Must Know Mondays:

Everything You Always Wanted

to Know About Director’s Bond

Coverage

CUNA CPD

October 20, 2014

Your Speaker

David A. Reed

Attorney at Law

david@reedandjolly.com

(703) 675-9578

Reed & Jolly, PLLC

Fairfax, VA

What Are Your Concerns?

• What does the bond do for me?

• Will it prevent personal liability for money

damages?

• Does it cover out of pocket expenses?

• Who pays for legal representation?

• How much is enough?

Not All Carriers Are the Same

Insurance policies and coverages that are outlined or mentioned in this presentation can be provided by various providers and do not represent any actual policy provisions.

It is important to note that each providers policies are not the same and can have significant differences that impact coverage and comparisons simply by coverage name, price or limits/deductibles are not sufficient in determining the best coverage for the credit union.

Regulatory Issues

§ 713.3 What bond coverage must a credit union have?

At a minimum, your bond coverage must:

(a) Be purchased in an individual policy from a company holding a certificate of authority from the Secretary of the Treasury; and

(b) Include fidelity bonds that cover fraud and dishonesty by all employees, directors, officers, supervisory committee members, and credit committee members.

Regulatory Issues

§ 713.5 What is the required minimum dollar amount of coverage?

(a) The minimum required amount of fidelity bond coverage for any single loss is computed based on a federal credit union's total assets.

Assets Minimum bond

$4,000,001 to $50,000,000 $100,000 plus $50,000 for each million or fraction thereof over $1,000,000

$50,000,000 to $500,000,000 $2,550,000 plus $10,000 for each million or fraction thereof over 50,000,000, to a maximum of $5,000,000

Over $500,000,000 One percent of assets, rounded to the nearest hundred million, to a maximum of $9,000,000

What’s In Your Coverage?

Employee/Director Dishonesty

• On Premises — Property Loss

• In Transit — Property Loss

• Defense Costs

• Counterfeit Currency

• Employee/Member Property Theft

• Reward Payments

• Payments for Injury/Death

• Post-Robbery Trauma Counseling

• Faithful Performance

• Extortion and Kidnapping Losses

• Cash Letter

• Funds Transfer

• Electronic Crime

• Kiosk Endorsement

• Audit Expense

• Fraudulent Deposit

Forgery or Alteration

• Stop Payment/Wrongful Dishonor

• Unauthorized Signature

• Mortgage Defectives Signature

• Counterfeit Share Draft, Check

or Securities

• Business Credit/Debit Card Travel

Advance

• IRA and EDCP

• ATM Off-Premises

• Telephone Toll Crime

• Signature Guarantee

• Electronic Crime — Loan

• Computer Crisis

• Fraud Mortgage Loan Documentation

• Third-Party Vendor Theft

• Safe Deposit Box

• Consumer Legislation

Wash, Rinse, Repeat

• Annual review of your bond coverage is

NOT enough.

• You need a system of regular reviews of

both types and depth of coverage.

• Are you looking at coverage at the product

development stage?

• Who is in charge of this area?

Basic Considerations

• You need a clear understanding of your

operations and risk profile!

– Every product and service and every door and

window

– Do your policies cover all high risk areas?

• How much is enough?

• Deductibles

• Who reviews the coverage and how often?

The MYTH of Insurance

• It does NOT eliminate risk, it transfers risk

• It will not prevent lawsuits, it helps pay

expenses and the damages which can

follow.

• Indemnification is different from insurance.

• Lending is a risky business and not all

risks are transferable.

• Bond eligibility is a part of pre-employment

screening NOT all of it.

Let’s face facts:

Gone are the days when your

carrier will bend over

backwards to pay your claim.

Top Claims Areas

• Lender Liability Claims

• Consumer Litigation (BK and Repo)

• Robbery/Burglary

• Altered and Forged Checks

• Incorrect Endorsements/Missing Signatures

• Funds Transfer and ATM Issues

• Loan Fraud (Indirect and MBL)

• HELOC Issues

• Employment Disputes

What About Risk?

• Risk is NOT a dirty word. It is a known element of our operations.

• Risk assessments are an essential management and regulatory tool.

• Risk is a simple game – Identify it

– Categorize it

– Deal with it!

