Most of my e-mails have been concerned with what needs to be included in a particular insurance policy. This newsletter will be concerned with items you DON’T want in your Financial Institution Bond. In particular, it will discuss the Loss Sustained Endorsement, the Aggregate Limit, an endorsement deleting or adding an employee, and a less than 30 day cancellation notice.
The Loss Sustained Endorsement (or form) severely limits the coverage of the Bond. This endorsement says that any Bond loss must occur (be sustained) and be reported within the policy period. Most Bonds cover losses “discovered” within the Bond period. If an embezzlement starts a couple of months before the Bond inception date, there is no coverage under the Loss Sustained form. If the loss occurs within the Bond period but not discovered until after the policy period ends, there is no coverage. This type of form should only be used when no other Bond is available.
Also, avoid an annual aggregate limit on the Bond. This endorsement is becoming more common, especially with larger financial institutions. An aggregate limit endorsement is merely a method of capping the amount of losses the insurance company will pay. Once this limit is exhausted, the policy is no longer in effect. An endorsement is sometimes available to reinstate the limit but it can be expensive. Most Bond limits are on an occurrence bases, which means each loss is covered to the limit of the Bond as long as the Bond is still in effect. Obviously, the occurrence form is preferable.
The cancellation notice clause may be part of the Bond or added as a specific endorsement. Most states require insurance companies to notify insureds of cancellation, non-renewal, or significant increase in premiums, usually at least within 60 days. However, what is not commonly known, is that the Fidelity Bond (the Financial Institution Bond is a Fidelity Bond) is usually exempt for these laws. Thus, a 10 day notice of cancellation on your bond is possible and can be a real problem.
The last area of discussion will be the endorsement deleting or adding a specific employee. Such an endorsement usually results after the discovery that the specific employee committed a felony or dishonest act in their past. Bond coverage for such an employee seizes the moment management becomes aware of said felony or dishonesty. In order to keep the employee, an endorsement must be added to delete this employee or adding him/her if the bank wishes to continue employment. Furthermore, the bank will need this endorsement on every Bond thereafter for this employee to be covered.
Obviously, all of these “endorsements” need to be avoided. Yes, there are circumstances where you are forced to “endure” these endorsements for a time. However, at the first opportunity, these endorsements should be removed.