Glossary of Business Credit Terms

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Financial Institution Blanket Bond

What is a Financial Institution Blanket Bond?

Financial institutions like brokers, mutual funds managers, insurance companies etc. have several people under their employ that handle large sums of cash and financial transactions for their numerous clients in the name of the particular institution. Lack of competence, theft, or dishonesty on the part of the employees could result in financial loss and consequently, legal lawsuits. Owners of financial institutions cannot monitor every transaction carried out by every employee but must protect themselves and their businesses from the consequences of such actions. This can be achieved with a financial institution blanket bond.

A financial institution blanket bond is an insurance policy obtained by financial institutions that protects the institution against the consequences of dishonest acts perpetrated by their employees. Such acts include theft, fraud, forgery, counterfeiting, cyber crimes, extortion etc.

How Do Financial Institution Blanket Bonds Work?

Financial institution blanket bonds are different from other bonds because it protects the institution that takes out the bond; it is therefore referred to as first-party bond coverage.

This bond protects only against dishonest acts by employees for personal gain. It protects only against financial loss resulting from the direct fraudulent actions of employees. The bond can either protect individual employees or particular positions within the institution.

The institution purchases the policy from an insurance company and receives coverage. If there is a loss or mishandling of customer funds and the institution falls victim to this, the bond can be used as an immediate source of remuneration. This bond also protects against claims by a third party like a customer whose funds have been stolen.

The financial institution bond is often referred to as an insurance policy but should not be considered as a full-fledged insurance policy where the all the risk associated with financial loss is transferred to the insurance company. The financial institution bears the full cost of a loss; the insurance company is around to provide immediate, temporary relief.

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