(September 2022)
This bond protects a bank
against losses that result from dishonest acts of its employees. Like the
Financial Institution Bond–Standard Form No. 24, it has a single limit of
liability for any single loss as well as an aggregate limit. It is written for
a minimum limit of $1,000,000 with higher limits in multiples of $1,000,000
available. The limit selected is on an excess basis above the single and aggregate
limits in Standard Form No. 24 but for only employee dishonesty losses.
Coverage is limited to eligible national and state
chartered commercial banks.
This form was developed
in 1986 because of requests by the commercial banking industry following
adverse experience from large employee dishonesty losses. The Surety and
Fidelity Association of America (SFAA) responded to this request by developing
this form.
The form is widely
available for use but few insurance companies offer it
because of higher capacity and favorable premium considerations currently
available in the marketplace. Most companies prefer to offer higher single loss
and/or aggregate limits under Standard Form No. 24.
Coverage under Standard
Form No. 28 is similar to the coverage that Insuring Agreement A of Standard
Form No. 24 provides with some exceptions that this analysis notes.
This coverage form is
written only as excess over a deductible amount not less than the required
underlying amount for the appropriate asset group. Banks are classified into
various deposit or asset groups according to size, based on the average amount
of their total deposits. Once the appropriate asset group is established, it does
not change during the policy term, except for new banks, or in cases of merger,
consolidation, asset purchase, or acquisition of the liabilities of another
commercial bank.
This analysis is based on
the revised to January 1986 version of this bond. It is the most current one as
of August 2016. It was not updated in 05 11 when the Standard Form No. 24 was
updated.
The one insuring
agreement is very similar to Insuring Agreement A on Standard Form No. 24.
Coverage applies to loss caused by dishonest or fraudulent acts of any
employee. The act can be committed anywhere and can be committed alone or in
collusion with others. The employee's act must intend to cause financial loss
to the insured and financially benefit the employee.
There is a limitation if
all or part of the loss is due directly or indirectly to a loan. The only
coverage is when the employee colludes with one or more of the parties in the
loan transaction but coverage doesn’t activate until
the employee’s financial benefit exceeds $2,500.
The financial benefit to
the employee does not include other benefits the employee may earn, such as
salary, commission, promotion, awards, or similar intentional employee
benefits.
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Example: Keisha’s bonus was on a sliding scale based on the
number of loans. She worked with three different realtors to prequalify their
buyers in order to increase her bonus. The bank filed an employee dishonesty
claim when many of those loans defaulted because of poor underwriting. The
claim was denied because the bonus was the only benefit Keisha received. |
All General Agreements below
are very similar but not identical to the corresponding General Agreements in
Standard Form No. 24. The only exception is General Agreement G. in the
Standard Form No. 24 which is not applicable to this form.
If the insured organizes
a group of employees into an operation to handle business on its behalf, and
that operation sustains a loss, that loss is treated as if incurred by the
insured and is covered. If a partner of that operation is implicated in the
loss, the loss is still considered a loss to the insured.
Note: This
agreement differs from Standard Form No. 24 by omitting the reference that the
insured cannot be a holding company.
If the insured grows
through merger or acquisition, there is no coverage for actions of employees
acquired as a part of the merger or acquisition unless and until the insured
notifies the underwriter. Once notified, the underwriter must agree to cover
the actions of the acquired entity’s employees and the insured must pay any
additional premium.
This bond provides a list
of asset groups for the insured’s benefit. If the additionally acquired entity
increases the insured’s assets significantly, the insured’s asset group may
change, requiring an increase in premium and a higher deductible amount.
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Example: High
Energy Bank has assets of $11,000,000, meaning it is in Group 8 and has a
required minimum deductible of $375,000. It acquires Go Real Slow Bank and the assets increase to $22,000,000. As a result
of this change, High Energy Bank is now in Group 10 and has a required
minimum deductible of $525,000 in addition to a higher premium. |
Note: This
agreement differs from Standard Form No. 24 in two areas.
