is not liable for any of the defense costs and is
also not bound for any judgment made against the insured.
|
Example: Marilyn’s auditor notifies her that there is a serious
discrepancy in the accounts. Marilyn does not notify the underwriter until
she completes her own internal investigation. She completes the investigation
60 days after the initial auditor’s report. Marilyn discovers the problem and
reaches a settlement agreement. She then sends all the information to the underwriter.
The underwriter declines to honor the settlement agreement because Marilyn
handled it without consultation and also because the notification was 60 days
after she was notified of the problem. |
In addition, the
underwriter may decide to not defend against any claim or event, even though
the insured provided the appropriate notices. If the insured elects to defend and
assume all attorney fees and other costs associated with the defense the costs
of the defense are the insured’s responsibility and the underwriter does not
pay. Any settlement the insured makes and any judgment against it is not
binding on the underwriter.
|
Example: Frank notifies his underwriter of a claim. He believes
the claim should be denied and is upset when the underwriter prepares to
settle. He hires an attorney to defend the claim. Frank must pay for all
expenses associated with defending the claim. The judgment entered exceeds the
amount the underwriter believed the claim could have settled for and refuses
to pay the amount of judgment. |
If the insured settles or
a judgment is entered against it, it has up to six months after the settlement
to file a complete proof of loss with the underwriter. It also must file any
claims against the underwriter within 24 months of that date.
If the insured is
required to provide ERISA bond coverage for any plan, the plan subject to ERISA
can be added to this bond as an insured. This is permitted only if the majority
of the ERISA beneficiaries are the insured’s employees or former employees. The
plan is an insured for only Insuring Agreement A. Because ERISA has its own
rules with respect to bonds, there are certain specific conditions that apply to
these ERISA plans.
Related Court Case: Trust Administrators Were Independent Contractors, Not Employees or
Officers
1. ERISA does not
permit deductibles on its required limits. The required limit is the lesser of
$500,000, or 10% of the plan assets when
the plan does not hold employer securities and the lesser of $1,000,000 or 10%
of the plan assets when the plan does hold employer securities. If an ERISA
loss that involves Insuring Agreement A occurs, the deductible applies once the
insurance company pays the minimum amount ERISA requires.
|
Example: The limit on the First Savings’ Financial Institution
Bond with Friendly Bonding Company is $5,000,000 and the deductible is $100,000.
First Savings has a pension plan that it adds as an insured to the Bond. The
pension plans assets are $2,000,000 so its minimum ERISA coverage is
$200,000. The director of the
plan embezzles $1,000,000 from the plan before his actions are discovered.
Friendly Bonding will pay the $200,000 ERISA minimum without any deductible.
The deductible of $100,000 is then applied after which Friendly Bonding pays
the remaining $700,000. |
2. A loss
discovered during this Bond’s policy term or within one year after it ends is
covered under this Bond. However, if a loss is discovered in the year following
the end of the policy term, any loss payable under this Bond is reduced by the
amount payable under the bond for the current policy term.
|
Example: In the example
above, the First Savings $1,000,000 loss began in June 2020 and ended in
June 2022. First was insured with Nice Bonding Company from January 2020 to January
2021 and with Friendly Bonding Company from January 2021 to January 2022.
Even through the loss applies to both policy terms, because Friendly Bonding's
limits are sufficient to cover the loss, Nice Bonding Company is not required
to contribute. |
3. If the
financial institution has two or more plans subject to ERISA, the limit of
coverage purchased must be sufficient to cover the sum of the minimum required
limits of all plans.
The 05 11 edition removes the statement that a director is an employee.
Refer to the definition of employee instead.
The terms defined in
Financial Institutions Bond–Standard Form No. 24 are in alphabetical order.
Most were modeled on definitions in the Uniform Commercial Code.
Certificate of Deposit
Any written
acknowledgement from a financial institution that it received money from a
depositor that it is formally obligated to repay.
Certificate of Origin or Title
A document a product manufacturer or government agent issues that
can be used to prove evidence of personal property ownership. It is used to
transfer ownership.
