The declarations page contains the customary spaces for the insured's name and principal address, the bond period (which runs from 12:01 a.m. on the inception date to 12:01 a.m. on the expiration date), and liability limits. The bond is written on an aggregate limit basis and may only be written for one year or less. Bonds written on a continuous basis may be written on an annual or three year premium term basis. Aggregate limits either totally or partially exhausted may be rewritten or reinstated, upon the acceptance of the underwriter.

All of the bond's coverages are written under a blanket aggregate limit. Recovery under the bond is also subject to a declared “single loss limit of liability” (which must be written in the same amount as the bond's aggregate limit) and a “single loss deductible.” Insuring agreements (D)—forgery or alteration and (E)—securities are subject to their own internal limits, which are part of, not in addition to, the single loss limit.

Analysis

According to the American Bankers Association there is substantial evidence that the amount of loss under fidelity coverage exceeds the combined total loss from all other perils insured under the bond. The fidelity coverage provided by the bond is broad, limited only to the amount specified in the declarations and by the bond's exclusions.

The fidelity insuring agreement pledges the insurer to indemnify the insured for loss resulting directly from dishonest or fraudulent acts committed by an employee acting alone or in collusion with others. Two conditions outline the dishonest or fraudulent employee actions for which coverage is intended. The act must be committed with a manifest intent to (a) cause the insured to sustain loss, and (b) to obtain financial benefit for the employee or another person or entity. An additional provision related to losses involving loan activity provides that if some or all of the loss results directly or indirectly from loans, that portion of the loss is not covered unless the employee was in collusion with one or more parties to the loan transaction and received a financial benefit of at least $2500 in connection with the fraudulent transaction.

Additionally, financial benefit, for purposes of fidelity coverage, does not include any employee benefits “earned in the normal course of employment, including salaries, commissions, fees, bonuses, promotions, awards, profit sharing or pensions.”

Thus, in order to be considered dishonest, an employee's act must have been done with the specific intent to cause loss to the insured and in order that the employee or some third party financially profit. This underscores the fact that there is no fidelity coverage for losses caused by an employee through negligence. Further, the loss must be of a financial benefit other than salary, fees, commissions, etc.

Various issues have arisen in connection with the language of this clause.

One is the issue of “manifest intent” to cause loss. In National Bank of Pakistan v. Saeed A. Basham, 142 A.2d 532 (NY 1988), the insurance company attempted to deny coverage where an employee of the insured allowed a bank customer to receive immediate credit for five checks totaling $256,000 that were later dishonored due to insufficient funds. The employee attempted to cover up this transaction by transferring funds from an Iranian account that had been frozen by U.S. government officials in 1975. (The employee did this because of the unlikelihood that the frozen account would be checked or investigated). The insurer denied coverage, claiming the employee lacked the requisite “manifest intent” to cause the bank loss. The court held, that in taking money from the frozen account, the employee intended that the loss would be sustained by the bank, for despite his efforts to conceal the fact that $256,000 was missing, the employee was aware that the bank would ultimately bear responsibility for the misappropriated funds.

The provision stating that “financial benefit” as used in the fidelity insuring agreement does not include any employee benefits earned in the normal course of employment, such as salaries, commissions, fees, bonuses, promotions, awards, profit sharing, or pensions, has also engendered argument and litigation.

An argument has frequently been made that the items mentioned in the clause refer to those benefits to which the employee is entitled; however, coverage would run to losses caused by employees who fraudulently increase salaries or commissions as this increase is not “earned in the normal course of employment.” Courts generally have not accepted this argument.

Two cases exemplify the position courts have taken in this regard, Benchmark Crafters, Inc. v. Northwestern National Insurance Co. of Milwaukee, 363 N.W.2d 89 ( Minn. Ct. App. 1985) and Berger v. Fireman's American Loss Control Co., (Slip Opinion, Court of Special Appeals of Maryland, No. 508, Sept. Term, 1982).

