Reporting to the Bond Company

The question of whether or not a reportable loss has occurred will often arise during an examination or supervision contact. Credit union directors may ask the examiner to help them arrive at a decision about reporting or giving notice of loss to the bond company, recovering the funds, or filing a claim.

In all cases, examiners should direct credit union management to refer to the bond requirements, which will state, among other things, when the credit union is required to make a report or notification to the bond company (that is, what constitutes a "reportable condition") and how quickly notifications should be made (that is, the timeframe for reporting or notifying the bond company once a reportable condition is discovered).

The table below outlines a non-exhaustive series of scenarios and the appropriate action indicated in each case.

Scenario Action
Credit union discovers that an employee has violated a policy that could cause future loss to the credit union (for example, has made member business loans not included in the credit union’s lending policy).
  1. Credit union should send a letter of notification to the bond company within the timeframe specified by the bond. (This will help protect the credit union in the event of any future losses from the MBLs or any other incident tied to that particular employee.)
Credit union experiences losses because an employee violated policy.
  1. Credit union should send a letter of notification to the bond company within the timeframe specified by the bond.
  2. Credit union should file a faithful performance bond claim to recover those losses.
Credit union experiences a loss of an identifiable amount due to a fraudulent act (for example, an employee steals cash from the teller drawer).
  1. Credit union send a letter of notification to the bond company within the timeframe specified by the bond.
  2. If losses exceed the deductible, the credit union should file a fidelity bond claim for the identified amount.
Credit union experiences a loss of an unidentifiable amount due to a fraudulent act (for example, an employee has issued fraudulent credit cards).
  1. Credit union should send a letter of notification to the bond company within the timeframe specified by the bond.
  2. Credit union should commence an investigation into the fraudulent activity. This may include hiring a forensic auditor to determine the exact amount of the fraud-related losses.
  3. Once the investigation is complete and the amount of the fraud loss is determined, the credit union should file a fidelity bond claim to recover losses.
Credit union employee violated policy, but did not cause a loss (for example, employee borrowed money from a teller drawer and replaced it).
  1. Credit union should send a letter of notification to the bond company within the timeframe specified by the bond.
  2. Credit union should commence an investigation into the dishonest act to determine if the act was an isolated incident or more pervasive in nature.
  3. Once the investigation is complete, the credit union should make the bond company aware of any additional findings.

Ultimately, a credit union’s board of directors needs to make the decision about what action to take. However, the examiner may guide the directors in protecting the credit union's interests under the bond. The examiner should warn the board of directors that a bonding company could refuse to pay a claim for losses suffered by the credit union if the board of directors fail to file a claim or make a notification in accordance with the requirements of the bond.

Letter of Notification

A credit union should report only facts to the bond company in a notice of improper acts by an employee or any other communication to the insurer. The credit union should not engage in speculation about how a loss or potential loss occurred. The following items can be included in the letter of notification (the bond itself contains specific requirements):

  • Description of the act
  • Name and position of persons whose acts may have terminated bond coverage as it applies to them
  • If possible, specific law, bylaw, rule, regulation, policy, or standard of conduct violated
  • An explanation of the acts, which indicates whether they were fraudulent, dishonest, or unfaithfully performed
  • Action taken to correct the acts
  • Action taken to prevent recurrence of the acts
  • Request to bond company for a statement of its willingness to continue bond coverage on persons whose acts are in question

The examiner should encourage the credit union to specifically mention the names of all responsible persons in the letter when it can clearly determine responsibility. The examiner may assist the officials in drafting the letter, but should bear in mind that the credit union, not the examiner, writes the letter. In the event the credit union refuses to notify the insurer, examiners should discuss the refusal with the supervisory examiner. The examiner should inform the credit union officials that their failure to file a notice of loss could result in loss of the bond claim and, therefore, breach their fiduciary duties.

Notice and Proof of Loss

The notice of loss is usually very short, factual, and contains no speculation or guesses. Credit unions need not know the exact amount of the loss before giving the notice. In fact, a delay until determination of the exact amount could jeopardize collection of the bond claim payment.

The following are items that the credit union should include in the notice of loss (refer to the bond for specific requirements):

  • Statement specifying discovery of a loss
  • Date of discovery of the loss
  • The amount of the known loss at the time of the notice
  • A brief statement of the circumstances surrounding the loss
  • Name, position, and address of the person responsible for the loss
  • Information as to whether the responsible person was removed from office
  • Request for acknowledgment of the notice of loss

The SAR, if filed, must not be included as an attachment to the notice.

The notice of loss puts the fidelity company on notice that a loss has occurred and that a claim may follow. Each bond requires filing of a proof of loss or claim within a specified period of time after the notice of loss. The proof of loss will usually require a more detailed and documented explanation of the loss suffered, the acts causing the loss, and why the credit union believes the bond covers the loss. As with the notice of loss, the credit union should refer to the policy to determine the specific requirements for the proof of loss. The credit union may need to request Proof of Loss forms from the bond company.

Follow Up

Bonds generally specify that the bond company has a certain number of days after a credit union files a proof of loss to investigate the loss. Unless the board of directors receive payment within a short time thereafter, they should follow up and request prompt settlement. If the bond company denies a claim, it should do so promptly and advise the credit union of the reasons for the denial.

Examiners should maintain close contact with any credit union in their district that has filed a claim with a bond company. If the bond company delays paying a valid proven claim, the examiner should urge the board of directors to follow up promptly.

Because most bonds require the credit union to bring a lawsuit against the bond company within a specified time after discovery of the loss, the examiner may wish to recommend that the credit union engage legal counsel to help it in negotiating payment of the claim or to determine the advisability of filing suit to collect on the claim. If the credit union appears to be making progress in negotiating and settling the suit, but may not meet the deadline for filing suit, the credit union may wish to secure an extension of the time for filing suit from the bond company.

Last Updated on October 09, 2020