Financial Institution Bonds
The most important insurance policy a bank has, and the only one that is required by the regulators, is the Financial Institution Bond. However, even as important as it is a great deal of confusion exists as to just what it covers and what it doesn’t cover. While this newsletter will hit only some of the high points of coverage, hopefully, it will clear up some of the confusion.
First and foremost the Financial Institution Bond (FIB for short) is primarily a CRIME policy. It is not designed to cover lawsuits against the bank. The liability area is the purview of the Directors and Officers Liability policy (a subject for another newsletter). There are 6 main coverage areas:
1. Employee Dishonesty coverage
2. Burglary and Robbery coverage
3. Transit coverage
4. Check forgery Coverage
5. Securities Forgery Coverage
6. Computer Theft Coverage
Employee Dishonesty Coverage
This coverage is the primary coverage and its limit is the guide for all limits to follow. It provides coverage for the bank for employee embezzlement and/or theft of any kind. The Employee dishonesty limits are dictated mostly by the size of the bank. The Surety Association of America put out guidelines for the minimum limit a community bank should carry in order to purchase a $1,000,000 Excess Employee Fidelity Bond (also required by the Regulators). Usually, this extra amount is included in the underlying bond limit.
Burglary and Robbery Coverage
Obviously, this the traditional coverage for outside Burglary and/or Robbery of a bank. The limits for this coverage usually are the same as Clause A. However, there may be times when this limit needs to be higher. Should a bank have an amount of cash in its vault overnight that exceeds its bond limit, it needs to increase its bond limit accordingly. The regulators take a very dim view of this sort of thing occurring.
In Transit Coverage
This coverage is for the loss of bank monies or securities while in transit to or from one of its offices by a messenger. This messenger could be a bank employee or an outside contractor. This includes the loss of a Cash Letter from or to the bank. Overt Theft does not have to be involved for coverage to exist. Should a messenger have an automobile accident and Cash and/or negotiable securities be “lost”, coverage should still apply.
This area is designed to cover the loss from forged or altered checks, “or in any Negotiable Instrument…” While there is no requirement that the bank check signatures against signature cards for authenticity, the application will require that you at least have a “policy” to do so. With the advent of sophisticated copy machines and scanners, this area of coverage has become a great deal more important. The limit in this area usually tracks with the largest checks being cashed by the bank. Too often banks will have the same limit here as they have in the employee dishonesty area and therefore carrying limits that are much greater than their actual exposure.
This area protects the bank from loss for accepting Forged Securities either as a purchase or as collateral for a loan. The policy usually will have a short laundry list of the types of securities that it will cover, and will also list the circumstances under which coverage will be provided. The same limit amount criteria that applies to checks also applies to Securities. An amount equal to the largest security the bank purchases or has as collateral is usually a sufficient limit amount in this area.
Computer Theft Coverage
Computer Theft Coverage has become almost as essential as coverage for a bank as the Employee Dishonesty coverage. It may have its own Insuring Clause or be provided by a separate endorsement. The coverage is designed to protect THE BANK from those that would rob the bank through its computer system.
While banks with internet banking services are the primary candidates for this coverage, any bank that uses a computer for its accounting is subject to loss in this area.
Employee theft using a computer is often excluded in the Employee Dishonesty area, and therefore coverage for this theft may only be found in this area. Also, damage done by Hackers or disgruntled employees planting computer viruses can only be found in this area.
This is coverage for the BANK only. Losses resulting from customers whose computers have been hacked, and then used to access their bank accounts to steal funds, are not covered in this area.
As you can see, I have just gone over the “highlights” of the Financial Institution Bond. There are many other CRIME areas that are covered by this policy (and even one or two minor Liability areas). When a bank has a loss from a crime, this should be the first policy it looks to for coverage.