Are there employee vacation requirements for crime applications?
One of the coverages provided in a crime policy is protection against employee dishonesty. These losses can go undetected for extended periods of time because the dishonest employee is able to cover up their theft by virtue of the nature of their duties. Solid accounting principles recommend requiring an employee to take a vacation of at least 5 days in a row. This period of time provides a greater likelihood that the actions of a dishonest employee can be uncovered in a timely manner and this reduces your exposure to loss as well as the carrier’s exposure to loss.
Why are financials so important to a bond underwriter?
A bond is a three party obligation in which one party guarantees the obligations of a second party to a third party. Cash, working capital, debt to wealth and profitability are key points of a financial statement. The stronger the financial statement, the easier it is to obtain a bond.
ERISA is an acronym for the Employees Retirement Income Security Act. This is a law passed by Congress that outlines the responsibilities and guidelines that have to be followed by trustees of employee profit sharing and retirement plans. One of those requirements is that the trustees must obtain a fidelity bond in the amount of 10% of the plan’s assets.
In our prior post on bonds we mentioned the fact that bonds are three party contracts involving a principal, a surety and an obligee. The principal is someone who has a legal or contractual obligation to another, the obligee, and that obligation is guaranteed by a third party, the surety, which is usually an insurance company. Fidelity bonds are the exception in that they are two party contracts and most resemble the insurance products with which most of us are familiar.
Fidelity bonds protect a company against theft from their employees. Pretty simple and straightforward. In the event an employee steals money and/or materials from their employer, the fidelity bond responds. The bonds are priced based on the limit of coverage chosen, the number of employees at the time of application and the amount of the deductible chosen. The underwriting is based on an application and possibly a supplemental questionnaire concerning your accounting system and internal controls.
Our agency has a few fidelity bonds that are a stand-alone bond, but today most fidelity coverage is written in conjunction with your commercial insurance. Several years ago, the insurance industry recognized that fidelity coverage is more similar to a standard insurance product than a bond, and it is now offered as a part of a crime policy available to a company alongside their general liability, workers’ comp, automobile and property. In either situation, the underwriting information needed is similar: a completed application and information on internal controls.
Fidelity coverage is usually an optional or voluntary coverage that a business owner might choose based on his or her own appetite for risk. However, there is one instance in which fidelity coverage is required by law. The Employee Retirement Income Security Act of 1974 (ERISA) requires that employee benefit plans be protected against fraud or theft by plan administrators and corporate officers who may have access to plan assets. The named insured on the bond is the benefit plan and the coverage amount must be at least 10% of the total amount of assets in the plan.
If you have any questions about this article, or wonder if this is a coverage you might need, please don’t hesitate to let us know.
“What Is Good to Buy Right Now? Municipals? Or Corporate Bonds?”
“What Is Good to Buy Right Now? Municipals? Or Corporate Bonds?”
Usually when I tell someone that I work for an insurance agency and that my product is bonds, the response from them is the question above. I’ve received that question so many times that I have a canned response, “The bonds I deal with are not something you want to buy. They are something someone makes you buy.”
So what is a bond? Simply put, it is a credit guarantee whereby a third party, usually an insurance company, guarantees an obligation from one party, the principal, to another, the obligee. The potential obligations cover contractual obligations for construction of bridges, buildings, roads, etc. to an obligation of a public official to faithfully perform the duties of their office.
The types of bonds can be broken down into three large categories:
Fidelity bonds are more like your typical insurance product. They protect an employer from embezzlement by employees. While some of these are written as a stand-alone product, today most fidelity coverage is written as a product of a company’s property coverage.
Contract bonds, or performance and payment bonds, guarantee that a construction contractor will complete a construction project according to the contract between the contractor and the project owner, and that they will pay all of the bills related to that project for labor, materials and subcontractors.
The largest category, and the one with the most variety, is commercial bonds. There are literally thousands of different types of commercial bonds and these are the types that most of our clients are required to obtain. This category contains everything from bonds on public officials guaranteeing their faithful performance, to simple compliance bonds which guarantee that a company will comply with the terms of a license or permit. When you have seen the trucks of an electrician, plumber, air conditioning contractor, roofer, etc. and they have the words “licensed, bonded and insured” on the side, usually all that means is they have posted a $5,000 to $10,000 bond required to obtain a license or permit to operate in a certain city or county.
This has been a basic introduction to bonds. Over the next several weeks we plan to explore in more detail the different types of bonds, what information is required to obtain them and how they are underwritten by the insurance company.
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