FINANCIAL INSTITUTION BOND–STANDARD FORM NO. 14

(September 2022)

 

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Insuring Agreements

General Agreements

Conditions and Limitations

INTRODUCTION

Financial Institution Bond–Standard Form No. 14 is used to insure stockbrokers and investment bankers. The form is similar to the Financial Institution Bond–Standard Form No. 24. It has six primary insuring agreements designed to protect eligible property and can be written with an aggregate limit or with a single limit to respond to individual losses.

Standard Form No. 14 is issued to stockbrokers whose principal business is dealing in securities listed on such recognized stock exchanges. It is also available to stockbrokers who deal in unlisted securities. It is also available for use by:

This analysis is based on the 05 11 edition. Changes from the previous edition are in bold print.

INSURING AGREEMENTS

A. Fidelity (05 11 change)

Insuring Agreement A. covers loss that involves any 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 who acts alone or who acts in collusion with others. The employee must intend for both of the following two very specific results:

 

Example: Sam is employee of Securities, Inc. He is unhappy with the company and takes the following actions:

He goes to the mail room and destroys all incoming mail for the day. This results in loss of funds and other problems for Securities, Inc. but Sam does not obtain a financial benefit. This loss is not covered.

Sam sets up a fictitious account and funnels securities to it. He sells them and retires. This loss is covered when it is discovered because Securities, Inc. sustains a loss and Sam benefits financially.

 

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 no limited to only these.

Note: This insuring agreement is identical to the corresponding insuring agreement in Standard Form No. 24.

B. On Premises (05 11 change)

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 Better Stocks Company has 15 locations. Its underwriter is concerned about three locations. Better Stocks decides to eliminate two of the locations and assigns those employees elsewhere, but it must maintain one of the problem locations. The underwriter will not change its mind so Better Stocks agrees to exclude that one unacceptable location in order to receive a lower premium for the entire account. It then places that location on 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 itself as a result of actual or threatened larceny, burglary, or robbery. 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.

 

Example: Ruraltowne Investors sustained a break-in and theft over the weekend. Standard Bond No. 14 Insuring Agreement B covered the value of the securities stolen from an office safe as well as damage to the building as a result of the burglars tearing out a window casement to gain access to the premises and commit the crime.

 

Note: This insuring agreement is identical to the corresponding insuring agreement in Standard Form No. 24.

C. In Transit

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.

Note: This insuring agreement is identical to the corresponding insuring agreement in Standard Form No. 24.

D. Forgery or Alteration (Optional)

This optional insuring agreement covers loss that results from forgery or alteration of any of the following:

Standard Form No. 14 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: Joey sends instructions to his stockbroker at Big Time Stocks to transfer part of his stock portfolio to Marissa. Big Time documents the request and follows the instructions. At the end of the year Joey demands to know why his stock value has decreased so dramatically. Big Time produces the letter requesting the transfer and Joey denies having made such a request. Investigation reveals that Joey’s signature was forged and also reveals that Marissa’s account was emptied and closed and she cannot be found. Big Time Stock’s Forgery and Alteration coverage will respond.

Note: This insuring agreement is identical to the corresponding insuring agreement in Standard Form No. 24.

E. Securities (Optional)

Listed Securities:

·         Certificated securities

·         Deeds, mortgages, or other instruments that grant title to, create, or discharge liens on real property

·         Evidences of debt

·         Certificates of Deposit

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 the insured’s 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.

Note: It is important to realize that any coverage involves either original or certificated documents. There is no coverage if the documents are reproductions, copies, or counterfeits.

Note: This insuring agreement is identical to the corresponding insuring agreement in Standard Form No. 24 except that Standard Form 14 does not cover the following:

·         Documents of title

·         Certificates of origin or title

·         Security agreements

·         Corporate, partnership, or personal guarantees

F. Counterfeit Currency

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 that situation, the counterfeit money from that country is covered.

Note: This insuring agreement is identical to the corresponding insuring agreement in Standard Form No. 24.

 

Example: Yankee Securities reports a loss to Financial Institution Bond Company after discovering that the $37,000 in Mexican currency it accepted was counterfeit. Financial denies the loss because Yankee is based in and has operations in only the United States and does not have any Mexican branch offices or operations.

GENERAL AGREEMENTS

A. Nominees (05 11 change)

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.

B. Additional Offices or Employees–Consolidation, Merger, or Purchase of Assets–Notice

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.

However, the insured may grow through merger or acquisition. When this occurs, there is no coverage for those mergers or acquisitions unless and until the underwriter is notified. Once notified, the underwriter must agree to cover the entity that was acquired and 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.

C. Change of Ownership–Notice (05 11 change)

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.

D. Representation of Insured (05 11 change)

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.

E. Joint Insured

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. However, having multiple insureds can result in unintended consequences.