Certificated Security
A written document that provides evidence of ownership or
participation in an enterprise or of an obligation of the enterprise. It must
be issued in a registered or bearer form. The instrument must be a type
commonly traded in securities exchanges or markets and be part of a class or series.
Change in Control (05 11 change)
When ownership of 50% or
more of the voting stock of the insured, the parent company, or the holding
company changes. This term also applies
when 50% or more of the ownership interest of the insured, its parent company,
or its holding company changes.
Counterfeit
A written imitation of an original intended to deceive and to be
accepted as an original
Document of Title
Any written original bill
of lading, dock warrant, warehouse receipt, or delivery order. It is also any
other written document with all of the following attributes:
Electronic Data Processor
Any person, partnership, or corporation that handles electronic
data processing of checks for the insured financial institution. The processor
must have written authorization to do so. The checks can be for a customer or
another financial institution. This definition specifically excludes Federal
Reserve Bank or clearinghouse as electronic data processors.
Employee (05 11 change)
Each of the following is considered an employee:
Note: Under the prior edition, attorneys the insured retained were
considered employees while performing services for the insured. The 05 11
edition removes this provision.
Evidence of Debt
A written instrument a
customer executes to document its debt obligation to the insured. It includes
Negotiable Instruments.
Forgery
When one party signs the name of another party without that other
party’s authorization but only if there is an intent to deceive. The party can
be a person or an organization. This definition does not treat electronic or
digital signatures as signatures. When a person places his or her own signature
on a document that he or she whether or not authorized to do so, it is not a
forgery even if the intent was to deceive.
Guarantee
Any written undertaking where one party agrees to pay the debt
another party owes if that other party does not pay based on the terms of its
obligation. The debt can be to the insured financial institution, an assignee
of the insured, or to an institution from which the insured purchased a
participation in the debt.
|
Example: Patrick entered into an agreement with the college
apartment complex to lease an apartment during the school year. The apartment
complex required that Patrick’s parents sign a guarantee for payment and any
damages that might occur during the term of the lease agreement. |
Letter of Credit (05 11 change)
A written arrangement between a bank and its customer whereby the
bank honors drafts and other demands for cash based on that arrangement. The
customer must request the letter of credit. The letter must include conditions
required for the bank to comply.
Note: The prior edition used the term “bank or other person.” The
05 11 edition deletes the term “other person.”
Loan
Any and all extensions of credit the insured makes. It also
includes transactions whereby the insured establishes a creditor relationship,
even those where the insured purchases another’s creditor relationship.
Messenger
Any employee of the insured who has the insured’s property off
premises. If that employee becomes incapacitated, any natural person who
assumes custody of that property is also considered a messenger.
|
Example: Joshua is taking securities from his branch to the
central bank. His car is struck and he is rendered
unconscious. A police officer impounds the vehicle and all contents of the
vehicle. At this point, the police officer has become the messenger. |
Money
A medium of exchange a
foreign or domestic government authorizes or adopts as part of its currency. It
must be in in current use.
|
Example: Georgia Good Ol’ Bank has 300 bills the Confederate
States of America issued in 1861. While they were a medium of exchange that
the Confederate government authorized at the time they were issued, that
government no longer exists and the bills are no
longer in current use. Those bills are not money. |
Negotiable Instrument
Any type of writing that
meets all of the following criteria:
Original
The first rendering of a document. A photocopy or a printed
version of an electronic document is not considered an original.
Property
All of the following are
considered property:
|
Money |
Certificated Securities
|
Negotiable Instruments |
Certificates of Deposit
|
|
Documents of Title |
Evidences
of Debt |
Security Agreements |
Withdrawal Orders |
|
Certificates of Origin
or Title |
Letters of Credit |
Insurance Policies |
Abstracts of Title |
|
Deeds and Mortgages on
Real Estate |
Revenue and other
Stamps |
Tokens |
Unsold state lottery
tickets |
|
Books of Account |
Hard copy or electronic
financial records |
Gems |
Jewelry |
|
Precious metals in bars
or ingots |
|
|
|
Other tangible Personal
Property not listed in the table is also property. However, it is not covered
in the same way as the property listed in the table.
