Financial Risks and Freight Payment: Fidelity Bonds (Employee Dishonesty Insurance)

The excerpt below is from the publication A Guide to the Financial Risks of Freight Payment Providers, which was produced by A3 Freight Payment for the benefit of customers and prospects. For the complete publication go to the Instant Access Materials in the A3 Freight Payment Resource Library

In receiving temporary custody of a customer’s assets, freight payment companies are assuming a risk of safekeeping, against which they normally take insurance. The insurance coverage can go by many names. It can be called a fidelity bond, a crime policy, or employee dishonesty bond or employee dishonesty insurance. Employee Dishonesty Insurance is the most descriptive term and, therefore, is how A3 Freight Payment refers to it. 

Employee Dishonesty Insurance protects the freight payment company (not its customers) against losses incurred due to the dishonest acts of its own employees. If employee John Smith of the freight payment company steals $1 million and heads to Bermuda, the freight payment company claims the loss with the insurance company. The insurance company makes the freight payment company whole and then tracks down John Smith for recovery.

 Customers of freight payment companies would be wise to have themselves named as “loss payees” on the employee dishonesty policy. In the event that an employee steals the assets of that customer, the customer may go directly to the insurance company and be made whole for his loss without needing to go through the freight payment company. This is important should the freight payment company go out of business due to the loss. The “loss payee” standing allows the customer to avoid the bankruptcy court. 

Some employee dishonesty policies also cover criminal acts of third parties who are not employees. They can cover such things as electronic fraud where EFT systems are hacked and a customer’s money is stolen, as well as acts of forgery by third parties. 

Customers of freight payment companies should require a certificate of insurance issued in their name to be sent to their risk management personnel or other representative. A copy of a “generic” certificate is not evidence of coverage. It must have the customer’s name and address on it and should come directly from the insurance company or broker. It should NOT come from the freight payment company.

Employee Dishonesty Insurance is NOT a surety bond. A surety bond is inappropriate for a freight payment company. It is typically used in the case of a contractor where one wishes to make sure a building job is completed even if the contractor goes out of business. These are extremely expensive bonds and the provider’s lack of an insurable interest (e.g. a construction project) usually makes them inaccessible for freight payment companies.

Posted by Ross Harris at 15:10