Reduce Uninsured Losses by Differentiating ‘Pure Risk’ from ‘Uninsurable Risk’

It can be difficult understanding which types of loss your credit union’s fidelity bond does and does not cover. A legal and risk management concept that can help clarify this is “pure risk” versus “uninsurable risk” (a.k.a. “speculative risk”).

The following two scenarios illustrate the difference between these risk types.

A teller withdraws money from his uncle’s savings account and creates a fake statement that he sends to the uncle, showing an incorrect account balance. The crime is discovered and the teller can’t repay the stolen funds. The cost to restore the uncle’s account balance is generally covered under the fidelity bond’s “Employee Dishonesty” coverage.

This example has several characteristics that illustrate pure risk:

  • Although the loss was due to an intentional act by an employee, the loss was unexpected and outside of the credit union’s control.
  • The loss was for a definite amount and occurred at a definite time.

In addition to the loss characteristics in this scenario, losses that are accidental or fortuitous also generally fall into the pure risk category.

A credit union’s VP of lending grants several member business loans that default. During the collections process, the credit union discovers that the VP unintentionally violated the credit union’s loan policies. Through her negligence, the loans were granted to non-creditworthy borrowers and the credit union was unable to recover some of the funds it lent.

A fidelity bond generally would not cover this loss because the cause was a speculative venture: lending. A bond isn’t intended to cover losses caused by liability for an employee’s negligence. Investments and deposits are other common business risks that fall into the uninsurable risks category. Also, fidelity bonds generally don’t cover third-party or indirect losses, such as those caused by vendors.

These examples offer a glimpse of what may or may not be covered by a fidelity bond. It’s important for credit union management and directors to read the fidelity bond policy carefully and use the expertise and resources of the bond provider to learn what the policy covers.

In addition to educating your credit union leaders about fidelity bond coverages, it’s even more important to avoid losses caused by insurable risks by using the following proactive steps:

1. Identify. Take a regular inventory of uninsurable risks and exposures your credit union faces. Use a process flowchart or functional analysis to map hidden exposures;

2. Measure. Determine the amount of risk in any given product or service by recording loss frequency (number of overall losses) and loss severity (amount of each loss);

3. Implement loss controls. Design a plan to address each type of risk and conduct regular training for the appropriate managers, directors and employees;

4. Track results and follow up. By repeating the first three steps regularly, you can identify new trends and respond quickly. A comprehensive internal audit plan is an effective technique to identify and manage risk.

Roger Nettie is staff underwriting specialist with CUNA Mutual Group Credit Union Protection. Contact him at 800-356-2644, ext. 7154.

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