Resource Library

Bond Coverage Frequently Asked Questions

Date: December 2018

Minnesota Statutes require many elected and appointed officials to meet certain fidelity bonding requirements in order to hold office. The amount of the bond can vary by official. Bonds are typically issued to the incumbent in the position and paid for by the county.

MCIT has provided employee dishonesty and faithful performance of duty bond coverage to all member employees since 2002. This coverage applies to elected and appointed officials and extends to all other employees.

MCIT county members have a blanket coverage limit of $50,000; associated members have at least a $5,000 limit, but this varies 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.

Bonds FAQ

Questions regarding bonding and MCIT coverage typically increase after an election. Following are the most frequently asked questions about employee dishonesty and faithful performance of duty coverage, as well as bonds in general.

What is a bond?

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 (the obligee) to whom the performance or debt is owed.

What is the difference between insurance and a bond?

Both are contracts meant to protect a party from loss. Insurance is a two-party contract in which an insured pays a premium to an insurance company to manage risk. The contract (coverage document or insurance policy) defines covered losses and responses to each, which could provide for payment, repair, defense or a number of other possibilities. With an insurance policy, losses are expected, premiums reflect the risk of a loss occurring, and premiums would be expected to increase following a loss.

With a bond, no loss is expected. A fee is paid to provide the bond which represents a guarantee that a contract or specified duties will be completed. In cases where a bond must be paid out, reimbursement is often sought by the surety against the principal.

Who is the bond intended to pay when there is a loss?

The bond is intended to pay the party who suffers the loss. In some cases, such as in the pilfering of petty cash, the member would receive the payment. In other cases, it could be the state, a department of the state, federal government or whoever is listed as the obligee.

What kinds of bonds are there?

There are many kinds of bonds. Some of them include fidelity, fiduciary, surety, dishonesty, contract, bid, payment, faithful performance of duty and ancillary.

What kind of bond does MCIT provide?

MCIT’s bond coverage is called employee dishonesty and faithful performance of duty coverage. It is considered a fidelity bond that covers dishonesty and performance of member employees and elected officials. Members should see the MCIT Coverage Document for exact language, terms, conditions, definitions and exclusions.

What is the difference between employee dishonesty and faithful performance of duty?

Employee dishonesty covers dishonest acts committed by an identified or unidentified employee acting alone or in collusion with other persons with the intent to cause the member to sustain loss and obtain financial benefit. This would apply to money, securities and property other than money and securities. 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 perform a duty faithfully as prescribed by law.

What is not covered?

Bond claims relating to volunteers are excluded. Examples of other actions not covered include accounting errors, minor human error and mysterious disappearance. Proof that a covered loss occurred must exist. In many cases, proof of an amount of loss must be provided.

Who is covered by the MCIT bond?

The MCIT bond coverage applies to all employees of the member including elected and appointed officials. Bond coverage does not apply to volunteers. For county members, coverage starts at $50,000. For other members, coverage starts at $5,000 or higher depending on the organization and determined by statutory or other requirements. Coverage can be increased either for specific positions or for all employees. (Excess coverage is available through Old Republic.)

What specific positions need bond coverage?

Minnesota law requires many elected and appointed officials and some employees to meet certain fidelity bonding requirements. MCIT’s employee dishonesty and faithful performance of duty coverage is designed to meet these statutory bonding requirements for all members whose county population is less than 150,000 (requirements for some officials in larger counties may exceed $50,000).

Some of the positions that have a bonding requirement include the following:

  • county highway engineers
  • county auditor, deputy county auditor
  • director of purchasing
  • county treasurer and all employees in the office including the deputy county treasurer
  • county recorder, any person authorized to make abstracts of title in the county building (separate from the recorder)
  • county sheriff
  • county surveyor
  • director of local social services agencies
  • watershed district managers
  • any employee as determined by the board
  • individuals appointed to fill a vacant office (county auditor, treasurer, recorder, attorney, surveyor or coroner) if required by law

This is not an exhaustive list. Members should ask legal counsel for specific requirements.

