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Must Know Mondays:
Everything You Always Wanted
to Know About Director’s Bond
Coverage
CUNA CPD
October 20, 2014
Your Speaker
David A. Reed
Attorney at Law
david@reedandjolly.com
(703) 675-9578
Reed & Jolly, PLLC
Fairfax, VA
What Are Your Concerns?
• What does the bond do for me?
• Will it prevent personal liability for money
damages?
• Does it cover out of pocket expenses?
• Who pays for legal representation?
• How much is enough?
Not All Carriers Are the Same
Insurance policies and coverages that are outlined or mentioned in this presentation can be provided by various providers and do not represent any actual policy provisions.
It is important to note that each providers policies are not the same and can have significant differences that impact coverage and comparisons simply by coverage name, price or limits/deductibles are not sufficient in determining the best coverage for the credit union.
Regulatory Issues
§ 713.3 What bond coverage must a credit union have?
At a minimum, your bond coverage must:
(a) Be purchased in an individual policy from a company holding a certificate of authority from the Secretary of the Treasury; and
(b) Include fidelity bonds that cover fraud and dishonesty by all employees, directors, officers, supervisory committee members, and credit committee members.
Regulatory Issues
§ 713.5 What is the required minimum dollar amount of coverage?
(a) The minimum required amount of fidelity bond coverage for any single loss is computed based on a federal credit union's total assets.
Assets Minimum bond
$4,000,001 to $50,000,000 $100,000 plus $50,000 for each million or fraction thereof over $1,000,000
$50,000,000 to $500,000,000 $2,550,000 plus $10,000 for each million or fraction thereof over 50,000,000, to a maximum of $5,000,000
Over $500,000,000 One percent of assets, rounded to the nearest hundred million, to a maximum of $9,000,000
What’s In Your Coverage?
Employee/Director Dishonesty
• On Premises — Property Loss
• In Transit — Property Loss
• Defense Costs
• Counterfeit Currency
• Employee/Member Property Theft
• Reward Payments
• Payments for Injury/Death
• Post-Robbery Trauma Counseling
• Faithful Performance
• Extortion and Kidnapping Losses
• Cash Letter
• Funds Transfer
• Electronic Crime
• Kiosk Endorsement
• Audit Expense
• Fraudulent Deposit
Forgery or Alteration
• Stop Payment/Wrongful Dishonor
• Unauthorized Signature
• Mortgage Defectives Signature
• Counterfeit Share Draft, Check
or Securities
• Business Credit/Debit Card Travel
Advance
• IRA and EDCP
• ATM Off-Premises
• Telephone Toll Crime
• Signature Guarantee
• Electronic Crime — Loan
• Computer Crisis
• Fraud Mortgage Loan Documentation
• Third-Party Vendor Theft
• Safe Deposit Box
• Consumer Legislation
Wash, Rinse, Repeat
• Annual review of your bond coverage is
NOT enough.
• You need a system of regular reviews of
both types and depth of coverage.
• Are you looking at coverage at the product
development stage?
• Who is in charge of this area?
Basic Considerations
• You need a clear understanding of your
operations and risk profile!
– Every product and service and every door and
window
– Do your policies cover all high risk areas?
• How much is enough?
• Deductibles
• Who reviews the coverage and how often?
The MYTH of Insurance
• It does NOT eliminate risk, it transfers risk
• It will not prevent lawsuits, it helps pay
expenses and the damages which can
follow.
• Indemnification is different from insurance.
• Lending is a risky business and not all
risks are transferable.
• Bond eligibility is a part of pre-employment
screening NOT all of it.
Let’s face facts:
Gone are the days when your
carrier will bend over
backwards to pay your claim.
Top Claims Areas
• Lender Liability Claims
• Consumer Litigation (BK and Repo)
• Robbery/Burglary
• Altered and Forged Checks
• Incorrect Endorsements/Missing Signatures
• Funds Transfer and ATM Issues
• Loan Fraud (Indirect and MBL)
• HELOC Issues
• Employment Disputes
What About Risk?
• Risk is NOT a dirty word. It is a known element of our operations.
• Risk assessments are an essential management and regulatory tool.
• Risk is a simple game – Identify it
– Categorize it
– Deal with it!