Note: In the first part of the On Premises coverage only “enumerated
items of property” are covered. Those are the items listed in the table above.
When term “property” is used, it means all items in the table plus the other
tangible personal property.
Security Agreement
A written agreement that has two purposes:
·
It
creates an interest in personal property or fixtures.
·
It secures payment or performance of an
obligation.
|
Example: First National Bank requires a security agreement from
Harrison Farms for the loan it requested. The agreement provides First
National with ownership of Harrison’s three tractors if Harrison does not
repay the $20,000 loan from First National. |
Transportation Company
Any organization that
uses it’s owned or leased vehicles to transport its customers' property. It may
also arrange for freight forwarding or air express services for its customers'
property.
Withdrawal Order
A non-negotiable instrument
the customer signs that authorizes the insured to debit its account for the
amount on the instrument
|
Example: Mary wrote and signed a check from her bank checking
account to pay her utility bill. This is a withdrawal notice to her bank to
debit her account for the amount of the check. |
Written
Three criteria must be
met for something to be considered written:
Despite Standard Form No.
24's very broad coverage, there are exclusions. Coverage for some of excluded
items can be purchased by using a rider or the coverage may have to be
purchased under another form of insurance such as a property coverage form. Standard
Form No. 24 contains 28 exclusions.
Related Article: Financial Institution Bonds Available
Riders and Their Uses
Editorial Note: The exclusion titles in this section are not part
of the bond. They are provided as an aid to understanding.
a. Forgery or alteration
Loss due to forgery or
alteration is excluded. The exceptions are when Insuring
Agreements, A, D, or E provide coverage.
b. War, riot, or civil commotion
Loss caused by riot or civil commotion is excluded but only when it
occurs outside the United States and Canada. Loss due to warlike action anywhere is excluded.
There is an exception when Insuring Agreement C
applies. However, the exception is in effect only if nobody knew about such
events taking place at the time the property started in transit.
|
Example: Juniper Bank’s employees were moving furniture and
supplies to a new location in Costa Rica. They were driving through Venezuela
when a coup took place. The coup backers spotted the U. S. vehicle and confiscated
it for their purposes. The vehicle and its contents vanished but the
employees were not injured. This loss is covered because the transit began
prior to the coup. |
c. Nuclear fission, fusion, or radioactivity
There is no coverage for any loss due to nuclear fission, nuclear fusion,
radioactivity, or any chemical or biological contamination. This applies
to both direct and indirect loss. There are no exceptions.
d. Acts of members of management board (05 11 change)
Losses caused by acts of a member of the board of directors or any
similar type board are excluded. The only
exception is the coverage that Insuring Agreement A provides for such persons.
e. Loan transaction
There is no coverage for
any direct or indirect loss caused by complete or partial non-payment or
default of a loan or transaction that involves the insured as a lender,
borrower, or extender of credit. The only exception is the coverage that
Insuring Agreements A, E, or G provide.
f. Customers’ property in safe deposit boxes
Coverage does not apply to property lost from a customer's safe
deposit box. The only exception is coverage that Insuring Agreement A provides.
g. Travelers’ checks and money orders
Losses caused by cashing or paying forged or altered travelers'
checks or travelers' checks with a forged endorsement are excluded unless Insuring Agreement A provides coverage.
|
Example: A customer comes to Dependable Savings and cashes a $100
travelers check. After the customer leaves, the Dependable employee cleverly
changes the amount on the travelers check to $1,000 and pockets the $900 for
himself. If this loss is discovered, the $900 amount is covered, subject to
any deductible. |
In addition, there is no
coverage if unsold travelers’ checks or money orders in the insured’s custody
are lost unless the insured had agreed in writing to repay their owner. In such
a repayment case, a loss is considered not to have occurred until the checks or
money orders are actually presented and paid by said owner.