How much coverage is needed?

Minnesota law establishes the required amount of bond coverage for certain elected and appointed officials. In other situations, the member’s need is determined by the amount of exposure to loss that exists.

One key question that is often used to determine if excess coverage is appropriate is how much money could be taken by a person in a specific position before the loss is noticed? Other considerations include steps that are taken by the member to mitigate risk and that may reduce the potential for loss. Each situation is different and requires separate consideration.

What is the difference between a blanket limit and a per-position limit?

All county members are provided with $50,000 blanket coverage for all officials and employees. Noncounty members are provided with at least $5,000 blanket coverage for all officials and employees.

If a member determines that more coverage is required, the increase can be handled on a per-position basis, meaning only for specific positions, or on a blanket basis, meaning for all employees and officials of the member. Per-position increases are typically purchased for auditors, treasurers, financial directors and employees who have access to high amounts of funds or frequent access to cash.

How do members report a claim?

All bond claims must be submitted electronically through the online portal. MCIT no longer accepts claims reported on old claim forms, by phone or through e-mail. Upon discovery of a loss or a situation that may give rise to a loss related to bond coverage, members should submit the claim to MCIT via the online portal. It is the duty of a member to notify MCIT as soon as he or she reasonably suspects a bond-related loss.

What if a member does not need bond coverage?

It is required that all members of MCIT purchase coverage for which they have an exposure through MCIT if the Trust offers that coverage. This is determined in part through the underwriting process when an entity joins MCIT. This is a required coverage for all members because each member has some level of

What should a member know about construction bonds or surety bonds?

It is common to use surety bonds in construction projects, including building and highway projects, and in many cases, the use of bonds is required by statute. MCIT does not provide these types of surety bonds.

Members should consult with the county attorney or other legal counsel for help in determining requirements.

A bid bond guarantees that a contractor will enter into the contract after winning the bid.

A contract bond or performance bond guarantees the performance or completion of the construction project. Should the first contractor fail to complete the project, the guarantor would either find another qualified contractor to meet the terms of the contract or pay the obligee.

A payment bond guarantees the payment of subcontractors and suppliers working under terms of the contract.

An ancillary bond guarantees the meeting of other requirements of the contract not directly related to performance.

The coverage provided by the surety bond is usually prescribed by the obligee or by statute and not by the contractor or surety.

Contractors have many ways to obtain bonds, e.g., banks, insurance companies and the Small Business Administration.

Where can a member find more information about bonds?

The MCIT Resource A Primer on Bonds is an excellent next step to learning about bonds. Members may also contact their MCIT risk management consultant for more information and to discuss questions that arise under this unique area of coverage.

Risk Management Considerations

  • Members should understand the type of bond with which they are working 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).
  • The member should report all suspected claims to MCIT or the appropriate carrier as soon as a loss is suspected or when the member receives notice of an actual or potential claim. Members should not wait until the loss has been confirmed.

Specific to MCIT’s employee dishonesty and faithful performance of duty coverage, members should:

  • 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 a checks and balances system.
  • limit access to vaults, cash drawers and even petty cash to those with proper authority.
  • review blanket and per-position bond limits to evaluate the appropriateness of those limits and work with the member’s MCIT risk management consultant to implement any changes.

Minnesota Bonding Statute

Minnesota Statutes, Section 382.10 requires that official bonds of county officers be filed and recorded in the office of the county recorder. County officials are generally considered the county auditor, treasurer and deputy treasurer, recorder, sheriff, attorney, coroner, and social service directors. County commissioners are not subject to bonding requirements.

The county recorder, per Minnesota Statutes, Section 386.01, should file his or her bond with the court administrator of the district court. Officers are responsible for filing the bond with the appropriate party.

Originally published January 2015 MCIT Bulletin

The information contained in this document is intended for general information purposes only and does not constitute legal or coverage advice on any specific matter.