Date: November 2018
Fidelity, dishonesty, performance, surety, contract, fiduciary are all terms that are frequently mentioned when discussing bonds. This article discusses what these bonding terms mean and how MCIT coverage responds.
To understand the various types of bonds and how they apply, definitions are necessary. A bond is a three-party contract in which one party (the surety) guarantees the performance or honesty of a second party (the principal or obligor), to the third party (obligee) to whom the performance or debt is owed.
A fidelity bond protects against financial loss to money, securities or other property through employee theft or failure to perform their duties faithfully.
MCIT provides a fidelity bond that is designed to protect the member and the public from loss caused by an employee’s dishonesty or lack of faithful performance of duties. The coverage is not designed to protect the employee. In the event of loss, MCIT and Old Republic (MCIT’s excess bond carrier) are entitled to pursue recovery against the employee who caused the loss equal to the claim amount or policy limit, whichever is less.
There are two important factors when considering the amount of employee dishonesty and faithful performance of duty coverage. First, members should meet the limits specified by Minnesota Statute for a particular position. Second, members should consider how much in funds or property an employee or official could take before being detected. Knowing the answers to these questions will help determine the amount of fidelity bond necessary for the exposure.
Employee dishonesty and faithful performance should not be confused with theft, disappearance and destruction of money and securities coverage that is included in the property section of the MCIT Coverage Document. The latter coverage responds to claims caused by the theft of money and/or securities by someone outside the organization.
Employee Dishonesty and Faithful Performance of Duty Coverage
The bond is a fidelity type, while dishonesty and performance are the coverages provided under the bond.
- Employee dishonesty: covers dishonest acts committed by an identified or unidentified employee acting alone or in collusion with other persons with the manifest intent to cause the member to sustain loss and also obtain financial benefit. Examples of losses include but are not limited to fraud, misappropriation of funds, computer theft and embezzlement.
- Faithful performance of duty: covers financial loss the member incurs because an employee failed to faithfully perform a duty as prescribed by law. This should not be confused with a liability loss that could be directed to an employee by a third party for a negligent act.
MCIT has provided the membership with employee dishonesty and faithful performance of duty coverage since Jan.1, 2002. Minnesota Statute requires many elected and appointed officials to meet certain fidelity bonding requirements. The amount of bond coverage varies by official, and MCIT’s employee dishonesty and faithful performance of duty coverage is designed to meet these statutory requirements.
County members have a “blanket” limit of $50,000, covering all employees and public officials. Affiliated members have various limits according to their needs. Members can purchase higher, or excess, limits of fidelity coverage through MCIT on a blanket basis, or they can purchase excess limits for specific positions.
What Is the Difference Between Fidelity Blanket Coverage and Per Position Coverage?
- Blanket coverage: Coverage for employee theft of money, securities or property, written with a limit that applies to the acts of all the member’s employees.
- Per position coverage: Coverage for employee theft of money, securities or property, written with a limit that applies to a specific position named in the policy, regardless of the number of individuals holding that position.
- Excess per position coverage is typically purchased for auditors, treasurers or financial directors who have access to high amounts of funds.
Surety and surety bond are defined:
- Surety: A party that guarantees the performance of another. The contract through which the guarantee is executed is called a surety bond.
- Surety bond: A contract under which one party (the surety) guarantees the performance of certain obligations of a second party (the principal) to a third party (the obligee). For example, most construction contractors must provide the party for which they are performing operations with a bond guaranteeing that they will complete the project by the date specified in the construction contract in accordance with all plans and specifications
Surety bonds are necessary for most construction projects including building and highway projects. MCIT does not offer this type of bond, so members need to obtain this coverage from another provider. The more common types of surety bonds include:
- Bid bond: A guarantee that a contractor will enter into the contract under consideration if it is awarded to the contractor. The bid bond also guarantees that the contractor will supply the additional bonds required throughout the course of the project.
- Contract bond: Guarantees the performance of obligations assumed under contract. This type of bond is utilized most often in the construction industry but does have application in other industries.
The coverage provided by the bid bond or the contract bond is usually prescribed by the obligee or by statute and not by the contractor or surety. Where the bond is given in conformance with the terms of a statute, the bond carries the limit that the statute imposes. The performance of a surety bond stipulates that the principal will faithfully perform the terms and conditions of a written contract. There may be other terms used for a surety bond such as performance bond, construction contract bond or permit bond; however, most construction projects will request a bid bond and a contract bond.
When MCIT members have fiduciary responsibilities, they can purchase a fiduciary bond. These bonds should be considered if an MCIT member has a fiduciary exposure. In some situations, a member may be required to secure a fiduciary bond. MCIT does not offer this type of bond, so members need to obtain this coverage from another provider.
- Fiduciary: A person entrusted with the responsibility for the property or assets of another.
- Fiduciary bond: Guarantees that the individuals or legal entities appointed to oversee the property of others will execute those appointed duties in good faith and be accountable for any deficits which may occur.
Risk Management Considerations
- Understand the type of bond that a member is working with to determine if it is fidelity (theft of monies, securities and property), surety (dealing with construction projects), or fiduciary (responsible for the property or assets of others).
- Report all suspected claims to MCIT via the online claims portal or the appropriate carrier as soon as a loss is suspected or when the member receives notice of an actual or potential claim. Do not wait until the loss has been confirmed.
- Specific to fidelity—employee dishonesty and faithful performance of duty—coverage:
- Know which employees have access to funds and property or handle large amounts of money on a regular basis.
- Determine how much in funds or property an employee or official could take before being detected.
- Establish and practice procedures for the handling of funds, separation of duties, and the check and balance system.
- Limit access to vaults, cash drawers and even petty cash to those with proper authority.
- Review blanket and per-position limits to evaluate the appropriateness of those levels and work with the MCIT risk management consultant to implement any changes.
There are many types of bonds, and this resource has profiled the more common types. Frequent questions relate to securing the appropriate amount of coverage, when and how to report a suspected claim, and placement of bond coverage for those types, including surety and fiduciary, that are not offered by MCIT. MCIT recommends members contact their MCIT risk management consultant to discuss questions that arise under this unique area of coverage.