Bond Coverage for Public Employees: What Every Government Entity Needs to Know

Tom Dunn

On a fairly regular basis you can read a newspaper article or watch a television news report documenting an account of misappropriation of a private employer's money by one of his or her own employees. Sometimes these accounts involve small amounts of money. At other times, they involve significant amounts used by employees to take expensive trips or to purchase luxurious vacation homes, all on the employer's dime. This also happens in the public sector, but probably less frequently.

Such brazen acts by employees who work for local governments shake the public trust. But there are other instances where municipal, county or school employees don't purposefully set out to steal money from their employer, instead failing through carelessness or misfeasance, to faithfully perform their duties, including properly accounting for all money received by virtue of their position as an officer, employee or volunteer of the local government.

Local government entities can protect themselves from these claims by obtaining different types of bond coverage. It is crucial, moreover, for the public entity to identify how a theft can occur and to distinguish between the types of bonds and separate crime coverage before making the purchase. Problems may arise if one insurance carrier provides the bond coverage for employee theft or failure to faithfully perform duties and another covers theft by an outsider, which falls under the more general crime protection. At the time of a loss, public employers are required to show whether a loss of money was caused by an employee, which would be covered by a bond, or if it was an outside individual who was the culprit, which would fall under the more general crime coverage. If the employer uses the same carrier for both types of coverage, the potential coverage problems are eliminated.

Two common types of bonds are blanket fidelity and faithful performance. A blanket fidelity bond may be purchased by private and public employers, while faithful performance protection is generally purchased by public entities because it protects against failure to faithfully execute duties prescribed by law, the charge of public officials, employees and volunteers.

A third type of bond coverage focused on in this article is the Public Official Schedule or Position Bond (POSB), which has a minimum monetary limit that applies to each position named in the bond regardless of the number of individuals holding the position. This bond is a blend of the two bonds already mentioned. The POSB is governed by state statute for public entities, and in New Hampshire, POSBs are referenced in RSA 41:6, which applies to certain municipal officials who regularly handle funds: town treasurers, tax collectors, town clerks, trustees of the trust fund, and agents for motor vehicle registrations and boat permit fees.

RSA 41:6 requires officials to be indemnified for losses that are a combination of the two bond coverage types mentioned: (1) failure of the officers covered to faithfully perform their duties or to account properly for all monies or property received by virtue of their positions; or (2) fraudulent or dishonest acts committed by the covered officers.

This statute is generally geared towards municipal positions; school officials or employees are not required to be covered under a POSB. Individual officials, employees, or volunteers who handle monies for a local government could be covered under a blanket fidelity or faithful performance bond, even if they are not required to be covered under a POSB.

POSB coverage is a three-way contract between the principal, the obligee, and the surety. The insurance company serves as the "surety," the insured, or local government entity, serves as the "obligee, and the employee or official serves as the "principal."

Municipal officials or employees are basically the parties guaranteeing they will fulfill their various obligations to the municipal government. Depending on how much money they handle day-to-day, a dollar amount is set that serves as a minimum amount the obligee can expect to receive if the official or employee does not fulfill his or her obligations. The surety essentially assures the obligee that the official or employee can perform the task up to the amount of the POSB. It is important to remember that whenever an insurer pays any loss under the POSB, the insurer is entitled to attempt to recover from the guilty or negligent employee.

The commissioner of the New Hampshire Department of Revenue Administration (DRA) has the power to adopt rules under RSA 541-A concerning the amount and form of the POSB required. The rules concerning who will calculate the minimum amounts of coverage for the POSB schedule bonds changed on January 1, 2012. These amounts had historically been set by the DRA with a report issued to insurance carriers or risk pools in order to issue bonds on behalf of their covered municipalities. Since January 1, this responsibility has been given to municipalities. The DRA provides a worksheet and minimum bond amount chart that assists in calculating these amounts,  chart available for download. The recommendation would be to review your current Public Official Schedule Bond amounts and compare them to the 2012 Surety Worksheet. If the current POSB amounts do not meet the minimum amounts calculated on the worksheet, the oblige should contact their insurance carrier to increase coverage.

The range of Public Officials Scheduled Bond amounts varies widely. The insurer typically provides POSB amounts ranging from $1,000 for a boat fee agent to $1 million for the Trustees of the Trust Fund, based on the amount of money handled. Remember, the amounts that are calculated are the minimum amounts required by DRA. For example, under Local Government Center Property-Liability Trust (LGC-PLT) protection, $10,000 for the deputy agent for motor vehicles is the minimum amount of the POSB in one particular town.

If an obligee under an LGC-PLT issued POSB sustains a loss by the deputy agent in excess of the $10,0000 limit set for that position, then other bond coverage such as blanket fidelity bond or faithful performance could provide protection up to $500,000. Any payment made under an LGC-PLT issued POSB would be an offset or reduction of the amount otherwise payable or paid under any portion of the crime coverage, less the applicable deductible, for the balance of the loss.

Premium charges and other terms and conditions for these bonds are not the same with every insurer. Some charge separately for POSBs. Other insurers may include this protection as part of the overall crime protection, and no additional costs are incurred.

One of the provisions of RSA 41:6 requires that the POSBs provide for at least a two-year discovery period from the date the coverage terminates. Some insurance carriers offer POSBs that provide an indefinite discovery period and others may be restrictive. So it's important to review your particular POSB coverage terms to be sure that the protection meets this requirement.

Public Official Schedule Bonds usually have language that requires the insured to cooperate with its insurance carrier in the pursuit of subrogation, and insurance carriers will typically reimburse the insured for all reasonable expenses incurred for assistance in such efforts, including loss of earnings to attend depositions, hearings, or trials and other related proceedings. Protection does not, however, always cover the insured's costs of investigating the loss, including forensic accounting or other investigation or documentation costs.

It's important for municipalities, school districts, and other government entities to do their homework before deciding on a carrier and bond coverage.

LGC-PLT offers a broad assortment of risk management programming that addresses how to avoid claims of misappropriation of money by public employees. We will provide a financial liability assessment through Municipal Resources, Inc. that will look at strengthening the weaknesses in cash management and financial reporting, analyze the current control environment, and provide a comprehensive report with recommendations. In addition, the LGC Academy provides courses such as Basic Governmental Accounting, Financial Account Reconciliation, Financial Reporting and Accountability, and Internal Controls and Fraud Prevention.

Tom Dunn is the former Senior Coverage Administrator for the Local Government Center's Property-Liability Trust.