United States: The Possession And Control Requirement For Third Party Losses Under Fidelity Bonds

Last Updated: October 30 2015
Article by Ned J. Kirk and Scott Schwartz

Fidelity bonds were designed to provide coverage for first-party property loss. Despite the nature of first-party coverage, some U.S. courts have applied tort and liability concepts, rather than the contract terms, to allow coverage for third-party losses. As two recent decisions highlight, fidelity coverage should be limited to direct losses sustained by the insured, except in the limited situation where the insured possessed and controlled a third party's property at the time it was lost.

Coverage is typically provided for direct financial loss "resulting directly from" or as "a direct result of" covered conduct. The first-party nature of fidelity coverage is confirmed by exclusions for indirect or consequential loss or damages for which the insured is legally liable to third parties. Therefore, coverage is usually not available for payment to resolve the insured's liability for loss sustained by a third party.

So-called "ownership provisions" provide a limited exception to the direct loss requirement. U.S. courts have narrowly interpreted such provisions to be consistent with first-party coverage, and limited their application to the loss of a third party's property only while in the possession and control of the insured at the time of the loss, such as when the insured is acting as a bailee or trustee of the property.

The majority of U.S. courts apply the contracted for terms and follow a narrow "direct means direct" approach to causation under fidelity bonds. Under this test, an insured must show that it sustained a depletion of funds as a direct and immediate result of covered conduct, and that the time between the conduct and the loss was not too remote.

Some courts, however, have found direct loss to be "nebulous and largely indeterminate", and therefore looked to proximate causation concepts drawn from tort law and liability insurance to determine coverage . Under this standard, an insured must show that the insured conduct was a substantial contributing factor to the loss, rather than the sole or immediate cause.

Two recent cases, one involving a fraudulent payment request and the other an advance money scam, which are increasingly common fraudulent schemes, address whether fidelity coverage is available for an insured's liability for a third party's loss. In both cases, coverage turned on whether the insured had possession and control over the third party's funds at the time they were stolen.

In Taylor & Lieberman v. Federal Ins. Co. (2015 WL 3824130 (C.D. Cal. June 18, 2015), a federal district court in California analyzed whether a loss incurred by the insured's client relating to a fraudulent payment request was covered under a policy providing forgery, computer fraud and funds transfer coverage. The insured accounting firm managed its client's accounts and had power of attorney over the client's funds held in an account at City National Bank. A perpetrator obtained access to the client's e-mail account and directed the insured's employee to wire funds to accounts in Malaysia and Singapore.

The insuring agreements at issue in Taylor provided coverage for "direct loss" "resulting from" a covered occurrence. The insurer asserted that the insured was attempting to recover for a third-party loss, rather than a direct loss, because the false e-mails requesting a wire transfer from the client's account did not immediately and without intervening cause result in a loss. Rather, the loss only occurred after the bank was unable to recover the lost funds and the client demanded payment from the insured.

The court noted the different approaches to determining whether a loss is direct, and that the policy at issue included liability coverage sections expressly separate from the indemnity coverage provided under the relevant insuring agreements.

Although it did not reference an ownership provision, the insured argued that the loss should be considered a direct loss because it was a bailee or trustee of the stolen funds. The insurer pointed out, however, that the funds were held in a separate account at another entity at the time they were stolen.

The court agreed with the insurer that the loss was not direct. While coverage might have applied if the hacker had entered the insured's computer system and withdrawn funds from an account "owned or attributed" to the insured, here, the loss "resulted from a series of far more remote circumstances." The court found significant the fact that before the insured incurred any loss: (i) the client gave the insured power of attorney over money held in the client's own account; (ii) the hacker motivated the insured to transfer funds out of the client's account; (iii) the insured discovered the fraud and attempted to recover the funds; and (iv) the client requested that the insured repay the funds. In view of this long causation chain, the court held that the loss did not follow immediately and without intervening causes and was not direct.

In Avon State Bank v. BancInsure, Inc. (787 F.3d 952 (8th Cir. 2015), however, an appellate court found that a third party's loss was direct for purposes of fidelity coverage because the funds were possessed and controlled by insured at the time of the loss. The Court of Appeals for the Eighth Circuit examined coverage for the insured bank's payment to resolve claims by two individuals who were induced by the insured's employee to invest in an advance money scam. A long-time customer of the bank was duped into believing that the estate of a former associate would transfer money to the bank if the customer made up-front payments of taxes and other fees. The customer promised huge returns to the bank's assistant vice president, Robert Carlson, in exchange for his help. Carlson obtained a loan from the bank and also paid USD 60,000 of his own money to the customer for costs relating to the estate transfer.

When the fraudster requested an additional sizeable payment to cover purported taxes on the estate, Carlson recruited two individuals, Donald Imdieke and Mike Froseth, to invest almost USD 500,000. Carlson deposited their checks into an account at the bank, and then wired the funds to an account in Hong Kong. This payment violated bank policy and Carlson had concerns that the estate was a scam. Not surprisingly, the funds were never repaid, and Imdieke and Froseth sued the bank for its vicarious liability for Carlson's conduct.

The district court held that the bond covered the bank's settlement with the two individuals. On appeal, the insurer argued that the loss to the insured bank was not direct because it was sustained by a third party, and the bank itself did not suffer a depletion of its own funds through covered conduct.

The Eighth Circuit disagreed with the insurer, finding that the bond's "loosely worded language" did not include specific limitations on third party losses. The court found that the bond applied to loss "resulting directly from dishonest or fraudulent acts committed by an Employee," and this "precisely describe[d] the loss" the bank suffered through its employee's fraudulent conduct. The court also found that applicable Minnesota law allows fidelity coverage for loss of a third party's property while in the insured's possession and control. Here, the loss occurred while in the insured's possession as the funds were held in the insured bank's own account.

Although the court did not refer to an ownership clause, the bond provided coverage for property "held by the Insured in any capacity" or "for which the Insured is legally liable." Significantly, the insured bank "held" the funds because its employee obtained checks made payable to the bank, deposited the funds into the bank's own account, and wired the money out of the bank's account. This was sufficient to show that the bank "held" the funds, even if the funds were not in the insured's account for an extended period of time.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.