Securing the Public Trust: Public Official Bonds vs. Government Employee Crime Coverage

Public Official Bonds

Through a public official bond, a public officer and a secondary obligor (the surety) undertake to pay up to a fixed sum of money (the penal sum) if the officer does not faithfully discharge the duties of his or her office. Within the context of the three-party surety relationship, the public official is the principal, the bonding company is the surety, and the government—or in some cases, the public being served by the official—is the obligee. Generally speaking, the public entity obligee that employs the official is the only proper claimant on these bonds, although, in some jurisdictions, specific statutory authority provides that third parties may also sue on the bond.

In general, state statutes require public official bonds for all elected and most non-elected public officials. It should be noted here that the federal government maintains a prohibition against public official bonds for federal officials. Covered state and local public officials can range from the governor to members of the local school board. Statutes may require an individual public official bond for each public official or may allow for a blanket bond for all public officials that fall into a certain group (i.e., all members of the board of directors or all alderman of a town or city). In considering a statutory bond, it is important to note that courts may interpret a statutory bond to conform to the statutory requirements, rather than the terms set forth therein. Otherwise, the bond will be construed as written.

Depending on the statutory language, a public official bond may be a “faithful performance bond,” which appears to be the most commonly required public official bond. In the alternative, a “fidelity bond,” “public employees blanket bond,” or “public employee dishonesty policy” may be statutorily required. A “faithful performance bond” is designed to ensure actual and proper performance of the official’s statutory and official duties. “Fidelity bonds” are generally limited to covering loss resulting from dishonest conduct of a public official.

Importantly, the scope of an official’s duties and construction of the “faithful performance” standard varies from state to state, and so the governing statute and the law of the specific jurisdiction must be reviewed in any one specific case. For example, some courts have construed “faithful performance” more broadly to include the negligent performance of official duties, in addition to fidelity and honesty. In any event, these bonds are not generally construed to provide coverage for all acts or omissions of public officials that result in a loss, only those that are within the official duties and responsibilities of the relevant official. The exception here in most jurisdictions is a public official’s failure to account for or turn over funds, including instances where funds were stolen despite the public official’s due care, or where the public official made unauthorized expenditures. In those cases, most jurisdictions will apply a strict liability standard to the surety. Nevertheless, recovery on a public official bond requires proof of actual damages; theoretical or non-pecuniary losses are not covered.

At the bottom, as with any surety bond, a surety is liable on a public official bond only to the extent that its principal is liable. To the extent its principal is immune from civil liability, the issuance of a bond should not act as a waiver of that immunity. Similarly, to the extent the principal acted within his or her “discretionary” authority and is thus immune from liability, the surety would also benefit from that immunity.

Government Employee Crime Coverage Policies

In contrast to public official bonds, government employee crime coverage policies are policies of insurance that follow the traditional two-party format and have detailed terms and conditions. These policies typically contain several enumerated insuring agreements and, subject to all terms, conditions, exclusions, and limitations, generally cover loss caused by employee dishonesty, forgery, or alteration, loss inside the premises, loss outside the premises, computer fraud, and money order or counterfeit paper currency. Government crime insurance policies are similar in form to public official blanket bonds, which typically have additional definitions, conditions, limitations, and exclusions, just like traditional insurance policies. These policies may be accepted in lieu of or as compliance with statutory bonding mandates, but individual state requirements must be consulted in this regard.

The level of intent required by these policies varies. Some forms require that the employee act with the “manifest intent” to cause a loss to the employer or government entity. Other forms cover loss resulting from “employee theft,” which is further defined as the “unlawful taking of property to the deprivation of the insured.” There is abundant case law discussing these different standards of intent in the context of fidelity and commercial crime coverages, which should be consulted in reviewing a claim under one of these policies.

Some companies also offer a “faithful performance” endorsement, which provides coverage for loss resulting from the failure of an employee to faithfully perform his or her duties as prescribed by law, when the failure has as its direct and immediate result a loss of the insured’s covered property. Just as with a public official bond, the extent of coverage under a “faithful performance endorsement” should be governed by the statutorily prescribed duties of the public official. Thus, each public official (or covered employee) should be considered on a case-by-case basis determined by their statutory jurisdiction and requirements.

Conclusion

Protecting the public from the potential dishonesty of elected officials through public official bonds has been a constant in municipal governance for centuries. It is not, however, unlimited. Local statutes and case law as well as the specific duties and responsibilities of the official at issue must be reviewed and a real loss ascertained before a surety or an insurer will be held to account.