TN 11 (05-20)

PR 07115.004 Arkansas

A. CPM- 20-030 LO Insurance Coverage for FFS Org Rep Payee First Step

Date: March 19, 2020

1. SYLLABUS

This particular crime policy does not adequately cover financial losses due to the action or inaction of all of First Step’s officers, both compensated and non-compensated, given the definition of “Employee.”

2. OPINION

QUESTION

You asked us to review First Step, Inc.’s (First Step’s) Philadelphia Insurance Company Insurance PolicyNumber PHSD 1457582, which includes a Crime Protection Plus Coverage Part, four endorsements, and a Policy Change Document adding the Social Security Administration (SSA or agency) as a Loss Payee, effective June 30, 2019, through June 30, 2020 (Collectively, the Crime Policy) (Adobe PDF Reader 13-14, 25-50).[1] In particular, you asked whether First Step’s Crime Policy provisions satisfy the Social Security Administration’s (SSA’s or agency’s) bonding requirements for non-governmental fee-for-service (FFS) organizations, as set forth in 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2) and the Program Operations Manual Systems (POMS) GN 00506.105. Specifically, you asked whether First Step’s Crime Policy meets SSA’s requirement that bonding/insurance coverage for employee theft include officers.

ANSWER

Based on the information provided pertaining to Policy Number PHSD 1457582, we believe that the agency could reasonably conclude that First Step’s Crime Policy does not comply with SSA’s bonding requirements for non-governmental FFS organizational representative payees to be bonded/insured to cover misuse and embezzlement by officers and employees.[2] Specifically, we believe the agency may reasonably conclude that the Crime Policy does not adequately cover financial losses due to the action or inaction of all of First Step’s officers, both compensated and non-compensated, given the definition of “Employee.” In addition, the Crime Policy’s broad exclusion from coverage for acts committed by “You” - First Step - could encompass First Step’s officers. Further, the Crime Policy, through an endorsement, indicates that coverage under the policy does not automatically extend to all additional employees that First Step obtains because of a consolidation or merger. Finally, the addition of SSA as a Loss Payee, through the Policy Change Document, does not cure the deficiencies in the Crime Policy. Therefore, we believe that there is legal support for the agency to find that First Step’s Crime Policy does not meet SSA’s bonding requirements of 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2), and POMS GN 00506.105.

BACKGROUND

The Arkansas Secretary of State’s on-line business search information shows that First Step is registered with the Arkansas Secretary of State as a non-profit domestic corporation that was first incorporated in 1988 under the Arkansas Domestic Nonprofit Corporation Act of 1963 and has 7 officers, including a President, Vice President, Chief Executive Officer, Chief Financial Officer, and three Directors.[3] See Ark. Code Ann. §§ 4-28-201 – 4-28-224 (Arkansas Nonprofit Corporation Act).

The 50-page PDF insurance package you submitted shows that First Step obtained Insurance Policy Number PHSD 1457582 from The Philadelphia Insurance Company, which includes a Crime Protection Plus Coverage Part, four endorsements, and a Policy Change Document listing SSA as a Loss Payee, effective June 30, 2019, through June 30, 2020 (collectively the Crime Policy) (Adobe PDF Reader pages 25-50). The Crime Protection Plus Declarations page lists First Step as the Named Insured, and shows that policy number PHSD 1457582 is effective from June 30, 2019, through June 30, 2020 (Adobe PDF Reader pages 13-14). Below, we have set forth what we believe are the provisions of the Crime Policy most relevant to SSA’s bonding requirements and your legal opinion request.

Section I: Insuring Agreements

A1: Insuring Agreement Covering Employee Theft and Client Property

We believe the most relevant of the Insuring Agreements in the Crime Policy relates to employee theft and client property.

Section A1 of the Crime Policy provides the following Insuring Agreement as to Employee Theft and Client Property:

  1. 1. 