In Benchmark, a toy manufacturer had a $25,000 fidelity policy with identical language to that of the financial institution bond's fidelity coverage. The manufacturer hired a new national sales managers, who, over a period of four months, submitted more than $340,000 worth of false orders and was paid salary and commission on these orders. The insurer denied the claim, invoking the provision that “financial benefit” does not include salaries, commissions, etc. At trial, the insured argued that the sales manager's four months of employment was the financial benefit to the dishonest employee. The appeals court disagreed, finding that “the plain language of the insurance contract requires that there must be proof of a manifest intent first to harm the employer and second to obtain financial benefit for the employee other than the benefits earned in the course of employment. It is controverted that [the sales manager] did not gain anything except his regular salary and expenses from the fraudulent acts.”

In Berger, the insured was in the automobile leasing business and an employee/salesman fraudulently reported leases for 150 automobiles. The salesman was paid a draw against commissions. The insured made claim under a fidelity policy with the exact wording of the financial institution bond's fidelity insuring agreement. The insurance company denied the claim, based upon the exclusion of employee benefits earned in the normal course of business, and the insured sued.

Considering the exact argument made above (that fraudulently increased salaries and commissions are not earned in the normal course of business), the court ruled, “[the insured] would have us read the language of subsection (b) as follows: 'to obtain financial benefit for the Employee,… other than salaries, [or] commissions … earned in the normal course of employment.' [The insured] asseverates that the phrase 'earned in the normal course of employment' indicates an intent to limit the scope of the exclusion. Since the financial benefits which [the salesman] obtained were not earned at all, they obviously could not be earned in the normal course of employment. Therefore, they are excluded from [the coverage exclusion].”

The court did not agree, writing that “…the phrase 'other employee benefits' precedes the phrase 'earned in the normal course of employment.' As there is no comma between these two phrases, it is clear that they are to be read together as one phrase. Such a reading makes substantive sense in that, prior to this phrase, the exclusionary clause names specific examples of the general category of employee benefits earned in the normal course of employment. A proper reading of the pertinent language is: “to obtain financial benefit for the Employee,…other than salaries, [or] commissions…” The court ruled that the policy “clearly and unambiguously excludes from coverage the acts of an employee who fraudulently or dishonestly obtains salary or commissions.”

There has been some criticism of the results of Berger and Benchmark. The CPCU textbook on commercial coverages, in the crime coverage section, uses the scenario of a bookkeeper paying him or herself in excess of actual salary as an example of a loss to be covered under fidelity coverage. Internal policy of the insurer will determine whether specific losses will be paid or denied in this regard.

Analysis

Insuring agreement B of the financial institution bond provides on premises protection for insured property. The bond covers direct loss on a specified perils, but virtually all encompassing, basis. The enumerated covered causes of loss are robbery, burglary, misplacement, mysterious unexplainable disappearance, damage, and destruction. The bond also covers theft, false pretenses, or common-law or statutory larceny committed by a person in an office or on the premises of the insured. Property may be within offices or premises located anywhere.

Additionally, under a separate extension of the on premises insuring agreement, there is coverage of the insured's offices and equipment. As to the latter, the insuring agreement covers loss of or damage to furnishings, fixtures, stationery, supplies, or equipment within the insured's offices caused by larceny, theft, burglary, robbery, or attempt thereat, or by vandalism or malicious mischief. With regard to the insured's offices, there is coverage for loss through damage to any office by the same perils, or to the interior of the office by vandalism or malicious mischief. This extension applies only if the insured owns or is legally liable for the office or equipment. Damage by fire is excluded.

Note that the coverage of loss caused by vandalism or malicious mischief is restricted to the interior of the offices.

Analysis

Insuring agreement C provides in transit coverage. This applies to losses caused by specified perils that occur during transit (anywhere) by a messenger or a transportation company. The perils insured against are: robbery; common-law or statutory larceny; theft; misplacement; mysterious unexplainable disappearance; being lost or made away with; and destruction.

For coverage to attach, property must be in the custody of a natural person acting as a messenger for the insured (or another person acting as messenger or custodian during an emergency arising from the incapacity of the original messenger) or a transportation company being transported in an armored vehicle. Coverage for property being transported by a transportation company, but not in an armored vehicle, is limited to records, certificated securities, and negotiable instruments not endorsed or payable to the bearer.