 

Example: Jared, Preston and Grange were insureds under the same bond. A loss involving one of Preston’s customers occurred. Jared handled all actions required of the first named insured. The underwriter issued a check to Jared to satisfy the loss. Ten days after the settlement, Preston contacted the underwriter regarding its status. Preston was very disappointed when he learned that Jared had left the country with the settlement and even more disappointed when he learned that the underwriter would not be issuing any additional funds.

F. Notice of Legal Proceeding Against Insured–Election to Defend

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.

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.

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.

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.

Note: This insuring agreement is identical to the corresponding insuring agreement in Standard Form No. 24.

G. Insured's ERISA Plans (05 11 addition)

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.

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.

2. A loss discovered during the bond’s 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 term, any loss payable is reduced by the amount payable under the bond for the current policy term.

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.

Note: This insuring agreement is identical to the corresponding insuring agreement in Standard Form No. 24.

CONDITIONS AND LIMITATIONS

Section 1. Definitions (05 11 changes)

The terms defined in Financial Institutions Bond–Standard Form No. 14 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.

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

Employee (05 11 change)

Each of the following is considered an employee:

Note: Under the prior edition, attorneys the insured retained and guest student interns were considered employees while performing services for the insured. The 05 11 edition removed this provision.

Evidence of Debt

A written instrument a customer executes to document its debt obligation to the insured. It includes Negotiable Instruments.

Financial interest in the insured (05 11 change)

The financial interest in the insured of a general partner is much more difficult to determine than that of a limited partner or a member of an LLC because of the relationship and intertwining assets. The general partner’s financial interest is established as of the date on which the loss is discovered. It is the general partner’s net worth plus money, securities, and other property in which it has an interest. The paragraph explains in detail how the net worth is established.

The limited partner's interest or the interest of a member of an LLC is limited to only the value it invested in the insured.

This definition is used on within exclusion y. No loss committed by a partner or member is paid until the loss exceeds the financial interest that partner or member has in the insured.

 

Example: Macruber embezzles $1,250,000 from Ace, Ace and Macruber, LLP. Macruber’s financial interest in the insured is $500,000 so the loss payable under this Bond is $1,250,000 - $500,000 = $750,000.

Forgery

When one party signs the name of another party without that other party’s authorization but only if there is 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.

 

Example: Michael signs his name on a check from Gramling Inc. Iggy's Investment Bank accepts the check and gives Michael the requested funds. The check is rejected when it is presented to Gramling as a paid item because Michael was not authorized to sign Gramling’s checks. Michael’s act was fraudulent but it was not a forgery.

 

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.

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 (05 11 addition)

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.

Member (05 11 addition)

Any natural person who has an ownership interest in a limited liability company

Messenger (05 11 addition)

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.

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.

Negotiable Instrument

Any type of writing that meets all of the following criteria:

Original (05 11 addition)

The first rendering of a document. A photocopy or a printed version of an electronic document is not considered an original.

Partner

A natural person who is either a general partner or a limited partner. The limited partner must also be an employee who provides services to the insured, is under the insured’s direction, and receives a salary from the insured.

Property (05 11 changes)

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.

Notes:

The table no longer lists United States Federal Reserve Uncertificated Securities and Acceptances.

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 (05 11 addition)

A written agreement that has two purposes:

·        It creates an interest in personal property or fixtures.

·        It secures payment or performance of an obligation.

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

Written (05 11 addition)

Three criteria must be met for something to be considered written:

Section 2. Exclusions

Despite Standard Form No. 14'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. 14 contains 29 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.

c. Nuclear fission, fusion, or radioactivity (05 11 change)

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.

Note: The 05 11 edition does not have the exception for industrial use of nuclear energy that was in the prior edition.

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 (05 11 change)

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 and E provide.

Note: The 05 11 edition does not have the exception for Insuring Agreement D that was in the prior edition.

f. Securities/Investment Laws

Any loss that is caused when an insured or its employees violate a securities or investment regulation 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.

g. 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.

h. Employee actions

There is no coverage for direct loss caused by an employee except under the following Insuring Agreements:

·          Insuring Agreement A.

·          Insuring Agreements B or C but only when property is misplaced, destroyed, or mysteriously disappears because of an employee’s unintentional act.

i. Transactions to a customer's account

Losses that result directly or indirectly from transactions to a customer's account are excluded. However, Insuring Agreement A has an exception for cases where an employee illegally converts money, securities, or precious metals.

j. 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.

k. Credit, debit, charge, access, convenience, or other cards

There is no coverage for any loss that involves any 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

Losses involving automated teller machines and similar devices that handle funds are excluded, except when Insuring Agreement, A provides coverage.

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 exhortation is also not covered if it is destroyed, disappears or stolen.

This exclusion does not apply to Insuring Agreement A.

n. Erroneous credits (05 11 change)

Any loss resulting from erroneous credits to a depositor’s account is excluded. This exclusion does not apply to Insuring Agreement A.

Note: The 05 11 edition deletes the exception for payments or withdrawals that take place in the insured’s office that was in the prior edition.