|
Example: Respectable Bank has money orders available to its
customers drawn on Gimme Money Bank. When 50 blank money orders go missing,
Respectable notifies Gimme. Before Gimme is able to notify its agents to
reject the money orders, two are presented and paid. Because Respectable had a
written indemnification agreement with Gimme, payment is made on the two
money orders that were paid. |
h. Employee actions
There is no coverage for
direct loss caused by an employee
except under the following Insuring Agreements:
|
Example: Carry On Banking
reports a $50,000 loss that is the result of Quentin’s actions. Scenario 1: Quentin is a bank teller who
has admitted to embezzling. This loss is covered under Insuring Agreement A. Scenario 2: Quentin is an employed janitor. In his zeal to clean up, he
grabs a bag of papers and throws them into the trash. It later is revealed
that those were valued securities. Coverage applies under Insuring Agreement
B because Quentin’s actions were unintentional. |
i. Trading Losses
Losses that result directly or indirectly from trading with or without
the insured's knowledge are excluded, except when Insuring
Agreements, A, D or E provide coverage.
|
Example: Jerry is an employee at Purloined Bank. He likes to make
trades and feels he is quite good at it Scenario 1: Jerry works
in the trading unit of the bank. He makes a number of sales that are outside
of his authority, but he is sure they will work out. When the bank examiners
finally discover his actions, the bank has lost $1,300,000. There is no
coverage because Jerry, although working outside his authority, was not committing
any action covered under Insuring Agreements A, D or E. He was just a risky
trader operating without control. Scenario 2: Jerry
decides to funnel bank money into an account that he uses for personal
trading. Because Jerry is using bank money for personal gain, coverage is
provided as part of Insuring Agreement A. |
j. Teller's cash
shortages
There is no coverage for
shortages in any teller's cash when the shortage is due to an error.
k. Credit, debit, charge, access,
convenience, or other cards
There is no coverage for
any loss that involves transactions through any device that involves any of
these types of cards. The use may be actual or implied. This exclusion does not
apply to Insuring Agreement A losses.
l. Automated mechanical devices
(05 11 change)
Losses that involve automated teller machines and similar devices
that handle funds are excluded. There is an exception when the machine is situated
within an office or premises staffed by an insured's employees. However, there
is still no coverage even when the machine is in such an office if the loss to
the machine occurs from outside the office or if the device fails to function properly.
There is also no coverage for mysterious disappearance or misplacement of property within such machines in the
office unless Insuring Agreement A provides coverage.
|
Example: Scenario 1: Three
friends decided that taking the First National ATM located inside a
convenience store would give them time to break into it and steal the money.
They used a pickup truck and cable and successfully stole the device but
threw it into the river after several unsuccessful attempts to break into it.
None of this loss is covered. Scenario 2: The same
situation applies but this time one of the friends is a teller at the bank
and has the access code to the machine. They remove the money and then throw
the machine in the river. This loss is still excluded because the device was
not within an office. Scenario 3: The friends
were happy with the plan but decided more money would be in the ATM located
inside the bank lobby. They steal the ATM, use the access code to remove the
money, and throw the machine in the river. Insuring Agreement A covers the
loss of the contents when the teller’s role is determined but the loss to the
machine itself is excluded. |
m. Surrender of property
There is no coverage when property is surrendered due to a kidnapping or
a ransom payment. There is also not coverage when property is provided in
response to a threat of bodily harm except when it is an immediate threat to
the person in control of the property. Property that is intended to be given as
ransom or in response to extortion is also not covered if it is destroyed,
disappears or is stolen.