    We will pay for loss of or damage to MONEY, SECURITIES and OTHER PROPERTY resulting directly from THEFT committed by an EMPLOYEE whether identified or not, acting alone or in collusion with other persons.

2. We will pay for loss of or damage to MONEY, SECURITIES and OTHER PROPERTY sustained by your CLIENT resulting directly from THEFT committed by an identified EMPLOYEE acting alone or in collusion with other persons.

Crime Policy, Insuring Agreements, Part I.A1, Employee Theft and Client Property (Adobe PDF Reader page 25). The Crime Policy provides for specific definitions of the terms “theft,” “client,” and “employee,” which we detail below.

Section IV: Relevant Coverage Exclusions

Section IV of the Crime Policy sets out exclusions from coverage and of relevance here, specifically excludes coverage for loss resulting from THEFT or any other dishonest act committed by “You” (First Step). See Crime Policy, Part IV.A, Exclusions (Adobe PDF Reader page 27).

The Crime Policy also broadly excludes coverage for loss resulting from THEFT or other dishonest acts committed by any of First Step’s EMPLOYEES, MANAGERS, directors, trustees or authorized representatives except when covered under Insuring Agreements A1 (Employee Theft and Client Property) and A2 (ERISA Fidelity). See Crime Policy, Part IV.B, Exclusions (Adobe PDF Reader page 27).

Section V: Relevant Coverage Conditions

Section V of Crime Policy sets out conditions applicable to the insuring agreements, and of relevance here, states that property covered under the policy is limited to property

  1. 1. 

    That you own or lease;

  2. 2. 

    That you hold for others; or

  3. 3. 

    For which you are legally liable, except for property inside the premises of a CLIENT of yours.

Crime Policy, Part V.S, Conditions; Ownership of Property; Interests Covered (Adobe PDF Reader page 34).

An endorsement explains coverage for additional employees acquired through consolidation or merger:

If through consolidation or merger with, or purchase or acquisition of assets or liabilities of, some other entity, any additional persons become EMPLOYEES, or you acquire the use and control of any additional PREMISES:

1. You must give us written notice and obtain our written consent to extend this insurance to such additional EMPLOYEES or PREMISES. We may condition our consent upon payment of an additional premium;

2. For the first 90 days after the effective date of such consolidation, merger, or purchase or acquisition of assets or liabilities, any insurance afforded for EMPLOYEES or PREMISES also applies to these additional EMPLOYEES or PREMISES for acts committed or events occurring within this 90-day period.

However, we agree to automatically extend such coverage, without the payment of an additional premium for the remainder of the Policy Period, as is afforded under this policy to any consolidation or merger with, or purchase of assets of, some other entity which has less than 25% of your total assets as reflected on your most recent fiscal year-end financial statement.

Crime Policy, Part V.B, Conditions, Consolidation – Merger (Adobe PDF Reader pages 44-45).

Section VI: Relevant Definitions

The Crime Policy defines THEFT as “the unlawful taking of MONEY, SECURITIES, or OTHER PROPERTY to the deprivation of the INSURED.” Crime Policy, Part VI.Y, Definitions, Theft (Adobe PDF Reader page 40).

An Endorsement modifies the Crime Policy to define CLIENT as “any entity or individual for whom you provide goods or services under a written agreement or other agreed upon arrangement.” Endorsement, Fraudulent Inducement Exclusion, Part VI.B, Definitions, Client (Adobe PDF Reader page 48).

In relevant part, the Crime Policy defines an EMPLOYEE as

  1. 1. 

    Any natural person:

    1. a. 

      While in your service or for 60 days after termination of service;

    2. b. 

      Whom you compensate directly by salary, wages or commissions; and

    3. c. 

      Whom you have the right to direct and control while performing services for you;

. . .

4. Any natural person who is:

a. A trustee, officer, employee, administrator or manager, except an administrator or manager who is an independent contractor, of any EMPLOYEE BENEFIT PLANS(S) insured under this policy; and

b. Your director or trustee while that person in handling FUNDS or OTHER PROPERTY of any EMPLOYEE BENEFIT PLAN(S) insured under this policy.

