Fidelity Bond Coverage

Fidelity bond coverage (also known as blanket, surety, or discovery bonds) protects a credit union against losses caused by fraud, dishonesty, theft, and related activities committed by credit union employees, directors, officers, supervisory committee members, and credit committee members. Credit unions may obtain optional bond endorsements that cover directors’ and officers’ liability, audit expenses, and other fraud-related losses.

A fidelity bond may also cover losses incurred as a result of:

  • Burglary
  • Robbery
  • Larceny
  • Theft
  • Mysterious disappearance
  • Forgery
  • Counterfeit money

and other perils caused by persons outside the credit union.

Typically, fidelity bonds cover only direct losses of property. For example, if an employee steals $10,000 by creating a fictitious loan, the $10,000 is a direct loss of property, which the bond covers (less the deductible). However, the bond would not cover the interest income that the credit union might have earned on this $10,000.

The FCUA §§ 1761b(2), and 1766(h) establishes the statutory requirements for bonding employees and appointed and elected officials of FCUs. The FCUA § 1766(h) requires that the NCUA Board approve bond forms and prescribe minimum bond coverage. The FCUA directs the NCUA Board to establish regulations that define both the amount and character of bond requirements for employees and officials.

Why NCUA Examines a Credit Union’s Fidelity Bond Coverage

In order to obtain federal insurance through the Share Insurance Fund, NCUA regulation § 741.201, Minimum fidelity bond requirements, requires all federally insured credit unions to possess the minimum fidelity bond coverage stated in NCUA regulations part 713, Fidelity Bond and Insurance Coverage for Federally Insured Credit Unions. NCUA regulation § 704.18, Fidelity Bond Coverage, defines the bond requirements for corporate credit unions.

NCUA regulation § 713.3, What bond coverage must a federally insured credit union have? requires, at a minimum, credit unions’ bonds to:

  • Be purchased in an individual policy from a company holding a certificate of authority from the Secretary of the Treasury
  • Cover fraud and dishonesty by all employees, directors, officers, supervisory committee members, and credit committee members
  • Include an option for the liquidating agent to purchase coverage in the event of an involuntary liquidation that extends the discovery period for a covered loss for at least one year after liquidation
  • In the case of a voluntary liquidation, remain in effect, or provide that the discovery period is extended, for at least four months after the final distribution of assets, as required in NCUA regulation § 710.2(c)

This section of the Examiner's Guide includes the following topics.

Last Updated on October 09, 2020