This exclusion does not apply to Insuring Agreement A.
n. Erroneous credits
Any loss resulting from erroneous
credits to a depositor’s account is excluded. This exclusion does not apply to Insuring
Agreement A.
o. Forgery or any other fraud
Any loss resulting from deposits not being paid into a depositor’s
account are not covered even if forgery or fraud is involved. This
exclusion does not apply to Insuring Agreement A.
|
Example: Nathan opens an account at Generous Savings and Loan
with a $1,250 payroll check from Humble Pie. Over the next few days, he
withdraws funds through checks and ATM transactions. At the end of the week,
Generous Savings discovers that the Humble Pie check is fraudulent
and it cannot collect on it. In addition, Nathan is nowhere to be found. This
loss is not covered. |
p. Counterfeiting
Any loss related to counterfeiting is excluded. This exclusion
does not apply to Insuring Agreements A, D, E and F.
q. Loss of tangible personal property
Loss to “Other Tangible Personal Property not listed in the table” in the definition of Property is excluded
when the insured has other insurance to cover the property. Even if such other
insurance is not available, loss to such property is excluded 60 days after the
insured becomes is aware that it owns or is responsible to insure it. This
exclusion does not apply to Insuring Agreements A. and B. 2.
r. Loss of property
Loss of property that is
in the mail, in the custody of any transportation company, or while on premises
of a messenger or transportation company is excluded.
This exclusion does not
apply to Insuring Agreement A.
When the property is in
the custody of a transportation company, this exclusion does not apply to
Insuring Agreement C.
s. Potential income
There is no coverage for potential income that the insured may have earned
if there had been no loss. Examples of sources of potential income are dividends
or interest.
t. Legal liability
There is no coverage for damages to property for which the insured is
legally liable. The only exception is when the insured can show that the loss
to such property would have damaged the insured’s property for the same amount
if it had not damaged the property for which the insured was legally liable.
|
Example: Jeremy transports property from one branch
location to another. He stops to run an errand. When he returns, he scares
off the man who broke into his car and removed several items. The loss
resulted in damage to owned property and property for which the bank was
legally liable. The bank gains coverage for the property it was legally
liable for when it shows that the criminal was grabbing armloads of items.
Some were owned and some were the other. Because the property for which it
was legally liable was taken, owned property worth approximately the same
amount was not stolen. |
u. Fees, costs, and expenses
The fees, costs, or
expenses the insured incurs to establish a claim or the claim’s amount are excluded.
Coverage also does not apply to fees, costs, or expenses associated with any
legal proceedings.
v. Indirect or consequential losses
Indirect or consequential losses of any kind are excluded.
Examples of such losses are fines, penalties, multiple, or punitive damages.
w. Securities/Investment Laws Violations
Any loss that is caused
when an insured or its employees violate a securities or investment law or any
of that law’s rules and regulations. An exception applies to fraudulent or
dishonest actions that the insured can prove would have caused the same amount
of loss if the laws, rules, or regulations were not in place.
x. Failure of a financial or depository institution to pay or deliver
funds
Any loss that occurs because of a financial or depository institution failure
resulting in the insured not being able to obtain insured deposited funds or
property is excluded. This exclusion does not apply to Insuring
Agreements A. or B. 1. a.
|
Example: Goodness Bank asks Almost There
Bank to transfer the $500,000 it has on account. Almost There declines to
transfer it. Scenario 1: Almost There Bank does not have funds available to honor the
request and Goodness sustains a loss because it cannot meet other
obligations. This loss is not covered. Scenario 2: Almost There Bank previously sent the $500,000 based on a request
from Jerald, an employee of Goodness Bank who cannot be found. Goodness
Bank’s Insuring Agreement I covers this loss. |
y. Erroneous deposits
Any loss that is the result of accepting a check that is payable to an
organization and placing it for deposit in a natural person’s account is
excluded.
z. Racketeering activity
Loss due to any racketeering
activity is excluded. Racketeering activity is defined in the United States
code.
This exclusion does not
apply to Insuring Agreement A if the racketeering damages were caused by an employee.
aa. Confidential
information
Any type of loss that results
from any theft, destruction, or disappearance of confidential information is
excluded. Examples of confidential information are intellectual property,
customer lists, and trade secrets.
bb. Employee (05 11 change)
Loss caused by any
employee with a history of fraudulent or dishonest activities at either this insured or any other business is excluded. This exclusion applies
only when the insured, an officer, or director knew about the history of activities.