Underwriting is largely
based on the insured's management. For this reason, the underwriter must be
notified of any significant changes in management. The definition of change in
control is when 10% or more of stock ownership changes hands. If a significant
change occurs and the underwriter is not notified in writing, coverage for loss
that involves the transferee ends on the date of the stock transfer.
Note: The 05 11 edition of Standard Form No. 24
retitled its Change of Control Notice to Change of Ownership Notice. It also
does not restrict ownership to stock only. Notification is required if more
than 10% of the partner/member or stock ownership changes. Standard Form
No. 24 also requires that the insured give notice in writing within 30 days of
any significant change. Standard Form No. 28 states only that notice is
required but it does not state the number of days.
The application the
insured completes is attached to the bond and the bond 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 in cases of any
misrepresentation, incorrect statement, or omission of material facts.
If the bond covers two or
more insureds, the first named insured acts for all others. Payment by the
underwriter to the first named insured fully releases 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 related 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. The provision requires notification not more
than 30 days after the insured first becomes aware of any legal action.
The underwriter can
assert its right to handle the legal defense of any legal proceeding that may
affect coverage (including the choice of attorneys) but is not obligated to do
so. If the underwriter decides to provide a legal defense, all related costs
are included as part of the coverage provided. The insured must cooperate with
the underwriter in any defense. Failing to do so could result in the
underwriter terminating any defense.
There may be a time when
the underwriter decides against providing a defense. In such a case the insured
has the option to provide a defense but none of the expenses associated with
the defense will be paid by the underwriter. In addition, when a settlement is
reached or judgement received due to the insured’s defense activities, it will
not determine the coverage available under this bond nor the amount payable.
If the insured settles with
the underwriter's assistance, the date of the settlement is used to determine
the time period for suits to be brought in place of the discovery date in Section
5. Conditions and Limitations.
If no underlying bond is available, this agreement applies only after the
loss, claim, or damage is in excess of this bond’s applicable deductible.
Note: This
agreement is very similar to the same agreement in Standard Form No. 24 except
for the final paragraph.
This item in Standard
Form No. 24 is not in Standard Form No. 28 because coverage for ERISA is not
part of this Bond.
There are only two
definitions.
Employee
Each of the following is considered an employee:
A guest
student is also an employee but only covered while pursing studies in such an
office.
Note: This
definition is much more limiting than the corresponding definition in Standard
Form No. 24 so it is very important to compare the two
definitions for potential gaps. It is also important to review the listings of
individuals or businesses that the insured would expect to be covered under
this Bond. If there are differences, endorsements can be added.
The 05 11 edition of
Standard Form No. 24 included significant changes in the definition of
employee. The following employees under Standard Form No. 24 are not included under
Standard Form No. 28:
Loan
Any and all extensions of credit the insured makes. It also
includes transactions where the insured establishes a creditor relationship,
even those where the insured purchases another’s creditor relationship.
Note: This
definition is identical to the corresponding definition in Standard Form No.
24.
There are only eight
exclusions compared to 28 exclusions in Standard Form No. 24. The included
eight are similar to the corresponding exclusions in Standard Form No. 24. It
is important to be aware of the limited coverage in the unendorsed form and to
be aware of riders available to cover certain excluded losses.
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. Acts of insured's (board of) directors
Coverage does not apply to any loss caused by acts of the
insured's directors. However, acts of a director acting as an employee are
covered. An example is a director who works on the insured’s task-oriented committee.
Note: Standard Form No. 24 excludes members of any type of
management board but continues with the exception. In addition, the definition
of employee under Standard Form No. 24 extends to this type of director.
b. Trading losses
Losses that result directly or indirectly from trading with or without
the insured's knowledge are excluded.
