370 Park Street, Suite 8, Moraga CA. 94556
341 S. Main, Suite 100, Alpine UT. 84004
888.313.9977(t) ~ 925.313.9978(f)

I'm Insured, So Why Bonding Too?

The common misperception that Errors & Omissions (E&O) insurance and bonding are mutually exclusive grows out of a misunderstanding of the purpose and function of each type of coverage. Let's begin with a look at bonds. Generally speaking, there are two types -- fidelity and surety. A fidelity bond is sometimes called a crime or employee dishonesty policy. Such coverage would protect you, the business owner, from losses resulting from embezzlement, counterfeiting or outright theft by your employee. If you don't have any employees, fidelity coverage would be totally superfluous. This coverage is not meant to cover losses resulting from such acts by the business owner, only by employees.

Minimal employee dishonesty coverage may be included in a Business Office Package (BOP). Separate stand-alone crime policies, which can accommodate higher limits, are also available for purchase and typically offer much broader coverage. For example, normally a stand alone policy would have a broadened definition of employee to include non-compensated officers, board members, volunteers, student interns, etc. Also the form would cover not only money and securities, but other types of property as well. Coverage for property of clients located off your business premises can also be included.

Generally, a stand alone policy would have no "manifest intent" or "conviction" requirements which may well be included in your BOP policy. A conviction clause would require an actual criminal conviction for coverage to apply while the term manifest intent refers to the required showing that the employee actually intended to personally profit from the wrongful act. So a Robin Hood motivated embezzlement would conceptually not trigger coverage under the typically more limited BOP form.

Turning now to surety bonds, these can take different forms. For example, there are licensure bonds which may be required by the state for certain licensed trades or professions, such as notaries, insurance agents, barbers or plumbers. Unlicensed businesses can in many cases purchase business services bonds, which, like licensure bonds can be issued on an umbrella basis. Other categories of surety include contract completion bonds, appellate bonds and bail bonds. A daily money manager may also be in need of a court or probate bond, if ever appointed to act as a fiduciary with respect to a particular estate. In such a case a surety bond may be required by the judge. Such a bond would be issued only with respect to the specific estate in question and would not apply to your practice as a whole as would an umbrella bond. Under any of these various types of bonds, the surety company essentially commits to cover any loss to the estate. However, upon payment of the loss, the surety would then turn around and pursue you for reimbursement of 100% of the amount paid out. So surety coverage should not be confused with actual insurance.

E&O coverage is actual insurance. After you cover the deductible, the insurance carrier is required to cover the entire remaining loss up to the full limit of liability, without any right of subrogation back against you. While we have specifically negotiated coverage under the AADMM/Lloyd's program for the defense of claims involving alleged criminal, fraudulent or malicious allegations resulting in a lawsuit, the carrier is prohibited by law from paying losses which are expressly adjudged to have arisen out of such conduct. Allowing this would run counter to sound public policy. However, this restriction does not apply to surety coverage since you would be ultimately responsible to reimburse the surety for all amounts paid out under the bond.

Aside from bonding, sometimes confusion arises about what kind of liability coverages a daily money manager needs. One may mistakenly believe that since the firm's BOP includes General Liability (GL) coverage, nothing more is required. Basic GL insurance covers claims for bodily injury and property damage while almost always omitting coverage for what is arguably a daily money manager's greatest risk exposure: claims arising out of an alleged act, error or omission in rendering professional services. This exposure is covered by E&O insurance.

Because as a daily money manager you handle other people's money you become a prime target for scrutiny not only by your clients, but by their family members, other potential beneficiaries, and government regulators. Even if you render all services with the utmost professionalism and competence, you can still find yourself on the wrong side of a lawsuit.

It's a free country. Anyone can file a lawsuit which once filed requires a legal defense. Although statistics suggest that while a significant percentage of professional liability claims do not result in a recovery for the claimant, the defense costs alone can have a devastating and debilitating impact on the ability of a professional to continue in practice. That's why in negotiating your endorsed E&O program with Lloyd's, we felt it important to secure broad defense costs coverage for AADMM members.

So the bottom line is that a well crafted E&O policy provides the most pertinent coverage for a daily money manager. GL coverage can certainly add to a daily money manager's portfolio of protection, but should not be viewed as an adequate substitute for E&O insurance. A fidelity bond is also desirable, but only if the insured has employees. Finally, surety bonds should really only be sought if required by some third party, such as a governmental agency, a court or particular client. A surety bond provides no coverage for the daily money manager, while imposing upon that practitioner the obligation of having to reimburse the surety company for any payments made under the bond.