The knowledge of the history must be gained prior to the date of loss. If
property is in transit with that employee at the time the history knowledge is
obtained, loss of that property would be covered.
|
Example: Peggy is a bright teller. She is well
thought of and Paul, the branch manager, was very surprised when a bank
customer told him of her criminal background. If Paul is considered an
officer of the bank, the bond ceases to cover Peggy as of the date that Paul
received the information. |
This exclusion does
not apply if the officer or director who knew about the background colluded with
the employee to commit a dishonest act.
|
Example: Paul really likes Peggy and discusses the
information with her. As they talk, they realize that they can make a lot of
money by working together. They work together to embezzle over $200,000 in a
short time and then leave together. The loss is covered because Paul kept the
information to himself and colluded with Peggy to embezzle the funds. |
Note: This Exclusion
bb. deletes and replaces exclusion bb. in the prior edition that excluded
intentional damage and destruction of property by an employee.
Similar to other bonds,
Standard Form No. 24 covers only losses discovered during the bond period. This
is like the Commercial General Liability (CGL) Claims-Made Coverage Form.
Discovery occurs when the insured first
becomes aware of facts that should lead it to assume that a loss has
occurred. The bond in effect when the loss is discovered is the one that
provides coverage, not the one written by another surety or even the same
surety that was in effect when the loss occurred.
|
Example: A loss that occurred ten years ago is discovered today.
Today’s bond underwriter responds, not the one when the actual loss started. |
Discovery also occurs
when the insured first receives notice or becomes aware of an actual or potential
claim where it is alleged that the insured is liable to a third party under
circumstances that would constitute a bond loss.
Related Court Case: Fidelity Loss Recovery Held Barred by Policy’s Discovery Provisions
Note: This bond does not define an insured. This therefore leads to
the question as to whom among the insureds must discover the loss. In order to avoid
disputes that involve discovering a loss, the discovery clause should be
modified to state that only a senior officer or the insured's risk manager can
discover a loss. Without this documentation, it could be asserted that any employee who knew about a loss
triggers discovery and the 30-day notice period begins.
Aggregate Limit of Liability
The underwriter's total
liability for all losses discovered during the bond period in Item 2. on the
declarations is the Aggregate Limit of Liability in Item 3. on the
declarations. It is reduced by the amount of any payments made. The Aggregate
Limit of Liability may be written for a larger amount than the single loss
limit.
The insurance company
does not make any additional payments once the Aggregate Limit of Liability is used
up paying losses. Its obligation to defend also ends. The insured must then
defend at its own expense.
Any recovery received
reinstates the Aggregate Limit of Liability but only if it is received before the
limit is used up.
|
Example: Measly Bank has an Aggregate Limit of Liability of
$5,000,000 and policy period of 01/01/20 to 01/01/21. Scenario 1: A series of
losses eats away at the aggregate and only $100,000 is left to pay losses by
10/01/20. On 10/02/20 Measly receives a $1,500,000 recovery. This recovery
amount is added to the $100,000 and the available aggregate is increased to
$1,600,000. Scenario 2: A series of
losses eats away at the aggregate and only $100,000 is left to pay losses by 10/01/20.
On 10/01/20, $100,000 is paid and the aggregate is exhausted. On 10/02/20 Measly
receives a $1,500,000 recovery. Because the recovery is made after the
aggregate was exhausted, the aggregate remains at $0. |
Reinsurance recovery by
the underwriter is not considered a recovery that reinstates the aggregate.
The underwriter may
choose to use a Lost Instrument Bond to settle a property loss. In that case,
there is no loss to the aggregate until that Lost Instrument Bond makes a
payment.
Single Loss Limit of Liability
The underwriter's
liability for a single loss is the applicable Single Loss Limit of Liability in
Item 4. on the declarations. If more than one insuring agreement or coverage
insures a single loss, the most paid does not exceed the largest Single Loss
Limit of Liability that applies.
The Single Loss Limit of
Liability for the optional insuring agreements may not be higher than the basic
bond limits.
Any payment under the
single loss limit of liability is subject to the aggregate limit of liability.
Single Loss Defined
Single loss means all
covered losses associated with a single act or series of related acts, including
costs and attorneys’ fees.
