Our Fidelity Bond Uses the Term “Manifest Intent.” What does that mean?

Most fidelity bonds define “dishonest or fraudulent acts” as “only dishonest or fraudulent acts committed by [an] Employee with the manifest intent (1) to cause the insured to sustain such loss and (2) to obtain financial benefit for the Employee or for any other person or organization intended by the Employee to receive such benefit....

other than salaries, commission, fees, bonuses, promotions, awards, profit sharing, pensions, or other employee benefits earned in the normal course of employment.”

The majority of courts to address this issue have interpreted the “manifest intent” requirement in one of two different ways, depending on the state law that is applicable:  requiring either (1) specific intent to cause loss; or (2) substantial certainty.  The difference relates to the degree of intent required for coverage.  While subtle, the variation between jurisdictions could have a substantial impact on the type of employee conduct that is covered by these bonds. 

(1) Specific Intent

The strictest interpretation of “manifest intent” provides for coverage only for “losses due to embezzlement or embezzlement-like acts.”  Kurtzman v. Nat’l Union Fire Ins. Co. of Pittsburgh (In re J.T. Moran Financial Corp.), 147 B.R. 335, 339-40 (Bankr. S.D.N.Y. 1992).  Under this standard, employee dishonesty will give rise to coverage only where there is no possibility that the dishonesty will benefit the employer.  See Glusband v. Fittin Cunningham & Lauzon, Inc., 892 F.2d 208, 210-11 (2d Cir. 1989).  Courts that have adopted this standard describe a continuum on which the relevant conduct must be plotted in order to determine whether the bond provides coverage, with embezzlement at one end of the continuum and at the other end “dishonest acts by employees which can only benefit the employee when the bank also benefits.”  First Nat’l Bank of Louisville v. Lustig, 961 F.2d 1162, 1165-66 (5th Cir. 1992) (citations omitted).

(2) Substantial Certainty

Other courts utilize a more relaxed standard of “intent” under which conduct that an employee knows is substantially certain to result in a loss to his or her employer is sufficient to trigger fidelity bond coverage.  See generally Michael Keeley, Employee Dishonesty Claims:  Discerning the Employee’s Manifest Intent, 30 Tort & Ins. L.J. 915  (Summer 1995).  The difference between the specific intent standard and the substantial certainty standard lies in the courts’ interpretation of “manifest” which qualifies “intent” in the bonds.  For courts utilizing the specific intent standard, “manifest” requires a finding that the employee “actively wish[ed] for or desire[d] a particular result,” whereas courts applying the substantial certainty standard interpret “manifest” to require only that the employee’s intent be “demonstrated (or ‘manifested’) by obvious or apparent conduct.”  Affiliated Bank/Morton Grove v. Hartford Accident and Indemnity Co., No. 91 C 4446, 1992 U.S. Dist. LEXIS 5919, at *12 (N.D. Ill. April 23, 1992). 

Conclusion

An employee must act with the subjective intent to cause his or her employer to sustain a loss for a fidelity bond to provide coverage for that loss.  It is important to note, however, that the employee’s subjective intent is not determined solely on what the employee has in his mind or what he or she claims in a deposition about wanting to have the money repaid.  Instead, an employee’s subjective intent is determined by relying on “external indicia of subjective intent.”  FDIC v. St. Paul Fire & Marine Inc. Co., 942 F.2d 1032, 1035 (6th Cir. 1991). 

This reliance upon the outward manifestations of the employee’s subjective intent makes the coverage inquiry one that is based upon the totality of the circumstances.  See St. Paul Fire, 942 F.2d at 1036 (noting that the inquiry is “almost purely a factual judgment”).

The following “external indicia of subjective intent” are most relevant to this inquiry:  (1) whether the employee had a major financial stake in the Bank; (2) whether the employee knew that the Bank would suffer a loss should any of the improper loans he authorized go into default; (3) whether the employee’s purpose in “rolling over” delinquent loans was to conceal his misconduct or, on the other hand, to give the debtors an opportunity to repay the loans; (4) whether the recipients of the loan proceeds were personally or professionally related to the employee; (5) whether the employee received any direct financial benefit as a result of the improper transactions; (6) whether the transactions were merely the product of a misguided attempt to benefit the Bank; and (7) the employee’s knowledge of the loan recipients’ true financial status and ability to repay the improper loans.  See, e.g., First Nat’l Bank of Louisville v. Lustig, 961 F.2d 1162 (5th Cir. 1992); Glusband v. Fittin Cunningham & Lauzon, Inc., 892 F.2d 208 (2d Cir. 1989); Liberty Nat’l Bank v. Aetna Life & Cas. Co., 568 F.Supp. 860 (D.N.J. 1983).   According to the relevant case law, the presence of any of the above factors may be sufficient to create a question of fact as to whether the Bank is entitled to coverage under its  fidelity bond. 

Posted by: Bart L. Greenwald, Peter M. Cummins

Categories: Bankruptcy & Banking Law