Analysis

Insuring agreement D—forgery or alteration—is optional. Coverage is provided for loss resulting directly through forgery or alteration of, on, or in any instrument specified in the bond. The minimum permissible amount of coverage is $25,000; there is no specified maximum amount.

The instruments specified in the bond are “any negotiable instrument (other than an evidence of debt), acceptance, withdrawal order, receipt for the withdraw of property, certificate of deposit, or letter of credit.” This would include any check made or drawn in the name of the insured payable to a fictitious payee, and any check procured in a face to face transaction with the insured or with one acting as a representative of the insured (i.e., a teller) by anyone impersonating another and made payable to the one so impersonated. Mechanically reproduced facsimile signatures are treated the same as handwritten signatures.

There is also coverage for the insured transferring, paying, or delivering any funds or property on the faith of any written instructions directed to the insured authorizing or acknowledging the transferring, paying, or delivering of property in the event such instructions proved to be forged or altered.

Analysis

Coverage E is optional. Insuring agreement E covers loss through the insured having (in good faith and for its own or another's account) acquired, sold, delivered, given value, extended credit, or assumed liability on any securities, documents, deeds, or other written instruments that prove to have been forged or otherwise altered, lost, or stolen.

Insuring agreement E also provides coverage for securities in two other situations: (1) when the insured has guaranteed in writing or witnessed any signature upon any transfer, assignment, bill or sale, power of attorney, guarantee, or endorsement of any covered security; and (2) when the insured has acquired, sold, given value, extended credit, or assumed liability on the faith of a document that proves to be counterfeit.

The word “security” is not defined in the definitions section, but instead is stated in the insuring agreement to be the following: certificated security; document of title; deed, mortgage, or other instrument conveying title; certificate of origin or title; evidence of debt; corporate, partnership, or personal guarantee; security agreement; instruction to a federal reserve bank; or statement of uncertificated security of any federal reserve bank.

“Counterfeited” is defined as meaning “an imitation which is intended to deceive and to be taken for an original.”

(F) Loss resulting directly from the receipt by the insured, in good faith, of any Counterfeit Money of the United States of America, Canada or of any other country in which the Insured maintains a branch office.

General Agreements

Nominees, Additional Offices, Change of Control

Analysis

Loss sustained by any “nominee” organized by the insured to handle certain business transactions (and composed entirely of its employees) is considered to be loss sustained by the insured. A financial institution may organize a nominee to handle particular functions or to limit the bank's liability with respect to certain aspects of business. Although the nominee theoretically may be a separate institution, the insurer has not accepted added risk by insuring a nominee composed of insured bank employees. The insurer simply insures the acts of the same employees it would insure if the nominee were not organized.

Analysis

This provision provides automatic coverage if the insured opens new premises or offices or increases the number of employees other than through consolidation, merger, or purchase of the assets or liabilities of another institution. No notice is required and neither is there any additional premium required for the remainder of the policy period.

However, in the event of a merger, consolidation, or purchase of assets or liabilities of another institution, prior written notice to the insurer is required, as is the written agreement of the underwriter to accept the additional risk and payment of additional premium. Without such notice and agreement, no coverage is afforded under the bond for loss that occurs in offices or premises acquired as a result of consolidation, merger, or purchase of assets, or that is caused by employees of such concerns.

Analysis

This clause requires the insured institution to notify the underwriter after a change in control. Note that a change in ownership of 10 percent or more of the outstanding voting stock is presumed to cause a change in control of the institution. In the event a report is not made, there will be no coverage for any loss (not merely a fidelity loss) in which a transferee is in any way involved.

The reason for this requirement is fairly obvious. Most bank bond underwriters make an exhaustive examination of a bank before issuing a financial institution bond. A later merger with a questionable institution or a change of ownership and control, unknown to the insurer, may render such an examination worthless.

Analysis

This provision incorporates the application, and the answers on it, into the policy and permits the insurer's rescission of the bond in the event of any misrepresentation or concealment.