Related Court Case:
"Series of Related Acts" in Employee Dishonesty Coverage Held to Encompass
Continuous Embezzlement Scheme
The insured must contact
the insurance company within 30 days after discovering a loss
but this is the maximum time limit. The insured is obligated to notify the
insurance company as soon as practicable. This is later than "as soon as
possible" but earlier than "at its earliest convenience."
The insured has six
months after discovering the loss (not six months from notice) to provide the
company with a sworn proof of loss including all known details. If lost
certificated securities are involved, the proof of loss must include their
numbers.
The insured has only a
limited time period to sue the company to recover the loss. The suit cannot be
filed sooner than 60 days after the proof of loss is filed or more than 24 months
after discovering the loss.
Note: It is very
important to be aware of the time limits and how they are established.
|
Example: Quality Savings and Loan discovers a loss on 03/01/21.
Quality must notify the underwriter as soon as practicable but not later than
03/31/21. Quality's notification
is dated 03/05/21. It must provide a written notice and complete proof of
loss to the underwriter by 09/01/21. It does so on 06/05/21. The underwriter denies
the claim on 10/05/21. Quality can begin legal proceedings immediately but
not later than 02/28/22. |
Time limits are amended
if they are different than or conflict with any state or federal statutes that
apply. In those cases, the minimum time limits that such statutes provide apply
in place of those stated above.
A bond is for only the
insured. Only the first named insured is authorized to bring any legal
proceedings against the underwriter.
Losses are valued as the
insured's net loss after credits for any receipts, payments, or recoveries. In
transactions where the insured receives an item of value, this means its value
is deducted from the loss amount. If a loan is involved, interest from the loan
is also deducted.
Money
Any loss of money,
currency, or funds of any country is paid in that country's money, currency, or
funds. The insured has the option to have foreign country losses paid in
dollars based on the rate of exchange of United States dollar equivalents on
the date the loss is paid.
|
Example: Valley Bank is located in a very diverse community.
Because of their clientele they often have money from 10 or 12 different
countries on premises. A holdup occurs and money is taken. When the loss is
settled six months after the loss, Valley Bank chooses to have the money from
countries that have increased in value versus the dollar to be paid in
dollars but the money from the countries that have decreased in value versus
the dollar to be paid in the actual currency. |
Securities
The underwriter settles
its obligation to pay an eligible loss of any securities in kind. As an option
(but only if the insured prefers), the underwriter pays the insured the cost to
replace the securities. The replacement value is determined by the market value
of the securities at the time of settlement and not on the date of discovery.
If the lost securities cannot be replaced or do not have a quoted market value,
their value is determined by agreement or arbitration.
When a deductible applies
to the loss or if the loss exceeds the limit of insurance available, the
underwriter is responsible to duplicate only the amount
of securities within the available limits.
Books of Account and Other Records
In case of loss or damage
to books of account or other records, the bond obligates the underwriter to pay
only if the books or records are reproduced. Payment is not for more than the
cost of blank books, blank pages, or other materials plus the cost of labor to
transcribe or copy data.
Property Other Than Money, Securities, or Records
When a loss involves
insured property other than money, securities, or records, the underwriter must
settle according to the property's actual cash value, the cost to repair it, or
the cost to replace it with similar property. This settlement option also
applies to damage to the insured's offices and furnishings, fixtures,
equipment, safes, and vaults contained in those offices.
If the insured and the
company cannot agree on a settlement, arbitration determines the final
settlement amount.
Set-Off (05 11 addition)
The amount of loss the underwriter pays for a loss under Insuring Agreement
A is reduced by a set-off. This set-off is the amount of money owed to the
named insured by the employee who caused the loss.
|
Example: Jackson Bank pays a 2% bonus
to all employees at the end of the year. In addition, Kelsey earned a 3% year-end
bonus because of her productivity. Kelsey’s annual salary is $60,000 so she
is owed a $3,000 bonus. Jackson’s outside auditor reveals a problem and the resulting investigation discovers Kelsey
has embezzled $250,000. Before the underwriter pays the $250,000, it deducts the
bond deductible and the $3,000 Kelsey would have received
if her embezzlement was not discovered. |
The insured assigns all
its rights of recovery for losses the underwriter paid to the underwriter. The
insured agrees to cooperate and assist the underwriter in any attempt to
recover payment from any other party responsible for the loss. If a recovery is
made the money is distributed in the following order:
1. The
insured is paid the amount of loss in excess of the amount it received from the
underwriter.
