Bank Fraud-Bond Misunderstandings… Servicing Contractors

In about half the small bank insurance programs I review I find that the fraud-bond has had coverage broadened to cover “Servicing Contractors.”

Most banks don’t need this coverage because they don’t use “Servicing Contractors” as defined in the bond.

This from the ABA’s coverage description:

The Servicing Contractors Rider extends the definition of “Employee” under Insuring Agreement A –
Fidelity to include servicing contractors. A servicing contractor is a person, partnership, or
corporation (other than a financial institution employee) authorized to:

1. Collect and record real estate mortgage or home improvement loan payments;
2. Establish tax and insurance escrow accounts;
3. Manage real property owned, supervised, or controlled by the financial institution; or
4. Perform other acts related to the above activities.

Coverage is provided for losses resulting from dishonest or fraudulent acts committed with intent
to cause a loss to the financial institution and to gain a financial benefit for the servicing
contractor or another. Coverage includes loss due to a contractor’s failure to forward funds
collected on behalf of the financial institution, provided that the contractor is legally obligated to
do so. This Rider does not provide coverage for losses resulting from a contractor’s failing to
collect funds; a contractor’s insolvency or bankruptcy; or loans to servicing contractors.

For example, a bank hires a servicing contractor to collect and record real estate mortgage payments. The contractor collects payments for a period of time but fails to forward the funds collected to the bank. The bank is unable to locate the contractor and sustains a loss.

Does your bank insurance have coverage you are paying for but don’t need?