The Three R’s

Risk Recognition and Reaction

Risk Management Team

• Comprised of your operational area experts,

stakeholders, managers.

• Work to identify key high risk areas, and make

sure you are properly addressing every potential

“issue.”

• Constant risk analysis can help reveal

unnecessary risks and operational weakness.

• This process will help you effectively and

efficiently manage your credit union.

Risk Response

• The risk management process will not only provide feedback on the effectiveness of controls that are designed to reduce risk, but it will also result in the identification of control weaknesses.

• However, the identification of control weakness will not necessarily be done for the purpose of eliminating risk.

• Risk cannot be eliminated completely; to focus on elimination is costly and largely impossible. When control weaknesses are identified, they will need to be evaluated for the appropriate risk response that best aligns with the credit union’s risk appetite and the expectations of management and the board of directors.

Credit Union Products

• Bond

• Management Professional Liability

• Property and Business Liability

• Plastic Card

• Cyber Security & Incident Package

• Risk Management

• Workers Compensation

• Collateral Protection

Claim Process

1. A loss is discovered by your credit union.

2. Take all reasonable measures to minimize the loss.

3. Notify your bond carrier immediately after discovering the loss.

4. You may need to file a formal claim by submitting a specific form (i.e. Notice of Loss, etc.).

5. The information is reviewed by a claim adjuster who will: • Contact you to gather all appropriate facts;

• Advise what, if any, documentation should be submitted.

6. Once the claim investigation is complete, the claim adjuster notifies your credit union of the claim decision.

Paper Trail

• This is the most important function!

• Gather all necessary information regarding the event:

– Statements from involved staff

– Timeline of events

– All related documents and computer files

– Financial and accounting records

– Related policies and procedures

– Proof of loss

Claim Preparation

• You need to have a complete

understanding of the claim event BEFORE

you submit the formal claim.

• Do not hesitate to utilize outside

investigative or audit resources.

• You never get a second chance to make a

first impression!

Timing Is Everything

• Your policy will specify how quickly you

need to notify your carrier after the

discovery of a covered loss.

• Usually 60 days from discovery.

• Failure to timely notify your carrier may

harm your claim.

• Most carriers allow an additional 6 months

to complete the formal claim.

Discovery of Loss

• Discovery occurs when you first become aware of a situation which would cause a reasonable person to assume that a type of loss covered under the Bond policy has been or will be incurred.

• It does not matter when the event causing the loss occurred.

• The exact amount or details of the loss may not be known at the time of discovery.

Discovery of Loss

• Discovery also includes when you receive

notice of an actual or potential claim

alleging that your credit union is liable to a

third party under circumstances which, if

true, would constitute a loss under the

Bond policy.

• What do you do with that attorney demand

letter or notice of data breach?

To Claim or Not to Claim…

• Sometimes a tricky question as the carrier

will track your claims.

• What is your deductible?

• What is the worst that can happen?

– Are there hidden elements of the loss?

– Failure to file a timely claim will more than

likely limit your recovery rights.

Vendor Assessment

Insurance Coverage

– Will relations create additional liabilities?

– Does the current level of insurance cover the

new risks?

– What insurance will the vendor carry and for

whose benefit?

– Management should be able to provide

certificates of insurance or limits of coverage

information

Wrongful Denial of Claim

• Nothing happens unless you act after denial!

• Make sure you have done everything required to

file the perfect claim.

– Is it a covered event?

– What does their denial letter say?

– Have you submitted all relevant documents?

– Have you cooperated in the carrier’s investigation?

• Have counsel review the coverage and the claim

in order to give you an opinion on next steps.

Maximizing the Relationship

• Have you looked at other providers?

• Does your bond carrier provide value

added services?

– Training

– Best practices

– Sample policies or procedures

– Process issues (claim filing, payment, etc.)

– Compliance reviews

Indemnification

• An agreement between the volunteer and

the Credit union to protect you from loses

• Different than bond coverage

• A great safety net

Indemnification

• Directors should be very familiar with the indemnification at their CU

• CU can advance expenses and losses, if– Director acted in good faith and in a manner

they reasonably believed to be in or not opposed to the best interests of the credit union

Impact of 701.4

• NCUA’s new rule prohibit a federal credit union from indemnifying officials and employees for liability from misconduct that is grossly negligent, reckless, or willful.

Questions?