Notice of Legal Proceedings against Insured—Election to Defend

Analysis

The insured is required to notify the insurer of any claim that would fall under the bond's coverage “at the earliest practical moment,” not to exceed 30 days. The insurer has the option to conduct the defense of the insured. In the event the insurer elects to conduct the insured's defense, any judgment or settlement, and legal expenses, are considered a loss covered under the bond. In the event the insured does not notify the insurer of an impending action within thirty days of the time a claim is made, or if the insurer elects not to conduct the insured's defense, the insurer is not liable for legal fees of the insured.

The Conditions and Limitations section of the financial institution bond is comprised of the following clauses: definitions; exclusions; discovery; limit of liability; notice/proof—legal proceedings against underwriter; valuation; assignment—subrogation—recovery—cooperation; other insurance or indemnity; ownership; deductible amount; and termination or cancellation.

Definitions

As used in this bond:

(a)     Acceptance means a draft which the drawee has, by signature written thereon, engaged to honor as presented.

(b)     Certificate of Deposit means an acknowledgment in writing by a financial institution of receipt of Money with an engagement to repay it.

(c)     Certificate of Origin or Title means a document issued by a manufacturer of personal property or a governmental agency evidencing the ownership of the personal property and by which ownership is transferred.

(d)     Certificated Security means a share, participation or other interest in property of or an enterprise of the issuer or an obligation of the issuer, which is:

(1)     represented by an instrument issued in bearer or registered form;

(2)     of a type commonly dealt in on securities exchanges or markets or commonly recognized in any area in which it is issued or dealt in as a medium for investment; and

(3)     either one of a class or series or by its terms divisible into a class or series of shares, participations, interests or obligations.

(e)     Counterfeit means an imitation which is intended to deceive and to be taken as the original.

(f)     Document of Title means a bill of lading, dock warrant, receipt, warehouse receipt or order for the delivery of goods, and also any other document which in the regular course of business or financing is treated as adequately evidencing that the person in possession of it is entitled to receive, hold and dispose of the document and the goods it covers and must purport to be issued by or addressed to a bailee and purport to cover goods in the bailee's possession which are either identified or are fungible portions of an identified mass.

(g)     Employee means

(1)     an officer or other employee of the Insured, while employed in, at, or by any of the Insured's offices or premises covered hereunder, and a guest student pursuing studies or duties in any of said offices or premises;

(2)     an attorney retained by the Insured and an employee of such attorney while either is performing legal services for the insured;

(3)     a person provided by an employment contractor to perform employee duties for the insured under the Insured's supervision at any of the Insured's offices or premises covered hereunder;

(4)     an employee of an institution merged or consolidated with the Insured prior to the effective date of this bond; and

(5)     each natural person, partnership or corporation authorized by the Insured to perform services as data processor of checks or other accounting records of the Insured (not including preparation or modification of computer software or programs), herein called Processor. (Each such Processor, and the partners, officers and employees of such Processor shall, collectively, be deemed to be one Employee for all the purposes of this bond, excepting, however, the second paragraph of Section 12. A Federal Reserve Bank or clearing house shall not be construed to be a processor.)

(h)     Evidence of Debt means an instrument, including a negotiable Instrument, executed by a customer of the Insured and held by the Insured which in the regular course of business is treated as evidencing the customer's debt to the Insured.

(i)     Forgery means the signing of the name of another person or organization with intent to deceive; it does not mean a signature which consists in whole or in part of one's own name signed with or without authority, in any capacity, for any purpose.

(j)     Guarantee means a written undertaking obligating the signer to pay the debt of another to the Insured or its assignee or to a financial institution form which the Insured has purchased participation in the debt, if the debt is not paid in accordance with its terms.

(k)     Instruction means a written order to the issuer of an Uncertificated Security requesting that the transfer, pledge, or release from pledge of the Uncertificated Security specified be registered.

(l)     Letter of Credit means an engagement in writing by a bank or other person made at the request of a customer that the bank or other person will honor drafts or other demands for payment upon compliance with the conditions specified in the Letter of Credit.

(m)     Loan means all extensions of credit by the Insured and all transactions creating a creditor relationship in favor of the Insured and all transactions by which the Insured assumes an existing creditor relationship.

(n)     Money means a medium of exchange in current use authorized or adopted by a domestic or foreign government as a part of its currency.

