Why do I need a public officials bond and what should the limit be?
A public officials bond is a surety bond that guarantees a public official will perform their duties faithfully and honestly and will remain in compliance with laws and regulations during their public service. The need for a public officials bond is determined by a city or town's local ordinance. The amount of the bond is determined by the municipal council.
Typical language in public officials bond ordinance states that "All city officers and employees who handle funds of the city shall enter into bonds to the city with a bonding company authorized to do business in this state in amounts determined by the council and conditioned on the faithful performance of their duties. The city shall pay the premiums of the bonds."
Unlike commercial insurance, a public officials bond is individually underwritten. Public official applicants must provide their Social Security number, since the bond company, also called the surety, will check the applicants' credit scores. A second important difference between these bonds and commercial insurance is that bond applicants agree to personally indemnify the bonding carrier if the carrier pays any claims under the bond.
What do public officials bonds cover?
Public officials bonds cover fraud, employee theft, embezzlement, illegal fund transfers, counterfeiting and other dishonest acts.
A common occurrence that involves these bonds is a trusted, long-time employee who steals from a municipality. At first, it may only be a minimal amount. Then, the employee becomes emboldened by how easy it is to forge checks, alter invoices or pad expenses. Many times, this fraud can go on for years. Greed or carelessness may finally lead to the employee being caught. By then, the city or town has suffered significant losses. Most thefts are uncovered while the employee is on vacation.
What types of insurance can municipalities purchase?
Insurance protection exists to cover employee dishonesty and theft, and it's economical and easy to purchase.
While surety companies usually sell fidelity bonds, they are actually a form of insurance. The policies are sold as one-year contracts that can be renewed annually. When a company suffers a loss, it makes a claim that is then paid by the insurer.
Tightening financial controls
Municipalities of all sizes can benefit from instituting these basic checks and balances:
- Confirm past employment, job references, certifications and degrees.
- Consider a background check before hiring someone.
- Have written policies regarding theft and fraud, and enforce them.
- Separate operations from accounting. Do not allow one person to have total control over funds. Someone authorized to write checks shouldn't make deposits or reconcile bank statements. Checks should be countersigned.
- Limit who can handle cash and institute controls.
- Create a paper trail for each accounting transaction.
- Lock and limit access to storage areas.
While a public officials bond cannot prevent employee theft from occurring, it is important to have bonds in place for those employees or public officials having regular access to cash and financial instruments.
For more information on public officials bonds, contact Robert Collins, underwriting manager at 803.933.1279 or rcollins@masc.sc.
Portions of this article originally appeared in the November 2019 edition of Construction Executive. Reprinted with permission from Old Republic Surety.