Bond Coverage Types

Faithful Performance

Faithful performance coverage covers losses resulting from an employee’s or director’s failure to faithfully perform their trust, or from their conscious disregard for a credit union’s established and enforced policies. Credit unions may purchase faithful performance coverage to supplement their fidelity bond coverage, but they are not required by statute or regulation to do so.

Endorsements and Riders

Bond companies issue endorsements or riders to the bond that add to, or subtract from, the basic bond coverage. Examiners should review any endorsements or riders that exclude coverage and determine if the endorsement or the rider reduces coverage below the minimum coverage in the approved bond form. If examiners cannot determine the effect of the endorsement or rider, they should contact their supervisory examiner and, if necessary, send a copy to the regional office with an accompanying memorandum.

Bond insurance generally does not cover expenses of recovery, such as legal fees or audit expenses, but because these expenses can be significant, credit unions may opt to purchase an endorsement to the bond with additional coverage. An examiner may review the audit expense coverage, if purchased, for adequacy to protect the credit union from the unexpected expense of documenting a claim by outside auditors. The minimal audit expense coverage often seen in credit union bonds probably will not cover the costs of a proof-of-loss audit. Examiners may recommend that the board of directors consider a higher audit expense limit when appropriate.

Additional Bond Coverage

The NCUA Board has the authority to require a FCU to obtain additional coverage when the coverage in force is not adequate, per NCUA regulation 713.7, May the NCUA Board require a credit union to secure additional insurance coverage? Adequate bond coverage may require coverage in excess of the prescribed minimums.

A credit union’s board of directors should review the extent of coverage at least annually, per NCUA regulation 713.2, What are the responsibilities of a credit union's board of directors under this section? The board should consider the credit union's loss exposure, internal controls, and financial resources when determining the amount and the type of coverage necessary. Refer to the Board of Directors subtopic for more risk management considerations regarding additional bond coverage.

Liability Insurance for Credit Unions Maintaining Employee Pension Plans

In accordance with NCUA regulation § 701.19(e), Liability insurance, no FCU may occupy the position of a fiduciary, as defined in the ERISA and the regulations issued by the Secretary of Labor, unless it has obtained appropriate liability insurance as described and permitted by the ERISA (29 USC § 1110(b)).

Last Updated on October 09, 2020