2. The
underwriter is reimbursed for the amount of the loss it paid to the insured.
3. The
insured is paid for the amount of deductible.
4. The insured is paid for any loss that this
bond did not cover. (05 11 addition)
The insured agrees not to
do anything to prejudice or inhibit any right of action by the underwriter
against other parties responsible for the loss.
|
Example: Jerry embezzled $500,000 from Franklin National Bank. Franklin
National was responsible for the $100,000 deductible. The underwriter paid
its limit of $350,000. Franklin National incurred $25,000 to establish the loss
and was not reimbursed for those expenses. Through a variety of actions,
$600,000 is recovered from Jerry for Franklin National’s benefit. The
$600,000 is divided as follows: 1. Franklin National
received $50,000 because that is the amount of covered loss in excess of the
amount the underwriter paid. 2. The underwriter is
reimbursed for the $350,000 it paid. 3. Franklin National
receives its $100,000 deductible. 4. Franklin National
receives its $25,000 loss expense. Franklin National
receives the remaining $75,000 to compensate it for all other losses it
sustained due to the embezzlement. |
The insured agrees to
submit to examination by the underwriter, to produce all pertinent records, and
to cooperate fully in all matters that relate to the loss.
If an insuring agreement
states that a specific type of instrument must be forged, altered, or
fraudulent in order for coverage to apply, that statement applies to only that
instrument. There is no coverage if other papers within the document are forged,
altered, or fraudulent when the specific instrument itself is valid.
|
Example: Joan is Paul’s senior administrative assistant. Paul is the
president of ABC Corporation. Joan is handed a letter she received from Paul
to the branch manager of Gleeful Bank. The letter tells Joan to have Gleeful
transfer certain negotiable securities it held for ABC to a foreign location.
A week later it was discovered that the secretary had written the letter,
forged the president’s signature, and took possession of the negotiable
securities. There is no coverage because the signature on the negotiable
securities was not forged, and the letter was not a letter of instruction to
the bank but instead was only a letter to the secretary. There is no coverage
for fraudulent signatures on a letter. |
Note: The 05 11 edition removes Section 10. Limit of Liability under
This Bond and Prior Insurance that was in the previous edition.
If other insurance in
force applies to the same loss, this bond contributes to the loss on an excess
basis.
This bond applies to the
insured's owned property, property it holds in any capacity, and also property that
is owned and held by others but, prior to the loss, the insured became
responsible for it. However, the bond is for the benefit of the insured named
on the declarations and not for other parties, even in cases where that other
party also owns the covered property.
The underwriter does not
pay any loss until the amount of loss exceeds the deductible on the
declarations that applies to a single loss.
The insured is still obligated to notify the underwriter of a loss even
if the underwriter is not responsible to pay it. Similarly, if the underwriter
wants more loss details, the insured must provide them. The primary reason for
this requirement is for the underwriter to become aware of situations that
could result in a covered loss at a later date, investigate the problem early,
and prevent a more serious loss later.
This section deals with
two different types of termination. The first is termination of the insured’s
bond. The second is termination of coverage for acts of specific individuals.
A bond terminates on the
earliest date on which any of the following occurs:
When there is a change in
control to any insured other than the first named insured, this bond is
terminated with respect to only that insured.
The bond does not cover losses
caused by any employee, partner, officer of the insured, or employee of any
electronic data processor after any of the following occurs:
The type of act and the
time frame of the act are irrelevant. All that is required is that the act was
dishonest or fraudulent. The only exception is when the particular employee is
transporting property at the time the information becomes known, losses that
occur in the course of transit continue to be covered.