Yesterday, we drafted part I of our post on how a surety bond is underwritten.
As you could easily tell, a lot of emphasis is placed on the character of the applicant. The goal is, of course, how to ably predict how an employee will act in the future, based only on the employee’s past and their position within the company.
Underwriters, therefore, try and ask themselves questions like:
- What will be the opportunities to take the employer’s money?
- What are the temptations that occur as a direct result of the job?
- What are the temptations that occur as an indirect result of the job?
- What amount of money will he handle?
- To what extent will he have control over the flow of funds?
- What opportunities will there be to conceal funds? And what is the expertise of the employee in the organization as compared with that ability to conceal funds?
- What are the employee’s personal expenditures?
- What is the total debt of the employee?
- Can the employee borrow money and what is the expectation of returning that money?
- What auditing capabilities does the company have regarding the position of the employee?
- What is the culture of the company?
Most of the underwriters that I know pay particular attention to the company’s culture and auditing capabilities. That is because a periodical audit of the employee’s files is really a necessary safeguard to reduce the temptation of bad behavior. Also, such a practice is generally recognized as a part of best business practices and are done without demeaning the integrity of the employee.
Trying to figure out the character of the employee is the utmost concern. This is done by a thorough investigation of the employee and their history (as discussed in Part I). Most underwriters interview former employers and colleagues and do a thorough background check.
Once approved, the agent sends a letter of transmittal, which provides all the information gathered, the investigation into the employee and explaining any other risk areas not explored.
The fidelity bond is written in one of two ways: as an individual bond or as a schedule bond.
An individual fidelity bond covers the employee only.
A schedule bond, however, covers several persons under the same basic bond (usually six or more). The general provisions are very much similar to an individual bond with the main difference being a schedule of persons covered under the bond. This schedule gives the names, positions, liability being underwritten and the premium for each person listed on the schedule. Then, these schedules can be updated as employees change.
Additions, deductions and other modifications after the bond is issued are made by “change notices” signed by the employer. Most employers prefer schedule bonds as they are easier to keep track of, including all changes, etc. Better yet, the renewal dates all fall on the same day and, therefore, the paperwork is substantially reduced.
Both individual and schedule bonds are generally written for one year, with a sixty (60) day window to renew prior to the end of the term.
There are certain risks that are excluded from coverage, which include such things as jewelry employees, outside employees of breweries, etc.
I hope that this has been somewhat helpful for you in understanding how these bonds are underwritten.