Para 13.2,IC 78, Miscellaneous Insurance One Liner, Chapter 6: Fidelity Guarantee 

Para 13.2,IC 78, Miscellaneous Insurance One Liner, Chapter 6: Fidelity Guarantee 

Insurance exams offered by the Insurance Institute of India (III), consist of various papers either in Life or Non Life or Combined. Here we are providing ONE LINER IC 78, Misc Insurance  CHAPTER 6:  Fidelity Guarantee  for para 13.2 and III exam . These questions will be very helpful for upcoming promotional exam in 2020.

IC 90, Human Resource Management is a very important topic in insurance promotional exam. This IC 78, miscellaneous insurance paper comes in all GIPSA exams which makes it very important.

The Article IC 78, Chapter 6: Fidelity Guarantee 

♦CHAPTER 6: FIDELITY GUARANTEE

1.Commercial fidelity guarantees: This policy covers the employer in respect of any direct financial loss which he may suffer as a result of employees’ dishonesty. The majority of policies issued are to commercial and manufacturing firms.

2.Two features that distinguish fidelity guarantee business from other types of accident insurance business are that there are three, instead of two, parties concerned.

3.The contract is entered into between only two of them (viz., the employers and the insurers), and that both the law of insurance and the law of suretyship are relevant.

4.The basis for a fidelity guarantee originates from an employer and employee relationship or a fiduciary relationship where confidence or trust reposed plays a crucial part.

5.Broadly, fidelity guarantee business can be divided into the following sections:

  • Commercial fidelity guarantees
  • Court bonds
  • Government bonds
  1. Commercial fidelity guarantees:
  • The cover granted is against a direct pecuniary loss and not a consequential one
  • The loss should be in respect of moneys securities or goods of the insured
  • The act should be committed in the course of the duties specified
  • If the employee guaranteed under the policy had left the services of the employer and was re-engaged by him, no liability attaches to the policy, unless the consent of the insurers was obtained
  • No loss that may have been caused by bad accountancy is payable, the loss must be supported by evidence of any of the specified acts of dishonesty

7.Section 17 of the Indian Contract Act provides a definition of fraud, but a precise definition of the term has not been possible even by courts of law.

8.fraud is understood as “obtaining an advantage by unfair or wrongful means.

9.Commercial fidelity guarantees Period of discovery: The customary time limit provided is that the act or acts insured against should be:

  • Discovered not later than twelve months after the resignation, dismissal, retirement or death of the employee, or
  • Not later than 12 months after the termination of the policy, whichever be the earlier

10.Commercial fidelity guarantees Conditions: Some of the important conditions are considered below

10.1.Application of control measures

  • The employer has to ensure that all precautions, checks and other control measures to secure accuracy of accounts are properly applied and supervision over the employee exercised.
  • He has also to advise the insurers immediately of any change in the nature of duties of the employee or the circumstances and conditions of employment
  • A breach of this condition relieves the insurers of all liability under the policy.

10.2.Notice of claim

  • Within three months of the initial notice, the claim has to be lodged with the insurers accompanied by full particulars and proof satisfactory to the insurer.
  • When the loss is made good, the policy has to be delivered upto the insurers for cancellation and discharge.This is so in respect of an individual policy.
  • if the policy is a floater or collective or blanket, it shall only cease to cover the defaulting employee or employees on and from the date the loss is

10.3.Prosecution

  • The insurers reserve their right to insist on criminal prosecution of the employee, bearing upon themselves the expenses thereof in the event of a conviction.
  • The purpose of this condition is to put to the test of law the allegations of an employer and to bring to books, the defaulting employee so that it may be a deterrent to other employees.

10.4.Subrogation: After satisfaction of a claim, the insurers are entitled to take over the rights of the employer against the employee as far as the loss is concerned, at the cost of insurer.

10.5.Contribution: The policy would pay only pro rata with any other guarantee, whether by policy or otherwise, held by the employer on the date of loss .

  • The employer is bound to disclose to the insurers the existence of all such guarantees and the termination or expiry thereof.

10.6.Termination of policy

  • The insurers are at liberty to cancel the policy at any time after due intimation to the employer, returning on demand a proportion of the premium corresponding to the unexpired period of the policy.

