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Fidelity Bond / Crime

Coverage details

A fidelity bond or crime policy written for a hedge fund is usually written on a Financial Institution Bond policy form. This type of policy covers the loss of money, securities and other property due to employee dishonesty and certain dishonest acts committed by third parties.

A Financial Institution Bond for a hedge fund is normally written with a minimum aggregate limit of $1,000,000. Higher limits are purchased in increments of $1,000,000. Deductibles of $50,000 and up are common. The policy usually has the following insuring clauses:

Coverage Description
Dishonesty Covers loss resulting directly from dishonest acts of any employee, committed alone or in collusion with others. Generally, the dishonest act must result in improper personal financial gain for the employee or co-consirator. And the act must have been committed with the intent to cause the fund or fund manager to sustain a loss.

The policy also may include coverage for loss arising from a trade or loan and caused by the dishonest act of an employee.

Loss due to the dishonest act of a partner may also be covered. Generally, only the amount of loss in excess of the partner's equity is covered. As in the case of the dishonest employee, the dishonest act must result in improper personal financial gain for the partner. And the act must have been committed with the intent to cause the fund or fund manager to sustain a loss.
Loss On Premises Covers loss of money or securities due to robbery, burglary, misplacement, mysterious unexplained disappearance, damage or destruction, false pretenses, or common law or statutory larceny, committed by a natural person while on the premises of the insured.
Loss In Transit Covers loss of money or securities in transit in an armored car, or in the custody of a messenger, resulting directly from common law or statutory larcency, misplacement, mysterious unexplainable disappearance, or damage or destruction.
Forgery or Alteration / Extended Forgery Covers loss due to the forgey or alteration of a signature or certain financial instruments and documents.
Counterfeit Money Covers loss resulting directly from the receipt by the insured in good faith of any counterfeit money.
Computer System Covers loss resulting directly from computer fraud, where a fraudulent entry or change causes funds or other property to be transferred, paid or delivered; an account of the insured or of its investor to be added, deleted, debited or credited; or an unauthorized account or a fictitious account to be debited or credited.
Facsimile Signature Covers loss resulting directly from any issuer of securities, transfer agent, bank, banker or trust company having received from the insured or the New York Stock Exchange, specimen copies of the insured's mechanically reproduced facsimile signature and having acted in reliance upon any false, fraudulent or unauthorized reproduction of such facsimile signature.
ERISA Bond Covers loss to ERISA plan assets due to dishonest acts of fund manager employees. This coverage is required by ERISA when the fund manager is deemed to be "handling" plan assets. For more on this, see the U.S. Dept. of Labor - Employee Benefits Security Administration - Field Assistance Bulletin No. 2008-04: Guidance Regarding ERISA Fidelity Bonding Requirements.

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Information needed to quote

We need the following information to quote a Financial Institution Bond for your hedge fund:

  • Copy of your current Financial Institution Bond (if applicable)
  • Completed Financial Institution Bond application
  • Audited financial statement for the fund manager
  • CPA letter to management and management response (if available)
  • Details on any claims

Hedge Fund Insurance, a division of Frenkel & Co., Inc., has access to every major market in the U.S., London, and Bermuda. As brokers, we represent the policyholder and not the insurance company. Among the largest brokers in the country as ranked by Business Insurance magazine, we have the market clout necessary to get you the best possible price. Some of the markets we place Financial Institution Bonds with include:

  • AIU Holdings (formerly AIG)
  • Chubb
  • CNA
  • Hartford
  • HCC / Houston Casualty
  • Lloyds of London
  • Travelers
  • Zurich

The premium for a Financial Institution Bond is based on a number of factors such as the number of employees of the fund manager, AUM, strength of internal controls, and claims history. Most hedge funds can expect to pay a premium of roughly $5,000 to $20,000 annually, depending upon the limit and deductible.

Claim Examples
Hedge Funds typically have a very low freqency of Employee Dishonesty / Crime claims. Some possible claim scenarios include:
  • A secretary used disappearing ink to make more than $800,000 vanish from her boss’s bank accounts. The secretary used quick-fading ink to write checks that her managing director had requested. After the managing director signed the checks, the secretary would easily erase the name of the payee and rewrite the checks for cash.
  • A bookkeeper for a surgery center embezzled nearly $330,000 from her employer. The bookkeeper forged hundreds of checks, made unauthorized ATM and other withdrawals from corporate checking accounts, and hid and destroyed bank records to cover up her actions. The bookkeeper wrote weekly payroll checks to herself, each for hundreds of dollars more than her gross salary.
  • Over a 7-year period, a computer programmer ordered more than 500 laptop computers on behalf of his company. The employee would personally accept the overnight delivery of the laptops and then load them into his car. He would then sell the laptops and pocket the proceeds. He was able to cover up this scheme because he was the only one authorized to approve invoices for payment to this vendor company. The check signers who paid the invoices never asked any questions because this person was thought to be a trusted employee. Loss to the company was $2,000,000.

Sell Sheets

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Copyright © 2009 Frenkel & Co., Inc.

Hedge Fund Insurance
a division of Frenkel & Co., Inc.
350 Hudson Street, 4th Floor, New York, NY 10014
Phone: 212-488-0270  Fax: 212-488-0432