Avoid Common Banker's Bond Pitfalls
Financial institution bonds are, in contrast to management liability policies (such as D&O and employment practices), written on standardized coverage forms. Although this provides buyers with a more clear understanding of the protection afforded, unfavorable terms and conditions are often accepted when more favorable language may be available. Below are several examples of common bond provisions that can often be amended to broaden your protection...
Financial institution bonds are, in contrast to management liability policies (such as D&O and employment practices), written on standardized coverage forms. Although this provides buyers with a more clear understanding of the protection afforded, unfavorable terms and conditions are often accepted when more favorable language may be available. Below are several examples of common bond provisions that can often be amended to broaden your protection, usually at no additional cost.
1. Discovery Provisions
The provision: Bonds require that losses be reported within a certain time period (usually 30 or 60 days) after discovery in order for the loss to be paid.
The issue: Discovery of a loss by any person (which could conceivable include tellers or administrative employees) “starts the clock” on the reporting requirement.
The solution: Banks can take several steps to limit what is deemed as “discovered” and modify the reporting provision:
a. A loss should only be “discovered” if it is known to a senior level manager/executive (e.g. CEO, CFO, risk manager).
b. The bank should be granted 90 days to report a loss, in lieu of 30 or 60.
c. A loss should only be deemed “discovered” if it exceeds fifty percent of the applicable bond deductible. For example, if a bank has a policy with a $25,000 employee theft deductible, losses less than $12,500 need not be reported within the “window” provided.
2. Termination/Cancellation of an Employee
The provision: Bonds immediately terminate coverage for an employee upon discovery by “any person” of them having committed a dishonest act. Acts committed at previous jobs, and acts outside of the scope of their employment all qualify for termination of coverage for that employee.
The issue: If coverage for an employee is canceled by the carrier for a prior dishonest act and an otherwise covered loss is subsequently discovered, coverage would not apply, regardless of who knew of the employee’s misdeeds or what the dishonest act was.
The solution: Banks can take several steps to help prevent this situation from occurring, thereby preserving coverage for an employee dishonesty loss).
a. Knowledge of previous dishonest acts should be limited to that information possessed by senior level manager/executive (e.g., CEO, CFO, risk manager).
b. The dishonest act should be a theft that would be a material amount to trigger cancellation. $10,000 is a common threshold carriers are willing to apply to the employee cancellation provision.
c. Some carriers are willing to amend the provision to apply only to dishonest acts that would otherwise qualify for coverage under the employee dishonesty section of your bond.
3. Definition of Premises
The provision: Theft of money and securities from inside the premises bond narrowly defines what qualifies as an “insured location”.
The issue: For financial institutions using outside firms to perform services in which an outside contractor has control of bank money and securities at a temporary facility (for example the vault of a contractor servicing standalone ATMs), there may be no coverage for theft while the property is at the contractor’s temporary location. Although the contractor’s coverage would be expected to apply, the ultimate availability of protection for the bank is uncertain.
The solution: The bond should be broadened to expand the definition of premises to include any location in which the assured has property.
4. Definition of Employee Dishonesty
The provision: Employee theft loss must be committed by an employee with manifest intent to cause harm to the employer and to obtain financial benefit for themselves in order for coverage to apply.
The issue: Employee actions that were not intended to explicitly cause harm to the employer and gain financially may not qualify as a covered loss under the bond. If both these criteria are not met, coverage may not apply. The provision has been subject to significant litigation and various interpretations by courts.
The solution: Endeavor to have the employee theft insuring agreement amended to remove “manifest” from the definition of employee’s intent. Removing “manifest” from the employee’s intent will remove ambiguity and allow the action to be covered even if the employee's desire was not expressly stated. Further, coverage should apply if the employee intended to cause either harm to the employer or obtain financial gain for themselves, but not both. An example of such a situation would be causing harm to the financial institution’s clients, but not the institution, with intent to personally gain.
Financial institutions should not settle for standardized language on their bond. By negotiating some key provisions, carriers are less able to evoke restrictive language to deny claims.