Navigating Bond Coverage and Claims: Trends and Tips on Getting Claims Paid. Charles Holzman Patricia Corkery

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1 Navigating Bond Coverage and Claims: Trends and Tips on Getting Claims Paid Charles Holzman Patricia Corkery Premium Breakout Session August 5, rd Annual National Directors' Convention

2 Who are Holzman and Corkery? Chuck Holzman Managing partner of Holzman Corkery Michigan-based law firm dedicated to representing credit unions for over 40 years Patty Corkery Partner with Holzman Corkery Experienced in representing credit unions in bond claim disputes and claims investigations

3 Agenda for the Next 60 Minutes What is a bond? Brief history Basic protections When loss is discovered Coverage? NOL, POL and investigation Denial Anatomy of bond claim and lawsuit Preparing for your next loss

4 Bond is Insurance Purpose is to protect your credit union from unforeseen losses Fidelity characteristic of being faithful Formerly called a blanket bond Losses caused by employees Theft Fraud Electronic Crime Fraudulent deposits

5 History Employee fidelity dates back to ancient Babylonia 1500 years BC Unscrupulous traveling salesmen employer would take as security the wife, children or property of employee for return of sale proceeds In US over a hundred years ago, banks and credit unions sought insurance unfaithful employees Started as honesty insurance Different losses expanded bond

6 History - cont surety industry formed the Surety Association of America 1916 Surety Association and American Bankers Association marketed first fidelity bond Since 1918 bonds evolved based on loss and litigation to what you have today

7 Bond Coverage Employee Dishonesty Coverage: Dishonest acts committed by employee or director Must be committed with INTENT to: Cause you to sustain a loss -OR- Obtain improper financial benefit Improper financial benefit DOES NOT include salary, commission, bonus, promotion, profit sharing or pension

8 Employee Dishonesty cont. Hard to prove Juries asked to determine subjective intent of employee Courts may look to manifest intent* Cannot just show employee was dishonest Must show manifest intent for insured to sustain a loss AND- That employee obtained financial benefit *Manifest not hidden, obvious

9 Faithful Performance Coverage Faithful Performance We will pay you for loss resulting directly from employee s failure to faithfully perform his/her trust. Faithful Performance Enhanced Same, but if loss involves loans, earnings are not deducted

10 Faithful Performance Coverage cont. Failure to faithfully perform his/her trust What does this mean? Acting in conscious disregard of your established and enforced share, deposit or lending policies

11 Faithful Performance Exclusions Negligence, mistakes or oversights Acts or omissions resulting from inadequate training Unintentional violation of laws or regulations Unintentional violations of your policies or procedures Acts or omissions known to, acquiesced in or ratified by your Board of Directors Acts where coverage exists under employee dishonesty coverage

12 Discovery of Loss Discovery occurs when you first become aware of facts which would cause reasonable person to assume loss incurred Exact details or amount of loss may not be known Also occurs when served or receive notice of lawsuit MUST send written notice of loss 60 days after discovery (may be more or less)

13 Form an Internal Team - Investigate Need to find out what happened and who was involved Prevent further wrongful activity Termination or discipline Implement various procedures Regulatory reporting obligations Determine recovery steps or mitigation efforts

14 Form Investigation Team One or more senior management Security department employee Outside legal counsel knowledgeable about investigation and legal issues Accountant/auditor Do not include people who may be involved in loss

15 Duties of Team Preserve documents Computer data Voice mails s Security tapes Assemble documents Conduct interviews Prepare Proof of Loss

16 Proof of Loss Typically due 180 days after notice of discovery of loss Identify people who caused loss Explain and document loss Sworn Proof of Loss signed by President/CEO or Chair of the Board

17 Your Obligations Under Bond Timely give NOL and submit POL Take reasonable measures to minimize loss may involve collection activities Give bond carrier reasonable access to your property, books, records and operations that are relevant to loss Permit carrier to question directors and employees under oath Cooperate in all matters pertaining to loss

18 Bond Carrier Investigation Usually starts after POL filed but can be before Bond carrier may hire attorney as investigator rarely is investigation conducted by bond carrier employee Investigator will request documents Investigator will meet with employees/directors/auditors

19 Documents to Bond Carrier Volumes of documents requested Requested documents may include: Board minutes Loan files included in loss and not included Policies NCUA or state exam reports (May need to exclude) Auditor reports Supervisory Committee minutes Recovery documentation Employee personnel files

20 Investigation Tips Document all papers presented to bond carrier Have attorney fully prepare employees/directors for statements Be sure to comply with all bond obligations Refrain from providing documents you are prohibited from providing exam reports, SARs

21 Coverage or Denial? Decision may take over a year Coverage may include coverage for certain loss but not others or a settlement Denial comprehensive denial letter Review denial letter with legal counsel and consider options

22 Denial Was loss covered? Analyze denial letter does insurer have valid basis? Submit additional documents Review letter and determine if additional documents may change coverage decision

23 Lawsuit Considerations Lawsuit against carrier Consider merits of claim in unbiased way Direct costs attorney, experts, court reporters, transcripts, documents Indirect costs employee time, morale, publicity Subrogation of claims against employee Effects on coverage increased premium and deductible, loss of coverage

24 Anatomy of a Lawsuit Michigan First Credit Union v. Cumis Ins. Society Discovery of Loss indirect lending 1,600 loans POL filed in May 2004 Cumis hired attorney/investigator 1.5 year investigation First denial letter November 2005 Additional investigation Second denial letter Lawsuit filed December

25 Loss VP of Lending and two employees Launch of indirect lending program Prime the Pump Loans approved in violation of policy Resulted in over 5 million dollars in losses Credit union needed to prove: Conscious disregard of established and enforced lending

26 Attorney/Investigator Cumis hired attorney to conduct investigation Court ruled that prior to denial letters all communications and documents created by investigator were discoverable Cumis also retained accountant to review loans on-site at credit union Cumis requested thousands of documents close to 100,000 documents provided to Cumis: All loan files Policies, Board Minutes, Financial Reports Employee files reviews and job descriptions lending Exam Reports

27 Claim Denied 19 Page denial letter Cumis claimed credit union did not have sufficient policies and procedures Lending policy vague employees have discretion Credit union making money on loans Not a conscious decision to circumvent policy Credit union wanted to increase lending Examiners critical of program

28 Lawsuit Filed in December, 2005 Several contested matters prior to trial: Exam reports state intervenes Electronic discovery Testimony of Cumis Risk employee Bond advertisement admissibility Credit Union loses several early battles

29 Michigan First Prevails Jury trial lasted 3 weeks Jury award 5 Million Dollar coverage limit Penalty Interest Michigan Uniform Trade Practices Act Judgment - $5,050,000 in damages and $2,730,415 interest. Recovered: $7,780,

30 Prepare for Your Next Loss Familiarize yourself with Bond and coverage Job descriptions Policies establish and enforce Employee sign acknowledgment of receipt Training Train employees when bond may provide coverage Train employees on all policies and procedures Violations of policies noted in employee file and advise bond carrier of all potential bond claims Living breathing policies Board adoption of policies and amendments highlighted

31 Questions? Please stop by booth 112 Visit holzmanlaw.com to learn more about our firm and sign up for our legal newsletter Thank you for Attending Navigating Bond Coverage and Claims: Trends and Tips on Getting Claims