The Three R’s
Risk Recognition and Reaction
Risk Management Team
• Comprised of your operational area experts,
stakeholders, managers.
• Work to identify key high risk areas, and make
sure you are properly addressing every potential
“issue.”
• Constant risk analysis can help reveal
unnecessary risks and operational weakness.
• This process will help you effectively and
efficiently manage your credit union.
Risk Response
• The risk management process will not only provide feedback on the effectiveness of controls that are designed to reduce risk, but it will also result in the identification of control weaknesses.
• However, the identification of control weakness will not necessarily be done for the purpose of eliminating risk.
• Risk cannot be eliminated completely; to focus on elimination is costly and largely impossible. When control weaknesses are identified, they will need to be evaluated for the appropriate risk response that best aligns with the credit union’s risk appetite and the expectations of management and the board of directors.
Credit Union Products
• Bond
• Management Professional Liability
• Property and Business Liability
• Plastic Card
• Cyber Security & Incident Package
• Risk Management
• Workers Compensation
• Collateral Protection
Claim Process
1. A loss is discovered by your credit union.
2. Take all reasonable measures to minimize the loss.
3. Notify your bond carrier immediately after discovering the loss.
4. You may need to file a formal claim by submitting a specific form (i.e. Notice of Loss, etc.).
5. The information is reviewed by a claim adjuster who will: • Contact you to gather all appropriate facts;
• Advise what, if any, documentation should be submitted.
6. Once the claim investigation is complete, the claim adjuster notifies your credit union of the claim decision.
Paper Trail
• This is the most important function!
• Gather all necessary information regarding the event:
– Statements from involved staff
– Timeline of events
– All related documents and computer files
– Financial and accounting records
– Related policies and procedures
– Proof of loss
Claim Preparation
• You need to have a complete
understanding of the claim event BEFORE
you submit the formal claim.
• Do not hesitate to utilize outside
investigative or audit resources.
• You never get a second chance to make a
first impression!
Timing Is Everything
• Your policy will specify how quickly you
need to notify your carrier after the
discovery of a covered loss.
• Usually 60 days from discovery.
• Failure to timely notify your carrier may
harm your claim.
• Most carriers allow an additional 6 months
to complete the formal claim.
Discovery of Loss
• Discovery occurs when you first become aware of a situation which would cause a reasonable person to assume that a type of loss covered under the Bond policy has been or will be incurred.
• It does not matter when the event causing the loss occurred.
• The exact amount or details of the loss may not be known at the time of discovery.
Discovery of Loss
• Discovery also includes when you receive
notice of an actual or potential claim
alleging that your credit union is liable to a
third party under circumstances which, if
true, would constitute a loss under the
Bond policy.
• What do you do with that attorney demand
letter or notice of data breach?
To Claim or Not to Claim…
• Sometimes a tricky question as the carrier
will track your claims.
• What is your deductible?
• What is the worst that can happen?
– Are there hidden elements of the loss?
– Failure to file a timely claim will more than
likely limit your recovery rights.
Vendor Assessment
Insurance Coverage
– Will relations create additional liabilities?
– Does the current level of insurance cover the
new risks?
– What insurance will the vendor carry and for
whose benefit?
– Management should be able to provide
certificates of insurance or limits of coverage
information
Wrongful Denial of Claim
• Nothing happens unless you act after denial!
• Make sure you have done everything required to
file the perfect claim.
– Is it a covered event?
– What does their denial letter say?
– Have you submitted all relevant documents?
– Have you cooperated in the carrier’s investigation?
• Have counsel review the coverage and the claim
in order to give you an opinion on next steps.
Maximizing the Relationship
• Have you looked at other providers?
• Does your bond carrier provide value
added services?
– Training
– Best practices
– Sample policies or procedures
– Process issues (claim filing, payment, etc.)
– Compliance reviews
Indemnification
• An agreement between the volunteer and
the Credit union to protect you from loses
• Different than bond coverage
• A great safety net
Indemnification
• Directors should be very familiar with the indemnification at their CU
• CU can advance expenses and losses, if– Director acted in good faith and in a manner
they reasonably believed to be in or not opposed to the best interests of the credit union
Impact of 701.4
• NCUA’s new rule prohibit a federal credit union from indemnifying officials and employees for liability from misconduct that is grossly negligent, reckless, or willful.
Questions?
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