Understanding the differences among various types of bonds, when they are necessary or required and how they work is key for safeguarding local government operations.

What Is a Bond?

A common type of bond is a three-party contract in which one party (the surety) guarantees the performance or honesty of a second party (the principal or obligor), to the third party (obligee) to whom the performance or debt is owed.

Other bonds appear similar to insurance policies; however, bonds and insurance are different. Insurance is a two-party contract in which an insured pays a premium to an insurance company to manage risk. The contract (coverage document or insurance policy) defines covered losses and responses to each, which could provide for payment, repair, defense or a number of other possibilities. With an insurance policy, losses are expected, premiums reflect the risk of a loss occurring, and premiums would be expected to increase following a loss.

With a bond, no loss is expected. A fee is paid to provide the bond, which represents a guarantee that a contract or specified duties will be completed. In cases where a bond must be paid out, reimbursement is often sought by the surety against the principal. The bond is intended to pay the party who suffers the loss.

In some cases, such as in the pilfering of petty cash, the member would receive the payment. In other cases, it could be the state, a department of the state, the federal government or whoever is listed as the obligee.

Fidelity Bonds

A fidelity bond protects against financial loss to money, securities or other property through employee theft or failure to perform their duties faithfully.

Employee Dishonesty and Faithful Performance of Duty Bond

The MCIT provided fidelity bond (employee dishonesty and faithful performance of duty bond) is designed to protect members and the public from loss caused by an employee’s dishonesty or lack of faithful performance of duties. The coverage is not designed to protect the employee.

In the event of loss, MCIT and Old Republic (MCIT’s excess bond carrier) are entitled to pursue recovery against the employee who caused the loss equal to the claim amount or policy limit, whichever is less.

• Employee dishonesty covers dishonest acts committed by an identified or unidentified employee acting alone or in collusion with other persons with the manifest intent to cause the member to sustain loss and obtain financial benefit. Examples of losses include but are not limited to fraud, misappropriation of funds, computer theft and embezzlement.
• Faithful performance of duty covers financial loss the member immediately incurs because an employee failed to perform faithfully a duty as prescribed by law. This should not be confused with a liability loss that could be directed to an employee by a third party for a negligent act.

The definition of “employee” includes elected and appointed officials.

Bond claims relating to volunteers are excluded. Examples of other actions not covered include accounting errors, minor human error and mysterious disappearance. Proof that a covered loss occurred must exist. In many cases, proof of an amount of loss must be provided. Members should see the MCIT Coverage Document for coverage terms, conditions, limitations and exclusions.

The employee dishonesty and faithful performance of duty bond should not be confused with MCIT’s theft, disappearance and destruction of money and securities coverage that is included in the property section of the MCIT Coverage Document. The latter coverage responds to claims caused by the theft of money and/or securities by someone outside the organization.

Required for Some Officials

Minnesota Statutes require many elected and appointed officials to meet certain fidelity bonding requirements. Some of the positions that have a bonding requirement include:

• County highway engineers
• County auditor, deputy county auditor
• Director of purchasing
• County treasurer and all employees in the office including the deputy county treasurer
• County recorder, any person authorized to make abstracts of title in the county building (separate from the recorder)
• County sheriff
• County surveyor
• Director of local social services agencies
• Watershed district managers
• Any employee as determined by the board
• Individuals appointed to fill a vacant office (county auditor, treasurer, recorder, attorney, surveyor or coroner) if required by law

This is not an exhaustive list. Members should ask legal counsel for specific requirements.

Bonds are typically issued to the incumbent in the position and paid for by the organization. The amount of bond coverage varies by official, and MCIT’s employee dishonesty and faithful performance of duty coverage meets statutory requirements for most members.

Proof of Coverage

The MCIT employee dishonesty and faithful performance of duty declarations page from the current year’s coverage document along with the table of contents section explains and documents the bond coverage in place. Members should provide copies to the county recorder (county recorders provide proof of bond to the court administrator of the district court).

Amount of Coverage

County members have a blanket limit of $50,000, covering all employees and public officials. For noncounty members, coverage starts at $5,000 but could be higher as determined by statutory requirements or other factors.

Members can purchase higher, or excess, limits of fidelity coverage through MCIT on a blanket basis, or they can purchase excess limits for specific positions.

Members should consider two important factors when determining the amount of employee dishonesty and faithful performance of duty coverage:

1. The required limits specified by Minnesota Statutes for a particular position.
2. How much in funds or property an employee or official could take before being detected.

Fidelity Blanket Coverage vs. Per Position Coverage

• Blanket coverage: Coverage for employee theft of money, securities or property written with a limit that applies to the acts of all the member’s employees
• Per-position coverage: Coverage for employee theft of money, securities or property written with a limit that applies to a specific position named in the policy, regardless of the number of individuals holding that position

Excess per-position coverage is typically purchased for auditors, treasurers or financial directors who have access to large amounts of funds.

Filing a Bond Claim

All MCIT bond claims must be submitted electronically through the online portal at MCIT.org. Upon discovery of a loss or situation that may give rise to a loss related to bond coverage, members should submit the claim to MCIT. It is the duty of a member to notify MCIT as soon as he or she reasonably suspects a bond-related loss.

Risk Management Considerations

To protect the organization from potential employee dishonesty or faithful performance of duty issues, members should:

• Know which employees have access to funds and property or handle large amounts of money on a regular basis.
• Determine how much in funds or property an employee or official could take before being detected.
• Establish and practice procedures for the handling of funds, separation of duties and a checks and balances system.
• Limit access to vaults, cash drawers and even petty cash to those with proper authority.
• Review blanket and per-position bond limits to evaluate the appropriateness of those limits and work with the member’s MCIT risk management consultant to implement any changes.
• Review bond requirements in statute to determine appropriate limits.
• Do not allow volunteers to handle money or other valuables, as there is no coverage for volunteers.