Saturday, April 19, 2014

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» Risk Transfer » Bonding


Bonding is defined as “an insurance contract in which an agency guarantees payment to an employer in the event of unforeseen financial loss through the actions of an employee”.  Bonding your employees means that you can recover any monies or properties that you lose due to employee theft.  The most commonly bonded employees include janitorial/maid services, accounting and financial services and security services.  These employees typically have access to large sums of money and/or property.  For example, security personnel have access to all areas of a building, passwords to security systems and twenty-four hour access.  It is important that these employees are trust worthy, loyal members of the corporation.  In the event that you have decided to contract out security services or janitorial services, it is important to ensure that the company has bonded their employees.  In this case, the company providing the service is responsible for screening the employees and bonding them.  This type of bond is also referred to as a fidelity bond.

Types of Bonds:

There are four standardized forms of fidelity bonds.  A description of each follows;

1. Commercial Blanket Bonds:  This type of bond is taken out by an employer and covers all employees.  These bonds typically have a policy limit.  For example, the Commercial Blanket Bond could have a limit of $100,000.  If an employee theft occurs, the maximum the policy will pay out is $100,000.
2. Blanket Position Bond:  This type of bond is taken out by an employer and covers each employee for a specific amount.  If the employer chooses a $20,000 limit and an employee theft occurs, the policy will pay out up to $20,000 per employee.
3. Individual Fidelity Bond:  This type of bond is taken out by an individual employee.  It is most commonly used by individuals who contract out their services, such as janitorial or accounting services. 
4. Scheduled Fidelity Bond:  This type of bond is taken out by an employer and covers named employees for a specific amount based on the exposure.  For example, if you have an accounting manager who have authority up to $2,500, an employer could take out a scheduled fidelity bond for that manager for $2,500.

Once you have decided who you wish to bond and what type of bond to use, you will begin the process of bonding existing employees and all new hires.  Bonding begins with a thorough background check and your broker/insurer may have you or the employees fill out a questionnaire.  At this point you may discover that one or more of your employees has been convicted of fraud in the past.  That does not mean that they are not bondable, it just means that the broker and the underwriter will need to work together to determine if they can make an exception for this employee.  You investigation should include questions that help determine if the employee has criminal tendencies based on past behaviour or poor personal credit history.   

The employee and employer will have to agree to full disclosure during this process.  The employee may also be sponsored.  The Correctional Services of Canada can be a sponsor.  The sponsor will write a letter indicating that they feel the individual has been rehabilitated and may be successful in the future.  The insurance company may choose to extend only so much in coverage.  At no time is an insurer obligated to bond someone, nor do they have to provide reasons for deciding not to bond an employee.  However, if an employee feels that they have been unfairly rejected, they can contact The Insurance Bureau of Canada at to have a third party review the process. 

Bonding is intended only reimburse the employer in the event of employee theft in order to prevent bankruptcy of the business.  A corporation may choose to self insure and put strict risk management protocols in place to prevent fraud and theft by employees.  Some risk management process could include:

1. Ensuring each employee takes two weeks off in a row and have someone else complete their work for that time period.  If an employee was involved in fraudulent activity, it would be more likely to come out over a two week period. 
2. Placing limits on employee authority, for example, how much they can deposit or withdraw.
3. Placing double signature on cheques and money transfer forms.
4. Installing computer software on within accounting systems that tracks entries into the system.
5. Installing security systems that track movement into and out of storage rooms and areas of the building that house large volumes of property.
6. Creating and implementing adequate human resources policies that make the work place a positive environment and ensuring that employees are adequately compensated to reduce employee fraud.    
7. Volunteers should have very limited access to funds and property and they should always be guided by a municipal employee.

In the event of a claim involving employee theft, you need to contact your insurers claims specialist and/or your adjuster as soon as you are aware of the theft.  You will need to collect the documentation that proves the financial loss and provide it to the insurer to see how much your policy will respond.  You will also need to follow your human resource policy relating to employee dishonesty and how that employee is to be handled from the beginning of the process until the end, whether that is deemed to be termination or rehabilitation for the employee.  During this process you should be working closely with the human resources department and a labour lawyer.  It is very important that you receive expert advice to avoid a wrongful dismissal claim. 

In the event that you choose to contract out services that have access to large amounts of monies or property, your insurance/purchasing department will want to ask for proof that the employees of the contracted company are bonded.  This provides a peace of mind and financial protection in the event of any losses.  You must look at the exposures you a facing and then determine how much coverage you want the company to provide.  You can request a certificate of insurance the provide details on coverage and the amount of coverage, including aggregate limits and any and all limitations on the policy.

For more detailed information on a fidelity bonds specific to your requirements, please contact your broker or insurer.