Crime Insurance or Bonds? That is the Question!
Author: Tom E. Corbett, Senior Vice President, Alliant and Jim Thyden, Insurance Programs Manager, California JPIA
While fidelity insurance and bonds are often considered to be an ancillary coverage by public entities, they really should be viewed as an essential element in any risk management program. Theft of money, securities, or other property by employees, elected/appointed officials, or others is a significant exposure that should not be taken lightly. Although these types of losses do not occur frequently, when they are discovered, they can be devastating to an entity that is not properly covered. Unfortunately, the largest losses typically occur over a period of several years before they are discovered.
Here are a few real-life claim examples:
- The comptroller of a town with less than 16,000 residents managed to defraud taxpayers out of more than $53 million over a period of 22 years in a complex scheme in which she opened a bank account that she alone controlled, abused her city position to transfer taxpayer money into the account, and then spent it on personal and business items. To date, only $7.4 million has been recovered through live online auctions of about 400 quarter horses, vehicles, trailers, tack equipment, and a luxury motor home.
- A city employee accused of stealing more than $1.3 million worth of city printer ink and toner. It was alleged that from 2006 to 2012 the employee purchased the ink and toner with city funds and resold the items.
- A former city Public Utilities project engineer was charged with 70 counts of theft for allegedly stealing $1.1 million from the city by diverting customer checks for water-main-extension projects into a private bank account. Investigators say he used some of the money to buy a rental house and a car and to pay down credit-card debt. Police seized $220,000 from his bank account but say about $500,000 is unaccounted for.
- A Fire Department employee stole over $1 million over four to five years in a scheme to siphon cash to pay for vacations and home furnishings by approving invoices that appeared to be for legitimate purposes.
For elected and appointed public officials who are required to maintain a surety bond, California law allows the bonding requirement to be satisfied by either a public official bond or a government crime insurance policy. Both provide similar protection for a public entity and provide a means by which the public entity can recover monetary losses sustained by the public entity that result from an elected or appointed official’s dishonesty or failure to faithfully perform duties as prescribed by law.
However, public official bonds and government crime insurance policies are not the same. The key difference is a public official bond is a surety bond that is purchased by the public official and guarantees that individual will fulfill their duties according to law. If the official does not, the surety bond will assure recovery of fines, fees, or expenses that are levied, but ultimately the official must make good on any loss resulting from the official’s dishonest acts or misconduct while in office (i.e., the bonded individual must repay the surety company for the loss paid under the bond). Public official bonds typically cost more than crime policies, and the amount the individual may be bonded for is dependent upon the individual’s personal assets.
On the other hand, a government crime policy is an insurance policy that reimburses an employer (the public entity) for loss of money, securities, or other property resulting from the dishonest acts of an “employee,” or the failure of a covered “employee” to perform their duties as prescribed by law. It is much different from a public official bond in that, because it is an insurance policy, it contains its own terms, conditions and exclusions. Crime insurance policies typically cost less than public official bonds, and higher limits can be purchased than may be available from a public official bond. Also, under a crime insurance policy a deductible will typically apply. As with public official bonds, the insurance company has the right to subrogate against the individual responsible for the loss, unless the insurer has agreed to waive subrogation, except in cases involving fraud or dishonesty by the individual(s) through endorsement. Furthermore, a crime insurance policy can be written to provide blanket coverage for all employees and officials of the public entity, while a public official bond is underwritten and issued for specific individuals.
While public official bonds are fairly standard in their wording, crime insurance policies can vary widely in the coverage they provide. When considering the purchase of crime insurance, there are several coverage enhancements that should be considered:
- Generally, crime insurance should be written on a “discovery” form policy, since coverage under this form applies to losses discovered during the period the policy is in effect, regardless of whether the loss actually occurred during that period.
- For governmental entities, faithful performance of duty coverage should be included up to the full employee theft limit, and policy exclusions for treasurers/tax collectors and bonded employees should be deleted.
- Policies should include or be endorsed to provide blanket coverage for all employees, officials, board members, committee members, volunteers, and leased workers.
- Blanket coverage for any employee benefit plans of the insured should be included.
- Standard language contained in most crime insurance policy forms automatically excludes coverage for any employee upon discovery by the insured of a theft or any other dishonest act committed by the employee whether before or after employment by the covered entity. So, once the insured knows an employee has a history, there is no longer coverage for any new thefts or dishonest acts by that employee.
- The policy should provide coverage for investigative expenses paid to third parties such as forensic accountants. Determining the total amount of a large loss can be very difficult because embezzlers are usually very good at covering their tracks. Having coverage in place for such expenses can result in a significant cost savings.
- Coverage for theft losses committed by vendors is available from a handful of markets and should be added by endorsement if possible.
- The policy should include or be endorsed to provide coverage for loss of third-party property resulting from acts committed by the insured’s employees.
- In addition to coverage for Employee Theft/Faithful Performance, crime policies can provide coverage for losses caused by third parties, including Forgery or Alteration, Theft of Money and Securities, Robbery & Safe Burglary, Computer Fraud, Funds Transfer Fraud, Money Orders/Counterfeit Money, and Credit, Debit and Charge Card Forgery.
- Amend the policy so the insurer agrees to waive subrogation against an employee except in cases involving fraud or dishonesty by the individual(s). This is a significant benefit over public official bonds, which require any claim paid by the surety to be reimbursed by the party responsible for the loss.
Since crime insurance and surety bonds are relatively inexpensive compared with other coverage lines, the protection they afford to the entity against severe losses usually justifies the cost of the coverage.