What Is a Financial Institution Bond?

A financial institution bond protects financial institutions from risks that may arise as a consequence of carrying out their business. It works to protect the assets of the bank and its investments form different types of losses that may be the result of employee actions or other external and internal acts. The bond is a form of insurance for financial institutions, and it provides some basic coverage that all banks are required by law to carry. It also provides some optional coverage at additional costs, which banks may or may not chose to purchase.

One basic coverage provided by the financial institution bond is the protection of the property of the financial institution. This includes incidents involving property belonging to the financial institution as well as any property belonging to employees and customers that is on the premises of the bank. For instance, if an armed robber comes on a bank's premises to steal some money and escapes afterward with the vehicle of a customer, the customer’s vehicle would be covered by the financial institution bond. This is in addition to covering the loss resulting from the bank’s stolen money.

Another basic coverage is for any item that is lost while in transit, either in transition to the bank or from the bank. Such items include money, jewelry and other valuables. The only condition for providing coverage for such items in transit is that banks must engage the services of an armored vehicle that is accompanied by an escort, who may either be a representative of the bank or of the vehicle armored vehicle company. Basic coverage also covers any type of loss incurred by the bank through the erroneous acceptance of counterfeit money by a depositor. The coverage also includes acts of internal sabotage resulting from fraudulent activities involving employees of the financial institution.

The optional coverage provided through a financial institution bond includes protection for any unauthorized use of credit and debit cards belonging to customers of the bank. Other types of optional coverage include protection for any loss incurred by the financial institution as a result of the loss of data, either through a virus, computer hacker or equipment malfunction. The financial institution bond also provides protection for any loss incurred by a bank as a result of the destruction or loss of an item that has been placed in the safe depository. For instance, if a customer puts some valuable precious stones in a bank safe depository and the stones are stolen, the financial institutional bond will cover the cost of the stolen gems — if that option is included in the coverage.