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What is a Fiduciary Bond?

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  • Originally Written By: Venus D.
  • Revised By: C. Mitchell
  • Edited By: Niki Foster
  • Last Modified Date: 17 June 2015
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A fiduciary bond is a legal instrument that basically acts as insurance that a person who is in a position of trust and responsibility, known as a fiduciary, will perform his or her job honestly and competently. These sorts of bonds are often required in probate settings, where one or more people are in charge of dividing the assets of someone’s estate. They can also be used in instances where someone is giving financial or banking advice to others, or when someone is in charge of someone else's assets. Bonds act sort of like medical or legal malpractice insurance. If clients, friends, or family are upset about how the fiduciary divided assets or question allocation choices that were made, they can bring their concerns before the bond-issuing agency for review. Full-fledged reviews are usually rare; it’s much more common that holding the bond is itself enough to compel good behavior on the part of the fiduciary while also inspiring trust in those he or she works with.

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Understanding Fiduciaries Generally

The term “fiduciary” usually means something like “person in a position of trust,” and it’s almost always used in situations that deal heavily with finances. Whether or not someone is thought of as a fiduciary is usually determined by the amount of control or discretion she holds over a specific financial resource. Fiduciaries are usually subject to high standards of conduct because they act on behalf of others. In all, fiduciaries and the fiduciary bond serve to ensure that financial duties are conducted properly.

Sometimes people choose their own fiduciaries, as is often the case when a person writes a will: he or she may stipulate that a child, a sibling, or a trusted friend act as executor, a position considered to be one of fiduciary responsibility by most courts. They can also be court-appointed. People who are going through bankruptcy proceedings or who are in the process of dividing assets in a divorce, for instance, may be assigned a financial advisor who bears fiduciary responsibility.

Bond Requirement Basics

Bonds are usually required by the courts, but they can sometimes be requested by the individuals involved, too. A lot depends on the circumstances and the specifics of the case at issue. The name can also vary a little bit from place to place. These instruments are sometimes also called administrator’s bonds, executive bonds, or surety bonds, but they typically work the same no matter their name.

Application Process

In cases where a fiduciary bond is recommended or required, the burden is usually on the fiduciary him or herself to get the application process started. The process usually starts with a simple paperwork filing with a judge or judicial office, typically the one that is handling the probate or other proceeding. Applicants usually need to provide enough information that the court can run a basic credit history and can get a sense of the person’s financial risk, which is usually calculated a couple of different ways.

Once cleared by the court, the application is usually forwarded on to the bond insurance company which will review it and set a price for coverage. As is the case with most insurance plans and coverage policies, pricing is set based on a variety of factors and isn’t usually refundable. Most of the time the fiduciary him or herself is personally responsible for securing the bond, which means that he or she must be willing to bear all related costs independently.

Encouraging Good Behavior

Many legal scholars think that the costs alone can help serve as a deterrent for negligent or improper behavior, which can be seen as an additional benefit. It can also come at quite a personal cost, however. People writing wills often specifically stipulate that a fiduciary bond is not required in order to save the named executor from this sort of burden, particularly when that person is someone whom the will writer trusts. Courts can sometimes overturn this and require one anyway, but in most cases the wishes of the deceased person are honored when possible.

Bringing Claims

People who feel that they were mistreated or that their trust was abused by a bond-holding fiduciary can bring a claim against that person with the bond-issuing agency. The process is much like it is with any other insurance claim. The complaint typically needs to set out the specific wrongdoing, and must usually provide ample evidence and documentation. Analysts and investigators from the bond company then usually research the claims and come to their own determination of whether any perceived problems came within the scope of coverage.

Different bond policies can cover different things, but in most cases, behavior has to be particularly egregious in order to sustain a claim. Simply disagreeing with the fiduciary’s decisions isn’t usually enough — there must usually also be some evidence of actual negligence or wrongdoing. In these cases, the bond company will either reimburse the claimant for his or her losses, help petition the court for a reversal, or both.

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anon344842
Post 4

Yes, the person will always pay in the end.

kr1
Post 1

If the bonding company has to pay a claim is the person insured by the bond liable for repayment ??

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