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THE BUSINESS RECORD OF FIDELTY AND SURETY COMPANIES FOR THE YEAR 1909

form of insurance is made clear by Mr. J. Frank Supplee,1 in his classification of the different departments of a bonding company and the various classes of risks included under each. Briefly summarized, Mr. Supplee's classification shows corporate surety bonding to cover the following:

1. The Banking Department, embracing surety desired by bankers, trust companies, and financial institutions having banking features.

2. The Fidelity Department, embracing bonds required from (a) bookkeepers, salesmen, collectors, cashiers, treasurers, and office men generally; (b) national, state, county, and city officials and their deputies and clerks; (c) officers and employees of fraternal and beneficial societies.

3. The Judicial Department, including bonds for executors, administrators, and those filed in bankruptcy proceedings, and upon replevin, trustee, receiver, guardian, attachment, injunction, supersedeas, appeal, security for costs, committee, assignee in insolvency, indemnity to sheriff, to release an attachment, and to dissolve an injunction.

4. The Transportation Department, embracing bonds required by steam and electric railroads and express companies. These bonds may be for their employees or shippers, or may be demanded by the federal or local government.

5. The Contract Department, including bonds which cover the almost unlimited variety of private, municipal, state, and federal contracts.

The Computation of the Premium.-When a surety company executes its bond it does so largely on the theory that in all probability it will never have occasion to pay the same. In issuing a fidelity policy, for example, the company first thoroughly informs itself concerning the employee to be bonded. As the application blank shows, a large number

1J. Frank Supplee: "Corporate Surety Bonding." Yale Insurance Lectures, pp. 277, 278.

of factors are taken into consideration in ascertaining the hazard. The applicant must furnish the company with a statement of his personal and real property holdings, his debts or liabilities and encumbrances on property, and the amount for which he is surety or indorser. Besides giving full details of the position he holds or is about to hold, the applicant must furnish particulars in case he has ever been a bankrupt, or has been discharged from a position, or has been in business for himself and has discontinued. He must name his nearest living relatives, and give the value of their personal and real estate holdings. He must furnish the names and addresses of his previous employers, the positions he has occupied, the time engaged with each, and the reasons for leaving. Lastly, he must give usually at least five references, none of whom are former employers, relatives, nor officers, or fellow employees of the service in which he is engaged. In addition to this information, the employer must furnish a statement in which is explained the past conduct of the employee, the nature of his work, the average amount of his daily cash handlings, the largest amount likely to be in his custody at any one time, and the means which are used to ascertain the correctness of his accounts.

From the foregoing information the bonding company assures itself of the character of the applicant, and the character and financial standing of his nearest relative. No one appreciates more than the bonding company the extent to which a father and mother will do all that can possibly be done to save a son from criminal prosecution. To quote the president of one of the companies: "The theory of the company is that when demand is made upon the company for the payment of a loss, the defaulter has exhausted all his resources and there is little hope for him. The company insists upon prosecution, but the company feels that it has no right to interfere between the employer and employee if friends come in to protect the guilty." Where the parents

are of good reputation and means, the company has a right to feel that its bond was not issued solely with reference to the employee, but that it possesses a valuable collateral in the moral indemnity of the father and mother.

In arriving at the premium on a bond, the company must be careful to ascertain the extent of its maximum liability; and for this reason requests the employer to state the average amount of daily handlings of cash by the employee, and the largest amount likely to be in his custody at any one time. While the premium is computed according to the size of the bond granted for different classes of risks, the amount of the bond that will be granted and the size of the premium per $100 of indemnity promised differ materially according to the hazard involved. It may be that a company assumes a smaller actual liability by bonding a state treasurer, who in the course of the year may have millions of dollars under his guardianship, and who may be required to furnish a bond for $500,000, than by bonding the cashier of a bank, although its liability in this case is limited to $25,000. Although the state treasurer may need a bond many times as large as the cashier, his financial operations may be surrounded by so many checks that he will have less opportunity than the cashier to steal a large The bonding company may provide that there must be a counter-signature to every check, that every tax bill must be certified to by another official, that money receipts must be deposited in bank several times a day at regular intervals, that there must be frequent examinations of accounts, and that the company cannot be held liable for the loss of funds deposited in bank. Thus, although the bond is for $500,000, the company's actual liability may not exceed $30,000, because this may be the largest possible amount that the treasurer, in view of the many safeguards insisted upon by the company, has within his control at any one time.

sum.

In the case of judicial bonds also, the actual liability of

the bonding company is not indicated by the size of the bond. Executors, administrators, and receivers must frequently furnish bonds for very large amounts, in order to comply with the law of the state or the demands of the court. And yet a moment's reflection will serve to show that the size of the bond may be out of all proportion to the amount of the estate that can be wrongfully converted. Much of the estate may consist of real estate incumbered with liens, which cannot be sold without first paying the debt. Another large portion of the estate may consist of stocks and bonds hypothecated with bankers as security for loans, which cannot be obtained until the loans have been repaid. Thus where a $1,000,000 estate is involved, and the administrator is required to give a bond for $500,000, a detailed examination of considerations like those just mentioned may convince the bonding company that its maximum liability could not exceed $150,000.

Policy Provisions.-As already stated, corporate bonds are applicable to a very wide field; and, in consequence, a large number of policy forms exist to meet special demands. These special bonds must be written in the case of contractors and administrators of estates, as distinguished from the ordinary fidelity risks. Ordinarily, when executing bonds, the company issues that form of bond which the application submitted requires. Usually bonds issued on behalf of executors, administrators, trustees, etc., are statutory (and vary slightly in different states), and the company, when executing such bonds is obliged to execute the statutory form. This applies also to bonds of federal, state, and municipal officials. In the field of fidelity risks one type of bond provides for the bonding of a number of employees specified by schedule, whereas another bonds a single individual. Again, in many instances, especially where the state or municipality is concerned, special forms of bonds are demanded by the government.

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