10.7.Arbitration: The disputes relating to the amount of claim only (liability being admitted), are to be referred to arbitration.

  • The making of an award shall be a condition precedent to any right of action against the insurers.

11.Types of policies The following types of policy are in general demand:

  • Individual policy
  • Collective policy
  • Floating policy or floater cover
  • Position policy
  • Blanket policy
  • Excess floating policy

12.Individual policy: This type of policy is used where only one individual is to be guaranteed

13.Collective policy: Where the entire staff or a number of selected individuals are to be covered, a collective policy is issued.

13.1.A collective policy comprises a schedule containing the names of the employees to whom the guarantee applies with a note of the duties of each employee.

13.2.The amount of guarantee of each employee is specified in the schedule against his name.

14.Floating policy or floater cover: This is an extension of the collective form of policy in which the name and duties of the individual to be covered are inserted in a schedule, but instead of individual amounts of guarantee, a specified sum of guarantee is “floated” over the whole group.

14.1.A claim in respect of one employee will, therefore, reduce the guarantee by the amount until renewal, unless the original sum is reinstated by payment of an extra premium.

14.2.Example : In many trades, it is difficult for an employer to estimate the possibilities of default if there is manipulation of the books and account by any one employee or more employees acting in collusion, and the extent of any loss, which might arise in such circumstances.

The employer may also be not in a position to attribute such loss to one employee more than another. Apart from assessing their respective opportunities, it cannot be foreseen which employee is likely to exercise the greatest ingenuity in concealing defaults till they have reached such proportion as could no longer be concealed.

15.Position policy: This is similar to a collective policy with the difference that instead of using names, the “Position” is guaranteed for a specified amount, so that a change in the person holding the position does not affect the cover

16.Instead of a specified amount for each position, a single amount of guarantee for all positions may be “Floated”.

17.Blanket policy: This policy covers the entire staff without showing name or position.

17.1.Such policies are only suitable for an employer with a large staff and the organisation to make adequate inquiries into the antecedents of his employees.

18.Excess floating policy: This is a combination of collective policy and a floating policy.

18.1.An employer may safeguard himself against loss of an unforeseen amount by reason of default continuing for a long time by unusually ingenious methods of concealment by having a floating guarantee for any loss in excess of the individual amounts set out in the schedule.

19.Employers’ forms: The form generally contains questions relating to the following:

  • Legal status of the employer, e.g. sole trader, partnership etc.
  • Amount of guarantee required
  • Details of any other security held by the employer
  • References
  • Details of present and past service
  • Duties assigned to the employee, and whether he has any outside duties
  • Whether the employee will have money in his possession during his duty period? If so, the manner in which he will make payments and the likely amount that will remain with him
  • Whether the employee will have charge of stock? If so, the nature and amount of stock, and system of maintaining stock records
  • System of check and method of supervision
  • Remuneration of the employee
  • Employees’ debts or liabilities, if any
  • Employees’ previous defalcations, if any

20.Applicants form : The applicant (the person to be guaranteed) has to fill in an applicant’s form which requires in addition to his name, age and address, other details such as:

  • The name, address and the business activities of the employer
  • The position to be covered by the guarantee
  • The names and addresses of references
  • The salary or other remuneration to be received
  • Details of past guarantees
  • Also details of the applicant’s status (single or married) and dependents, if any
  • The extent of debts, private income, whether or not the applicant has ever been bankrupt or insolvent
  • Details of past employment, whether he is a householder and owns furniture Details of his life assurance are also required

20.1.This information enables the insurers to make full enquiry into the moral hazard of the risk proposed.

21.Private referees form: This is a form which may be sent to persons whose names and addresses have been supplied by the applicant.

21.1.The object is to obtain a reference for the applicant.

21.2.The form contains questions about the extent to which the referee knows the applicant, whether he is related to him, applicant’s character and habits, and the general opinion of the referee about the applicant.

21.3.The form has little underwriting value because any person can get two friends to vouch for him.

22.Previous employer’s form: This form is sent with the main object of ascertaining the applicant’s integrity and honesty, the extent of his duties with the previous employers and the reasons for leaving them, and whether he was guaranteed.