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: Patrick opens an account at Magnificent Stock Brokerage with a $25,000 bonus check from Easy Deals. He withdraws funds over the next few days through a series of ATM transactions. At the end of the week, Magnificent discovers that the Easy Deals check is fraudulent and uncollectible. Patrick 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 the insured 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 (05 11 change)

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: Kyle’s briefcase contains securities that Little Security Brokerage owns and securities that clients of Little Security Brokerage own. Kyle runs to catch a taxi and the briefcase flies open and the securities scatter. He stops and collects as many as he can but others are lost. Little Security gains coverage for some of the securities it was legally liable for when it shows that some were owned and some were the other. Because the property for which it was legally liable was lost, owned property worth approximately the same amount was not lost.

 

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. Erroneous deposits (05 11 addition)

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.

Note: The 05 11 edition deletes the exclusion of uncertificated securities that was in the prior edition. The 05 11 edition also deletes all reference to uncertificated securities throughout the form.

x. Dishonest or fraudulent acts

Coverage does not apply to any loss that results directly or indirectly from any dishonest or fraudulent act by any non-employee broker or agent engaged in any of the practices the exclusion lists.

y. Partners

Loss caused directly or indirectly by one of the insured's partners or by a member of an LLC is excluded. An exception provides coverage when the amount of loss exceeds the sum of the partner's “financial interest in the insured” plus the deductible. The term “financial interest in the insured” is defined in the definition section.

z. Representation, advice, warranty, or guarantee

There is no coverage for a loss that is based on representation, advice, warranty, or guarantee with respect to performance of any investment.

aa. Unlawful disclosure of non-public material information

Any liability that is imposed on the insured because an employee or the insured discloses non-public material is not covered. In addition, liability based on any actions an employee takes based on such material is also not covered. This exclusion applies to employees regardless of whether or not the insured authorized their actions.

 

Example: Harry is a mail clerk. He overhears conversations concerning a merger for which his firm is a consultant. He purchases some stock in advance of the merger and sells his information to others who also purchase stock. The stock price spikes prior to the merger and costs the firm part of its value of the transaction. Because of the rise in the stock value before the merger, the Securities and Exchange Commission (SEC) investigates the firm for insider trading. This bond does not cover any of the losses or costs associated with Harry’s actions.

 

bb. Confidential information (05 11 addition)

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.

cc. Employee (05 11 addition)

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.

This exclusion does not apply if the officer or director who knew about the background colluded with the employee to commit a dishonest act.

Section 3. Discovery

Similar to other bonds, Standard Form No. 14 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: Mildred substituted her name for a client’s on stock certificates purchased in 2004. She is no longer with the firm but has been collecting the client’s dividend since that substitution. The client suddenly dies in 2022 and all records are frozen for probate. During the records review, Mildred’s substitution is revealed and a claim is presented to all bond underwriters who provided coverage over those years. However, only the current bond underwriter will respond.

 

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.

Note: This bond does not define an insured. This therefore leads to the question as to who at the insured 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.

Section 4. Limit of Liability

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.

Reinsurance recovery by the underwriter is not considered a recovery that reinstates the aggregate.

When the underwriter uses a Lost Instrument Bond to settle a property loss, there is no loss to the aggregate until the 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

Section 5. Notice/Proof–Legal Proceedings Against Underwriter

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 details it knows of. 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 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.

Section 6. Valuation (05 11 change)

Losses are valued as the insured's net loss after credits for any receipts, payments, or recoveries. This means that in transactions where the insured receives an item of value, 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.

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

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: Kensington Stockbrokers discovers that Rick, one of its best brokers, embezzled $275,000 from it. Before it submits the loss to the insurance company, Kensington realizes Rick's commission account is worth $250,000. Because Kensington owes Rick the $250,000, it is deducted from the loss and the total value of the bond loss is reduced to $25,000.

Section 7. Assignment–Subrogation–Recovery (05 11 change)

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: Petra embezzled $750,000 from Trusted Securities. Trusted Securities was responsible for the $100,000 deductible. The underwriter paid its limit of $500,000. Trusted Securities incurred $25,000 to establish the loss and was not reimbursed for those expenses. Through a variety of actions, $300,000 is recovered from Petra for the benefit of Trusted Securities. The $300,000 is divided as follows:

1. Trusted Securities received $150,000 because that is the amount of covered loss that exceeds the amount the underwriter paid.

2. The Underwriter receives the $150,000 to offset the $500,000 it paid.

 

Note: The 05 11 edition removes Section 8. Limit of Liability under This Bond and Prior Insurance that was in the previous edition.

Section 8. Cooperation (05 11 addition)

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.

Section 9. Anti-Bundling (05 11 addition)

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.

Section 10. Other Insurance or Indemnity

If other insurance in force applies to the same loss, this bond contributes to the loss on an excess basis.

Section 11. Ownership

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.

Section 12. Deductible Amount

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.

Section 13. Termination or Cancellation (05 11 change)

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.