. . .

8. Any natural person who is performing services for you as the chairman, or member of any committee and whether compensated or not; or

9. Any natural person who is a director or trustee while acting as a member of any of your elected or appointed committees to perform on your behalf specific, as distinguished from general directorial acts; or

10. Any natural person who is a non-compensated officer.

Crime Policy, Part VI.F, Definitions, Employee (Adobe PDF Reader pages 37-38).

The definitions further provide that an EMPLOYEE does not mean “[a]ny MANAGER, director, or trustee except while performing acts coming within the scope of the usual duties of an EMPLOYEE.” Crime Policy, Part VI.G, Definitions Employee, does not mean (Adobe PDF Reader page 38).

ANALYSIS

A. Federal Law and SSA Policy: FFS Organizational Representative Payees

The Social Security Act permits “qualified organizations”[4] to collect a monthly fee from payments to a Social Security beneficiary or recipient for expenses the organization incurs in providing representative payee services for the beneficiary or recipient. See 42 U.S.C. §§ 405(j)(4)(A)(i), 1383(a)(2)(D)(i); 20 C.F.R. §§ 404.2040a(a), 416.640a(a). A “qualified organization” consists of either:

(1) [a]ny state or local government agency with fiduciary responsibilities or whose mission is to carry out income maintenance, social service, or health care-related activities;

or

(2) [a]ny community-based nonprofit social service organization founded for religious, charitable, or social welfare purposes, which is tax exempt under section 501(c) of the Internal Revenue Code and which is bonded/insured to cover misuse and embezzlement by officers and employees, and which is licensed in each State in which it serves as representative payee (if licensing is available in the State).

20 C.F.R. §§ 404.2040a(a), 416.640a(a); POMS GN 00506.001(C). SSA authorization is required before an organization can begin collecting a fee from a beneficiary or recipient’s monthly payments. See 20 C.F.R. §§ 404.2040a(a), (d), 416.640a(a), (d); POMS GN 00506.001(B).

Here, you have indicated that First Step is a non-governmental FFS representative payee organization. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2). We do not otherwise address whether First Step is a “qualified organization” meeting all of the regulatory requirements. See 20 C.F.R. §§ 404.2040a(a)-(d), 416.640a(a)-(d); POMS GN 00506.001(C), GN 00506.100(B)(3). Further, we do not address its section 501(c)(3) tax-exempt status, whether it is licensed in the state in which it serves, nor whether the amount of coverage under the bond or policy is sufficient. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.001(C), GN 00506.105(B), GN 00506.010(B)(2), GN 00506.100(B)(2), GN 00506.105(C)(5), (D). Rather, pursuant to your legal opinion request, our focus is upon whether First Step’s Crime Policy meets SSA’s requirement for bonding/insurance coverage for financial loss due to misuse and embezzlement by both officers and employees, as we discuss in the next section. 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105(A)-(C) (explaining that bonding constitutes a bond or insurance contract).

A non-governmental FFS representative payee organization must be adequately bonded or insured before the agency will authorize the organization to collect a fee. See 20 C.F.R. §§ 404.2040a(a)(2), (d), 416.640a(a)(2), (d); POMS GN 00506.001(C), GN 00506.105(A).[5] The regulations instruct that the FFS representative payee organization must be “bonded/insured to cover misuse and embezzlement by officers and employees.” 20 C.F.R. §§ 404.2040a(a), 416.640a(a). Although the regulations require coverage for “misuse and embezzlement,” SSA law and policy do not specify what insurance or bonding product the FFS representative payee should use or the exact wording of the insurance or bonding contract. 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105(A)-(C). SSA’s POMS instructs that the bond or insurance contract must protect the FFS representative payee organization “from financial loss caused by the action or inaction of the organization, or officer(s), or an employee of the organization.” POMS GN 00506.105(A). POMS GN 00506.105(B) and (C) discuss in general terms various types of bonds and insurance policies that protect from financial loss due to such things as theft, dishonest acts, or fraudulent acts by employees and officers. The POMS states that the bond or insurance contract should provide coverage for financial loss from an organization’s employee’s or officer’s theft. See POMS GN 00506.105(B). Therefore, the bond or insurance contract must provide coverage for financial loss caused by the misuse of benefits and embezzlement of both the FFS representative payee organization’s employees and officers, and the POMS indicates that coverage for loss due to theft, dishonest acts, and fraudulent acts would suffice. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105(B), (C)(3), (4).