23.Collective proposals: For collective, floating and blanket policies, individual applicants’ forms are dispensed with.

24.Commercial fidelity guarantees: the following are some of the features which may be considered good for such a system:

  • Money should not be allowed to accumulate in the hands of any one employee to an unreasonable extent.
  • All moneys collected on behalf of the employer should be paid over daily or at short intervals.
  • Employees engaged in handling money should not also be employed upon the books or records in which the money is accounted.
  • Employees collecting money should not be allowed to make any disbursements there from.
  • All payments should be made by crossed cheques only.
  • Receipts for all money collected should be made on printed and numbered forms out of a book with counter foils.
  • The record should provide documentary evidence which places the responsibility for irregularities at the right place.
  • The responsibility for the correctness of every payment should be shared by at least two persons. IN other words, there should be dual control
  • The entries in cash book should be checked at least once a week with original documents.
  • The employers’ books should be balanced monthly.
  • Cash in hand should be checked daily.
  • There should be a regular professional audit by a firm of recognised standing.
  • There should be independent surprise check at regular and frequent intervals, of all money transactions.
  1. Moral hazard: The moral hazard of the proposer/person to be guaranteed is another important factor to be considered.
  2. Commercial fidelity guarantees Additional precautions: It is essential when investigating the system of check where a computerised system operates, to ask a number of additional questions such as:
  • Is there an independent check of the completed programs / and / or modules and how often?
  • It is possible for the program to be run by a single operator?
  • Do system analysts and data preparation have access to the computer room?
  • . Is anyone responsible for data preparation allowed access to control records?
  • How program changes are authorised and records of changes kept?
  • Is a self checking system incorporated for internal control?
  • Is there a rotational system for operational duties?
  • What functions do external auditors exercise in connection with the system?
  1. Commercial fidelity guarantees Hazardous risks: A representative list of such risks is given below
  • Collection agents whose financial limits are disproportionately high compared to their remuneration and the security deposit given by them.
  • Jewellery salespersons
  • Cashiers in eating houses, cinema houses and other places of entertainment
  • Estate agents
  • Treasurers of societies or associations
  • Employees of bullion merchants and of works of art dealing in antiques, firms and other valuables

28.Commercial fidelity guarantees Rating: The premium under individual and collective policies is charged as a rate per cent of the amount guaranteed, subject to a minimum premium.

28.1 The factors ordinarily taken into consideration for determining the rate of premium are:

  • The amount of guarantee
  • The type of occupation
  • The system of check and the method of supervision

28.2.The premium for a floating policy comprises a percentage charge and a per capita charge.

28.3.The percentage charge is applied on the amount guaranteed and the per capita charge applied on the number of employees to be guaranteed.

28.4.Example: If a floating policy has to be issued covering 200 employees for an amount of Rs.2,00,000 and the percentage charge is, say, 1 percent and per capita charge Rs.5. What would be the premium payable?

Premium for floating policy = Percentage charge+ Per capita charge

= (1% of 200000) + (5*200)

= 2000+1000

= 3000 Rs

29.Commercial fidelity guarantees Period of insurance: The policies are customarily, issued for a period of 12 months.

29.1the exposure of risk under short period policies is considerably higher than that under annual policies.

30.Commercial fidelity guarantees Extensions: negligence or lack of care on the part of the employee, Government departments, the Posts and Telegraphs Directorate, the Railways and many public sector institutions demand such extension.

30.1.Since the terms ‘negligence’ and ‘lack of care’ do not admit of precise definitions, it is not a safe underwriting proposition to cover them.

31.Commercial fidelity guarantees Claims: A fidelity guarantee claim form usually contains questions relating to:

  • Name of the defaulting employee, and his last known address
  • Date on which the loss was discovered
  • Period for and the manner in which the embezzlement has been carried on, and concealed
  • Previous irregularity, if any, in the defaulting employees account
  • The extent of loss
  • Whether the matter is reported to the police and if so, the date, time and place of reporting
  • Security held by the insured, in respect of the defaulting employee
  • Amount of salary, commission or other remuneration or allowance that may be due from the insured to the defaulting employee
  • Particulars (if known to the insured) of property, furniture or other effects belonging to the defaulting employee
  1. Investigation of claims: On receipt of a claim form duly completed, investigation of the claim is undertaken in order to ascertain the following:
  • That the loss was notified immediately on discovery
  • When the loss was known and for how long defaults have been going on
  • Whether all material facts were disclosed by the employer in the proposal
  • Whether the system of check and method of supervision as stated in the proposal has been maintained?
  • Particulars of any circumstances which have arisen since the policy was issued which might have the effect of relieving the insurers of liability
  • How, when and under what circumstances the default came to light?
  • Whether there is any salary or commission due to the employee, and if so how much?
  • Particulars of any other guarantee or security held by the employer
  • The methods adopted by the employee to conceal his default and defeat the system of check and method of supervision and the reasons as to how the shortage escaped the notice of audit

32.1.The investigation of fidelity guarantee claims is entrusted to independent surveyors preferably with accountancy qualification e.g. Chartered Accountants.

  1. b) Prosecution

33.Compliance with policy conditions: An important condition in the policy relates to methods of check and supervision.

33.1.According to this condition, the loss will not be paid if the employer adopts new and less efficient methods of supervision or when he fails to exercise proper supervision. If there is a change in the nature of the business since the policy was effected, insurers would be relieved of liability

33.2.The claim would also be prejudiced if there is change in the duties or terms of service of the employee.

34.3.Example: If an employee is required to handle larger amount of cash, consequent on promotion or otherwise, it would adversely affect liability under the policy. However, routine promotions or temporary redistribution of work, etc. due to administrative exigencies, will not affect the risk. However, a reasonable interpretation is placed on the provisions of this condition.

The provisions of the policy relating to the period of discovery should be specially noted. It is not enough if the loss takes place during the policy period it has also to be discovered within the discovery period specified in the policy.

35.The amount payable: The policy provides that the amount payable by the insurer in respect of the defaulting employee shall not exceed the amount of indemnity stated in the schedule of the policy in respect of such employee.

35.1.The amount of claim payable under the policy is affected by the following considerations:

  • Any sum of money which, but for fraud or dishonesty of an employee, would become payable to him, shall be deducted from the amount of the loss before a claim is made under the policy.
  • Thus any salary or commission or any other money due to the employee from the employer has to be deducted from the amount of the loss under the policy.

36.fidelity guarantee insurance. It is not possible to decide on the amount of full insurance, and hence the principle or pro-rata average is not applied.

37.A policy condition provides that if at the time of any loss, there exists any other security or guarantee of insurance covering the same loss, the insurer shall not be liable to pay or contribute more than its ratable proportion of any sums payable in respect of such loss.

Under floating policy, it is provided that any amount paid to the insured in any one period of insurance is accounted in reduction of the amount of indemnity stated in the policy, so that the amount payable by the insurers in respect of all losses in any one period of insurance shall not exceed the limit of indemnity.

38.It may be noted that under a floating policy, the insured has no right of recovery until each defaulting employee has been identified by name.

39.Action after settlement

  • Under individual fidelity guarantee insurance, the policy is cancelled on payment of a claim.
  • Under a collective policy, the name of the defaulting employee is deleted.
  • Under a floating policy, the cover ceases so far as the defaulting employee is concerned.

39.1.Once a claim is paid, it cannot be reopened.

39.2.However, if further loss comes to light subsequently after settlement, insurers may consider the claim strictly on an ex-gratia basis.

39.3.The employer is entitled under common law to recover the amount of the loss from the defaulting employee, or if he dies, from his estate.

39.4.Under the law of subrogation, the insurers, upon payment of the loss, are entitled to take over these rights of recovery.

40.Administration bonds: When a person dies intestate, that is, without making a will, or when the will made by a person is not in order, or when an executor named in a will is not in a position, or refuses, to discharge his duties, the court appoints an administrator for winding up the affairs of the deceased.

40.1.The person who is appointed as an administrator has to furnish a surety for the proper discharge of his duties and for the proper accounting of the deceased’s estate.

40.2.The bond issued by insurers in favour of the court guaranteeing the proper discharge of duties by the administrator and the proper accounting of the estate of the deceased is known as an administration bond.

40.3.The amount of the bond is stipulated by the court making the appointment, and it depends upon the value of both the real and the personal estate of the deceased.