(o)     Negotiable Instrument means any writing

(1)     signed by the maker or drawer; and

(2)     containing any unconditional promise or order to pay a sum certain in Money and no other promise, order, obligation or power given by the maker or drawer; and

(3)     is payable on demand or at a definite time; and

(4)     is payable or order or bearer.

(p)     Property means Money, Certificated Securities, Uncertificated Securities of any Federal Reserve Bank of the United States, Negotiable Instruments, Certificates of Deposit, Documents of Title, Acceptances, Evidences of Debt, Security Agreements, Withdrawal Orders, Certificates of Origin or Title, Letters of Credit, insurance policies, abstracts of title, deeds and mortgages on real estate, revenue and other stamps, tokens unsold state lottery tickets, books of account and other records whether recorded in writing or electronically, jems, jewelry, precious metals in bars or ingots, and tangible items of personal property which are not herein before enumerated.

(q) Security Agreement means an agreement which creates an interest in personal property or fixtures and which secures payment or performance of an obligation.

(r)     Statement of Uncertificated Security means a written statement of the issuer of an Uncertificated Security containing:

(1)     A description of the issue of which the Uncertificated Security is a part;

(2)     the number of shares or units:

(a)     transferred to the registered owner;

(b)     pledged by the registered owner to the registered pledgee;

(c)     released from pledge by the registered pledgee;

(d)     registered in the name of the registered owner on the date of the statement; or

(e)     subject to pledge on the date of the statement;

(3)     the name and address of the registered owner and registered pledgee;

(4)     a notation of any liens and restrictions of the issuer and any adverse claims to which the Uncertificated Security is or may be subject or a statement that there are none of those liens, restrictions or adverse claims; and

(5)     the date:

(a)     the transfer of the shares or units to the new registered owner of the shares or units was registered;

(b)     the pledge of the registered pledgee was registered, or

(c)     of the statement, if it is a periodic or annual statement.

(s)     Transportation Company means any organization which provides its own or leased vehicles for transportation or which provides freight forwarding or air express services.

(t)     Uncertificated Security means a share participation or other interest in property of or an enterprise of the issuer or an obligation of the issuer, which is:

(1)     not represented by an instrument and the transfer of which is registered upon books maintained for that purpose by or on behalf of the issuer;

(2)     of a type commonly dealt in on securities exchanges or markets; and

(3)     either one of a class or series or by its terms divisible into a class or series of shares, participations, interests or obligations.

(u)     Withdrawal Order means a non-negotiable instrument, other than an Instruction, signed by a customer of the Insured authorizing the Insured to debit the customer's account in the amount of funds stated therein.

Exclusions

Though the scope of coverage under the financial institution bond is very broad, it has, in the basic form, 26 exclusions (however, some of these can be deleted for an additional premium).

Forgery, Civil Commotion, Nuclear

Analysis

There is no coverage for loss caused by forgery or alteration of any instrument unless covered under the fidelity, forgery or alteration, securities, or counterfeit currency insuring agreements.

There is an exclusion of riot or civil commotion loss outside the United States or Canada . Also excluded is loss caused by military, naval, or usurped power. An exception to this exclusion, however, is if the loss occurs while the property is in transit and would normally be covered under the in transit feature. The exclusion does not apply if the person acting for the insured in initiating transit had no knowledge of riot, civil commotion, war, or insurrection.

Paralleling this exclusion is another relating to nuclear fission, fusion, or radioactivity, whether in time of peace or war. However, this exclusion does not apply to loss resulting from industrial uses of nuclear energy.

Analysis

Loss caused by wrongful act or default of a director is excluded unless the individual is also a salaried, pensioned, or elected official or a bona fide employee of the insured. There is an exception to this exclusion that provides coverage for these individuals when performing acts that are within the scope of the usual duties of an employee or while acting as a member of a committee elected or appointed by the board of directors to perform some specific directorial act. The latter applies only to specific directorial acts—not general functions of a director.

Losses resulting from loan activity is not covered, whether or not the loan was obtained in good faith or through trick, artifice, fraud, or false pretenses. If such loss falls under the fidelity coverage or forgery or alteration or securities insuring agreement, there is coverage.

