Bond Coverage

LMCIT bond coverage: Simplified rating mechanism and new requirements for securing bond limits

The League of Minnesota Cities Insurance Trust (LMCIT) offers faithful performance bond coverage as an option to members of the property/casualty program. For members with renewals occurring on or after Nov. 15, 2015, LMCIT will begin using a simplified bond rating mechanism. Members with renewals on or after Nov. 15, 2016, will be required to meet new requirements for securing bond limits in excess of $50,000.

How bond coverage is designed
The LMCIT bond coverage is designed to make available all the bond coverage and limits that cities and city officials need. It is written to cover both fidelity and faithful performance risks. LMCIT coordinates this coverage with the city’s other coverages to avoid gaps, overlaps, and inconsistencies. There are several limits and deductible levels to choose from.

New rating mechanism
LMCIT will begin using a simplified bond rating mechanism based on the number of full-time equivalent (FTE) employees and the limit of coverage selected by the member. Members that carry this optional coverage will see this effect beginning with renewals on or after Nov. 15, 2015. The new rates are as follows:


The old rating system was overly complex for both members and LMCIT. For example, cities were required to inventory all of their employee types (i.e., inventory all positions in the city that handle, maintain, or audit money, securities, or supplies) in order for LMCIT to apply a premium charge. The new system will simply look at the number of FTEs and limit of selected bond coverage, to determine the premium charge. This will simplify the data reporting process for members and agents when they complete their annual coverage renewal applications. A change to the new rating system will mean some members’ bond premiums will go up slightly, while others will go down slightly.

New requirements for securing bond limits
The minimum bond coverage available is $50,000, and limits up to $1 million are available. Members with coverage renewals on or after Nov. 15, 2016, will be required to meet new underwriting criteria if limits in excess of $50,000 are needed. Members will have to verify with LMCIT that either:

  1. An annual outside audit is being performed.
  2. An independent review of bank statements, cancelled checks, and cash receipts is being performed.

LMCIT is delaying implementation of this new requirement until Nov. 15, 2016, to give members that may be affected an adequate amount of time to comply with the new criteria.

The audit requirement recognizes the increase in risk and exposure when audits are not completed. The cost of an audit varies greatly from city to city. It also depends on the state of the city’s records and the scope of city operations.

Audits are a good way to mitigate the exposure for employee theft, but because the cost of an audit can be significant, members have the option to instead have an independent review performed on bank statements, cancelled checks, and cash receipts as a way to obtain higher bond coverage limits. The independent review can be done by:

  • Someone without authorization to initiate or execute bank transactions.
  • Someone without access to the member’s checks or signature authority.
  • Someone without access to the member’s physical cash receipts.

If a city, for example, has staff consisting of a single clerk, the mayor might be able to conduct the independent review, or the city might contract with a neighboring city. LMCIT encourages members to contact their LMCIT underwriter to discuss whether the independent review they currently have in place or are planning to put into place would meet the new requirement.

Deciding what amount of bond limits to carry
There is some guidance for cities when deciding the amount of bond limits to carry. Minnesota statutes identify minimum bond limits for the following positions:

  • A relief association treasurer must carry at least 10 percent of the relief association’s assets, or $500,000, whichever is less.
  • A gambling manager must carry at least $10,000.
  • A port authority or economic development authority’s bond must equal at least twice the amount of money likely to be on hand at any one time, or $300,000, whichever is less.

For all other city officers, the Municipal Clerks & Finance Officers Association (MCFOA) developed a formula for determining suggested bond amounts. There’s no guarantee the bond amounts suggested by this formula will be enough to cover a loss, but it does provide a starting point.