Protecting against the loss of money, securities or property resulting from dishonest acts of employees or public officials should be an important part of a municipality’s risk management strategy. There are several ways municipalities can protect against these losses, including purchasing public official bonds and crime insurance, commonly referred to as employee dishonesty coverage.
The type of coverage and limits should be determined by the municipality. This decision should be based on an analysis of potential risk.
There is often confusion about the difference between a public official bond, which is a type of surety bond, and crime insurance. Both offer protection against the conduct or omission by a public official that constitutes a breach of the public official’s duties of office.
Crime insurance coverage includes employee dishonesty, forgery, alteration, theft, disappearance and destruction. SC Municipal Insurance and Risk Financing Fund offers a standard $200,000 crime insurance limit for each member. Higher limits are available in increments of $100,000 up to $500,000 each year at renewal. Municipalities should consult with their municipal attorney to determine if a higher limit is needed.
Some municipalities have ordinances which require the city to purchase public official bonds on key employees who handle money. Contractual and legal compliance involving loans or requirements of staff administered programs are common reasons for securing public official bonds.
The primary difference between crime coverage and public official bonds is that crime coverage focuses on the "act," whereas the bond is “personal.” The public official bond application requires a signature from the principal, or applicant, who agrees to indemnify the bond company for any sums paid by the bonding company. An application is needed for each employee who is to be bonded. A bond is individually written so it also requires a credit check of the individual to be bonded.
Another difference between the two is that crime coverage limits could be exhausted quicker if more than one person is involved. With an individual bond, the limit applies in full to the bonded person without a deductible.
The purchase of public official bonds and crime insurance should not be a substitute for properly vetting applicants for a position, including background checks. Internal controls and workflow processes to create the necessary financial checks and balances for preventing or detecting fraud should also be implemented.
For more information on crime insurance or public official bonds, contact Robert Collins, underwriting manager at 803.933.1279 or rcollins@masc.sc.