Analysis

There is an exclusion concerned with the business risk and bookkeeping exposure associated with traveler's checks. Unless there is fraud or dishonesty on the part of employees, loss through cashing or paying forged or altered traveler's checks or those bearing forged endorsements, however drawn, is excluded. Also not covered is loss stemming from unsold traveler's checks that are in the custody of the insured for purposes of sale when there is no fraud or dishonesty on the part of any of the insured's employees. However, if the insured is legally liable for the loss and the checks are subsequently paid and honored by the drawer, there is coverage.

An exclusion is addressed to trading activity. A number of the larger commercial banks engage in trading activity on a very large scale. This trading frequently involves transactions in the volatile foreign exchange market, which became extremely active since the dollar was allowed to float. This sort of financial activity was not within the contemplation of the bond's drafters, except when covered under insuring agreements D (forgery or alteration) and E (securities).”

Note that this exclusion runs to every type of trading, not merely foreign exchange and financial futures trading. Trading coverage may, however, be purchased by rider for those commercial banks engaging in this type of financial activity.

(j)     shortage in any teller's cash due to error, regardless of the amount of such shortage, and any shortage in any teller's cash which is not in excess of the normal shortage in the teller's cash in the office where such shortage shall occur shall be presumed to be due to error;

(k)     loss resulting directly or indirectly from the use or purported use of credit, debit, charge, access, convenience, identification or other cards

(1) in obtaining credit or funds, or

(2) in gaining access to automated mechanical devices which, on behalf of the Insured, disburse Money, accept deposits, cash checks, drafts or similar written instruments or make credit card loans, or

(3)     in gaining access to point of sale terminals, customer-bank communication terminals, or similar electronic terminals of electronic funds transfer systems

whether such cards were issued, or purports to have been issued, by the Insured, except when covered under Insuring Agreement (A)

(l)     loss involving automated mechanical devices which, on behalf of the Insured, disburse Money, accept deposits, cash checks, drafts or similar written instruments or make credit card loans, unless such automated mechanical devices are situated within an office of the Insured which is permanently staffed by an Employee whose duties are those usually assigned to a bank teller, even though public access is from outside the confines of such office, but in no event shall the Underwriter be liable for loss (including loss of Property)

(1)     as a result of damage to such automated mechanical devices from vandalism or malicious mischief perpetrated from outside such office, or

(2)     as a result of failure of such automated mechanical devices to function properly, or

(3)     through misplacement or mysterious unexplainable disappearance while such Property is located within any such automated mechanical devices,

     except when covered under Insuring Agreement (A);

Analysis

The bond also excludes shortages in tellers' cash to error. (Any shortage not in excess of the normal shortage is presumed to be due to error.) An argument might be made that when the shortage is greater than normal, a claim for coverage could be based on the misplacement coverage of the bond. This would be possible only if there is some evidence that the teller actually had the money and misplaced it; but not if it appears that he or she simply made an error in the transaction.

The bond excludes loss resulting from the use of credit, debit, charge, access, convenience, identification, or other cards in obtaining credit or in gaining access to automated mechanical devices or electronic terminals of electronic funds transfer systems. Excepted from the scope of this exclusion are such losses as would be covered under insuring agreement A, fidelity coverage, as when loss occurs through any dishonest act of an employee.

There is an exclusion of loss from automated mechanical devices that “disburse money, accept deposits, cash checks, drafts or similar written instruments, or make credit card loans.” Covered, however, are losses from automated teller devices situated within an office of the insured that is permanently staffed by an employee whose duties are those usually assigned to a teller. There may be access by the public other than through the office, but there is no coverage for losses resulting from vandalism or malicious mischief perpetrated from outside the office. Furthermore, this exception to the exclusion does not include loss as a result of failure of the device to function properly, or, through misplacement or mysterious disappearance while covered property is located in a mechanical device (except for the fidelity coverage of insuring agreement A). A separate coverage is available to protect against certain perils in connection with the use of unattended automated teller machines and point of sale terminal.

Analysis

There is no coverage for the surrender of property away from an office of the insured as a result of a threat to do bodily harm to any person (except a messenger covered under in transit coverage) or to do damage to the premises. This would preclude coverage for extortion activities where, for example, a family member of a bank official is being held hostage or a bomb threat is received.

