Watch the Small Print: Who Does Your Fidelity Bond Cover?

Insufficient coverage can be costly in the RFP process By Gary Sutherland, CIC, MLIS

Recently I was asked to review a fidelity bond in a RFP that was in the final due diligence phase of acceptance.

The investment professional carried their current bond for five-plus years and believed that it met or exceeded what was needed by their clients.

I reviewed the full policy and had the unfortunate job of telling the ERISA attorney that it did not afford coverage for the principal/owner, and it could not be considered proper coverage to satisfy the RFP.

The policy contained the following language:

Employee Dishonesty: We will pay for loss resulting directly from dishonest acts committed by an employee.

Employee was defined as any natural person:

 1.) While in your service or for 30 days after termination of service
2.) Whom you compensate directly by salary, wages or commissions
3.) Whom you have the right to direct and control while performing services for you

On the surface it seems pretty good — until you get to who and what isn’t covered.

We will not pay for loss as specified below: Acts committed by You or Your Partners for any reason.

What does it mean? If an employee of the owner steals funds from a client where they have a legal liability to protect those funds, there is coverage as an employee of the firm. However, if the owner steals then there is no coverage.

Question: what person is the client worried about stealing? It is the owner (financial advisor). Is there a fix? Yes.

Section F. Definitions, Item 5. “Employee” is amended by adding the following language:

You, as corporate owner, when under written contract with a client or customer to perform services on that client or customer’s premises in the capacity shown in the SCHEDULE, and only when loss of or damage to “money”, “securities” and “other property” that is owned or leased by that client or customer results directly from “theft” by you, whether acting alone or in collusion with others.

The moral of the story is: don’t guess at your coverage. And don’t wait until you are at the five yard line in the RFP process only to stumble badly at the end.

Contact us for additional information:

Gary Sutherland, MLIS, CIC    508-656-1350