40.4.The administrator may be an individual or a corporate body, but whoever he is, he would be thoroughly screened by the court before making the appointment.

41.Administration bonds Rating

  • The premium is charged as a rate per cent of the amount of the bond.
  • The rate per cent is based on the value of the estate to be administered,

42.The bond may be issued for annual periods renewable automatically after each annual expiry or for the entire period of administration.

43.Unlike a commercial fidelity guarantee policy, an administration bond is a specialty contract to be executed under seal and it attracts stamp duty higher than the ordinary policy.

43.1.Hence, along with the premium, the stamp duty is also collected from the administrator.

44.Liquidator’s and Receivership bonds

A receiver may also be appointed to administer the estate:

  • Of a minor who is placed under the Court of Wards till he attains majority, or
  • Of a person who is pronounced mentally incapable

45.Liquidators are appointed by the court to deal with the estates of persons who have filed insolvency petition before the court or are declared insolvent by the courts.

46.Differences between Commercial guarantees and Court bonds

Commercial guarantees Court bonds
Commercial guarantees are simple contract Court bonds are specialty contracts executed under seal
The proposal made by the employer is

the basis of a commercial guarantee,

and it is deemed to be incorporated in

the policy, and hence any

misrepresentation or inaccuracy in the

proposal will make the policy void or

void able

In court bonds, the proposal does not

form part of the contract, and hence

the contract is not affected even if the

proposal contains materially inaccurate

particulars

The commercial guarantee is subject

to conditions the breach of which may

render the policy void or void able

No such conditions are incorporated in

a court bond

In order to obtain a payment under a

commercial guarantee, the insured

has to prove to the satisfaction of the

insurers that he has suffered a

pecuniary loss arising out of the

insured contingencies.

In a court bond, a demand from the

appropriate authority of the amount

guaranteed for failure in the discharge

of duties or obligations, by the persons

guaranteed is sufficient

Commercial guarantees are normal

annual contracts which the insurers

may renew at their option

Court bonds are automatically

renewable, unless the insurers give

sufficient notice to the court of their

intention not to renew the bond

In a commercial guarantee the insured

is not a party to the contract

In a court bond, the person guaranteed

is a party to the contract

Commercial guarantees are stamped

with the ordinary insurance stamps

Court bonds have to be stamped in

accordance with the stamp duty

prescribed for deeds and documents,

under seal

The cover under a commercial

guarantee is restricted in scope as

compared with that under a court

bond.

The cover under court bond is not as

restricted as a commercial guarantee

Quite often, the assistance of the

insured is sought under commercial

guarantees by the insurers to enforce

their rights of subrogation

Under court bonds recoveries are

sought to be made under the counter

guarantees executed in favour of the

insurers by the person guaranteed

Commercial guarantees prescribe time

limits within which the insured has to

intimate defaults to the insurers

Court bonds are not subject to this

restriction of time limit

 

47.Government bonds like court bonds are specialty contracts. The two important types of government bonds issued are the Customs bonds and Excise bonds.

48.Customs Bonds: Customs bonds are to be executed by importers in favour of the Controller of Imports and Exports agreeing, inter-alia, to perform the conditions stipulated in the Import Trade Control Regulations.

48.1.A representative list of importers who have to execute customs bonds is given below:

  • Persons or corporate bodies who are permitted to import motor cars for their personal use
  • Manufacturers who import essential raw materials on which a concessional customs duty is levied provided they produce an end-use certificate that the imported materials have been consumed in the production of goods originally declared by the manufacturer
  • Suppliers of industrial chemicals imported in special containers who have to export back the containers after using the content

49.Excise Bonds: Excise bonds are to be executed by manufacturers in the country in respect of finished products assembled or produced in the country, which are dutiable.

49.1.The excise duty is to be paid to the Excise Department in lieu of which a bond may be executed.

49.2.Manufacturers of alcohol, sugar, textiles, automobiles, etc. are required to execute the bond.

50.The period of customs bonds may vary from a few months to a period as long as seven years, depending upon the materials or goods imported.

51.Hence it is a long term contract, Excise bonds, on the contrary, are mostly annual contracts.

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