There is no coverage for payments made to or withdrawals from depositors' accounts, unless such payments are physically received by the depositor who is within the office of the insured at the time of the payment.

Excluded is loss are payments made to or withdrawals from a depositor's account involving items of deposit that are finally not paid for any reason, including, but not limited to, forgery, except as covered under the bond's fidelity coverage.

Analysis

There is no coverage for counterfeiting, unless the option coverage is purchased.

Loss of any tangible item not described specifically in the definition of property (e.g., statuary in a bank's lobby) is not covered if the insured has other specific insurance on such chattel—whether or not the insured is legally liable. On the other hand, when such property is covered by insurance purchased by someone other than the insured, this bond is excess. However, the bond excludes—in any event—loss of any such property occurring more than sixty days after the insured becomes aware that it is liable for its safekeeping. It is important to note that these limitations do not apply when loss of the chattel is covered under the fidelity or on premises agreements.

There is no coverage for loss of property while in the mail or in the custody of a transportation company, unless covered by the bond's in transit coverage agreement.

Analysis

The damages exclusion makes clear that punitive damages are not covered under the bond. Punitive damages includes jurisdictions' statutory multiples of compensatory damages awarded as punitive damages.

(v)     indirect or consequential loss of any nature;

(w)     loss resulting from any violation by the Insured or by any Employee

(1)     of law regulating (i) the issuance, purchase or sale of securities; (ii) securities transactions upon security exchanges or over the counter market, (iii) investment companies, or (iv) investment advisers, or

(2) of any rule or regulation made pursuant to any such law, unless it is established by the insured that the act or acts which caused the said loss involved fraudulent or dishonest conduct which would have caused a loss to an insured in a similar amount in the absence of such laws, rules or regulations;

(x)     loss resulting directly or indirectly from the failure of a financial or depository institution, or its receiver or liquidator, to pay or deliver, on demand of the Insured, funds or property of the Insured held by it in any capacity, except when covered under Insuring Agreements (A) or (B)(1)(a);

Uncertificated Securities, Racketeering Activity

(y)     loss involving any Uncertificated Security except an Uncertificated Security of any Federal Reserve Bank of the United States or when covered under Insuring Agreement (a);

(z)     damages resulting from any civil, criminal, or other legal proceeding in which the Insured is alleged to have engaged in racketeering activity except when the Insured establishes that the act or acts giving rise to such damages were committed by an Employee under circumstances which result directly in a loss to the Insured covered by Insuring Agreement (A). For the purposes of this exclusion, “racketeering activity” is defined in 18 United States Code 1961 et seq., as amended.

Discovery Period

Analysis

The basic coverage of the financial institution bond is written on a discovery basis. Under this arrangement, the bond covers losses sustained at any time (prior to or during the life of the bond) and discovered during the life of the bond. Discovery occurs when the insured becomes aware of facts that would cause a reasonable person to assume that a loss covered by the bond has been or will be incurred, even though details of such loss may not be known. Third-party notice of claims that, if true, would result in the insured being liable constitutes discovery.

There is no protection following expiration or cancellation of the bond. At any time prior to termination of the bond in its entirety, however, an insured can purchase an extension or “cut-off” coverage of an additional twelve months within which to discover losses that might have occurred during the period prior to termination.

The rules provide for converting the bond from a discovery basis to a loss sustained form. Thus, coverage may be provided for only those losses sustained while the bond is in force. Coverage then does not apply to loss from any action preceding the effective date of the bond. In addition, loss sustained forms specify a period, generally a year, after termination of the bond within which loss must be discovered and reported to the company.

Analysis

This provision contains the operative language for the aggregate limit of liability. All payments made under the terms of the bond reduce the aggregate liability of the insurer as set forth in the declarations. Upon exhaustion of the aggregate limit, the insurer has no further obligation to the insured, including the duty to defend. In the event a loss is settled through the use of a lost instrument bond, that loss will not reduce the aggregate limit. In addition, this section also includes language setting forth the single limit of liability and the definition of Single Loss.