Note: This exclusion is more restrictive than the
corresponding exclusion in Standard Form No. 24.
c. 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.
d. 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.
e. 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.
f. Indirect or consequential losses
Indirect or consequential losses of any kind are excluded. Examples
of such losses are fines, penalties, multiple, or punitive damages.
g. Securities/Investment Laws Violations
Any loss that is caused
when an insured or its employees violate a securities or investment law or any
of the 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.
h. Racketeering activity
Loss due to any racketeering
activity is excluded. Racketeering activity is defined in the United States
code.
This exclusion does not
apply if the racketeering damages were caused by an employee and the action is
covered under the insuring agreement.
This section explains
when a loss occurs. Coverage applies to only losses discovered during the
policy 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.
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Example: Jerry was a very busy and diligent bookkeeper. He
started working for Best Bank on June 1, 2002. He continued working there
until May 31, 2022, when he retired to Paraguay with $1,250,000 in embezzled
funds. He left a note describing his activities and wishing all of his fellow
employees the best. The date of the discovery is May 31, 2022
but according to his note, the date he started embezzling was June 1, 2002
and continued throughout his tenure. Only the bond in effect on May 31, 2022 will respond. |
Note: The bond does not define an insured. As a result, and in
order to avoid disputes that involve discovering a loss, the discovery clause
should be modified to state that a senior officer or the insured's risk manager
must be aware of the facts surrounding a possible loss. Otherwise, it could be
asserted that any employee who
knew about a loss triggers discovery and the 30-day notice period begins.
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Example: Feisty Underwriters are not pleased with the Best Bank
claim and begin their investigations. They discover that Priscilla, a bookkeeper
at Best Bank, had discovered Jerry’s error in 2000 but kept it to herself
because she really liked Jerry and didn’t want him to lose his job. Feisty
Underwriters denies payment of the entire amount because Best Bank did not
report the loss within 30 days after Priscilla had knowledge of the loss. |
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.
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.
Once the Aggregate Limit of
Liability is used up paying losses, it cannot be reinstated, even if a recovery
is made. In addition, the underwriter's obligation to defend also ends when
this limit is used up.
Note: Under Standard Form No. 24, any recovery received reinstates
that part of the aggregate unless the aggregate is completely used up.
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.
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.
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 that includes 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.
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 in such statutes apply in place
of those stated above.
A bond is for a specific
insured. As a result, only the first insured named on the bond can bring legal
proceedings to recover under it.
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.
Note: Section 6. in Standard Form No. 24 is
the Valuation Section. The two forms are similar with respect to the Money part
of that Valuation section.
Note: This is a combination of Section 7 and Section 8 in Standard
Form No. 24.
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 insured receives money for any losses the underwriter did not pay because
the limits were used up. Any remaining monies go to the underwriter to repay
its loss settlement. If money still remains, the insured is reimbursed for any
deductible it may have paid.
Note: This differs from Standard Form No. 24. because it does not
explain the disposal of any remaining money. Standard Form No. 24 states that
remaining money goes to the insured for expenses the bond does not cover.
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.
The insured agrees to not
do anything to prejudice or inhibit any right of action the underwriter has against
other parties responsible for the loss.
If the underwriter
previously either issued bonds to the insured or issued bonds to parties that
subsequently joined or merged with the insured, and a loss covered under more
than one bond occurs, the most paid is the highest aggregate limit of the
different bonds. The bond aggregates are not stacked to respond to a single
loss. If the current bond replaces a previous bond that another carrier issued,
the current bond's coverage is excess over the same coverage that applied under
the previous bond.
Note: The 05 11 edition of Standard Form No. 24 removed this
section.
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 property owned
and held by others for which the insured was responsible. 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 owns the covered property.
Note: This is the
Covered Property section in Standard Form No. 24.
The underwriter does not
pay any loss until the amount of loss exceeds the deductible on the
declarations that applies to a single loss.
Note: 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:
The bond does not cover
any employee when 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.