Businesses today rely on insurance coverage as a way to manage risks and guarantee their ability to survive sometimes catastrophic loss, such as some arising from the financial crisis. An often overlooked component of a business’s coverage program is its fidelity or crime bond—a specialized form of insurance designed to protect against loss from crime. Fidelity bonds can be further specialized by industry, such as with the Standard Form 24 Financial Institution Bond that combines various types of coverage to protect banks and other financial institutions.
The typical fidelity bond consists of insuring agreements that define the scope of coverage as well as exclusions from coverage, definitions, and general conditions. Common insuring agreements target fidelity loss (loss from employee theft), on-premises loss (loss caused by a person present on the defined business premises of the insured), in-transit loss (loss while goods are being transported to or from the defined premises of the insured), forgery or alteration loss (loss caused by fraudulent signatures or documents), and similar risks inherent in the operation of a business. Recognizing the electronic nature of many businesses, more recent bonds also provide coverage for computer-related fraud and funds transfer fraud, as well. In the context of mortgage loans, there may also be coverage for the dishonest acts of a loan servicer or loans purchased by a financial institution that prove to be fraudulent because (possibly among other things) the documents contain a forgery, are counterfeit, or altered. Insurers use countervailing exclusions to limit the coverage that may otherwise be provided. For example, insurers often purport to exclude coverage for credit losses, trading losses, and similar risks that insurers deem unavoidable and thus uninsurable (at least in exchange for standard premiums).
Because of the unanticipated factual circumstances and high stakes usually involved with fidelity bond losses, and because bonds are esoteric and less common in the broader range of insurance coverage, disputes frequently arise between policyholders and their insurance carriers as to the nature and scope of coverage. Several common areas of disagreement relevant to coverage for losses arising out of financial crises are outlined below.