Analysis

This provision dispels the implication that the bond provides third party coverage and confirms the intent that only the named insured has any rights under the bond. Hence, the insurer is not liable for loss sustained by anyone other than the insured unless the insured—at its discretion and option—includes such loss in the proof of loss statement.

Another provision requires the insured to notify the company of loss at the “earliest practicable moment” (not to exceed thirty days) after discovery and also to file proof of loss within six months after the loss is discovered. If loss problems arise, the insured may not begin legal proceedings until sixty days after proof of loss is filed nor later than twenty-four months after discovery of loss in question. Any action or proceeding to recover court costs and attorneys' fees must be initiated within twenty-four months after a judgment is final. Also, if any of these limitations in the bond are prohibited by law, the law applies. Lost securities listed in a proof of loss must be identified with certificate or bond numbers, if such numbers were issued with the securities.

Analysis

Though the value of securities fluctuates constantly and it is often difficult to determine their worth at any given time, form twenty-four specifies that securities be valued at market value at time of loss settlement. In case of subscription, conversion, or redemption of deposit privileges, loss is determined by the value immediately before they expire. When securities cannot be replaced or securities or privileges have no quoted market value, their value is then determined by agreement or arbitration. Additionally, loss of currency or funds of any country is payable in the currency or funds of that country, or, at the option of the insured, in equivalent United States dollars.

When books of account or other records are damaged or destroyed, the bond provides coverage only if the books or records are actually reconstructed and then only for the cost of blank books, pages, or other materials plus the cost of labor for actual transcription.

Loss to property other than securities and records—furnishings, fixtures, stationery, supplies, and equipment—is settled on an actual cash value basis. If the property can be repaired, the company may repair or replace such property with the like quality and value, but, in any event, the company has the option of repairing, replacing, or settling on the basis of actual cash value, as in property policies. When the company and insured cannot agree on settlement, value is determined by arbitration.

Analysis

This condition is comprised of five sub-sections. Sub-section (a) provides that in the event of payment under the bond, the insured will assign the insurer all rights, title, interest, and causes of action it has against any entity to the extent of the payment; (b) states that the underwriter will be subrogated to the insured's rights of recovery; (c) provides that recoveries shall be applied (minus recovery expenses) first, to the insured's loss in excess of the amount paid under the bond; second, to the insurer as reimbursement of amounts paid to settle the insured's claim; and third, to the insured in satisfaction of the deductible amount; (d) provides that the insured, at the insurer's request, will submit to examination by the underwriter, produce all pertinent records, and cooperate with the underwriter in all matters relating to the loss; (e) states that the insured is obligated to execute all papers and render assistance to secure the underwriter's rights and causes of action.

Analysis

The financial institution bond is excess over any valid and collectible insurance obtained by the insured or by a transportation company or by another entity on whose premises the loss occurred.

This bond shall apply to loss of Property (1) owned by the Insured, (2) held by the Insured in any capacity, or (3) for which the Insured is legally liable. This bond shall be for the sole use and benefit of the Insured named in the Declarations.

Deductible

Analysis

The insurer is only liable for that portion of any loss that exceeds the policy deductible. Further, the insured is under an affirmative obligation to inform the insurer of any loss payable under the bond, whether or not a claim is made for such loss (for example, if the facts constitute a loss, but the amount is below the deductible; the insured is required to report such loss).

Analysis

Financial institution bond may be terminated in four ways—three of these cause immediate cessation of coverage. When coverage is terminated at the request of the company, the bond remains in force for sixty days after receipt by the insured of written notice from the company of its intent to cancel. The following three situations terminate bond coverage immediately: (1) receipt by the company of a written request from the insured; (2) when the operation is taken over by a receiver or other liquidator or by state or federal officials; or (3) when the insured is taken over by another institution (unless prior written approval has been obtained from the underwriter).

Also possible is partial termination of bond coverage on a particular employee. The termination provisions require immediate termination of coverage of any employee discovered in a dishonest or fraudulent act except that any property then in transit in custody of such employee continues to be covered. In addition, if the company has some reason for not wanting to provide coverage on any employee, protection is terminated as to the particular employee fifteen days after receipt by the insured of written notice to this effect.