B. Review of First Step’s Crime Policy to Determine if it Complies with Federal Law and SSA Policy[6]

1. Summary: First Step’s Crime Policy Coverage is Insufficient Due to the Definition of “Employee,” Broad and Unclear Exclusions from Coverage, and a Condition of Coverage in Mergers or Consolidations

As stated, we must determine whether First Step’s Crime Policy satisfies SSA’s requirement that a non-governmental FFS representative payee organization be bonded to cover financial loss due to misuse and embezzlement by its employees and officers (Adobe PDF Reader pages 25-50). See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105(A)-(C). For the reasons detailed below, although First Step’s Crime Policy adequately covers against misuse and embezzlement, the policy is insufficient because: (a) the definition of “employee” does not clearly include all officers, (b) there is a broad exclusion from coverage for loss resulting from First Step’s theft or dishonest acts and as a corporate entity, First Step acts only through its employees and officers, and (c) any additional employees added to First Step through a consolidation or merger are not automatically extended coverage.

a. The Crime Policy’s Coverage under the Insuring Agreements for Loss due to Employee Theft and Client Property Sufficiently Covers for Loss of Social Security Benefits Due to “Misuse and Embezzlement”

As noted in the background, the Crime Policy provides for the following Insuring Agreement as to Employee Theft and Client Property:

  1. 1. 

    We will pay for loss of or damage to MONEY, SECURITIES and OTHER PROPERTY resulting directly from THEFT committed by an EMPLOYEE whether identified or not, acting alone or in collusion with other persons.

  2. 2. 

    We will pay for loss of or damage to MONEY, SECURITIES and OTHER PROPERTY sustained by your CLIENT resulting directly from THEFT committed by an identified EMPLOYEE acting alone or in collusion with other persons.

Crime Policy, Insuring Agreements, Part I.A1, Employee Theft and Client Property (Adobe PDF Reader page 25).

We considered whether the Crime Policy’s insuring agreements for Employee Theft and Client Property covers loss for an employee’s theft/misuse/embezzlement of SSA beneficiaries’ funds (Social Security benefits) held by First Step as the representative payee for the beneficiaries (Adobe PDF Reader page 25). Insuring Agreement A1.1, pertaining to Employee Theft, covers losses resulting from an employee’s THEFT of money, securities, and other property, and the Crime Policy expressly definesTHEFT as the “unlawful taking of MONEY , SECRURITIES or OTHER PROPERTY to the deprivation of the INSURED ” (Adobe PDF Reader page 40). The Crime Policy, under the common policy conditions, specifies that coverage applies to property that First Step holds for others, as well as property for which First Step is legally liable (Adobe PDF Reader page 34). Once a misuse determination has been made, the agency holds organizational representative payees liable for the misused benefits. Because the Crime Policy covers property that First Step holds for others and property for which First Step is legally liable, and because an organizational representative payee would be liable for misused benefits, we believe that the agency may reasonably conclude that an employee’s theft of SSA beneficiaries’ funds would be to the deprivation of First Step.

Insuring Agreement A1.2, pertaining to Client Property, could also be construed to adequately cover theft of SSA beneficiaries’ funds (Social Security benefits) held by First Step (Adobe PDF Reader page 25). This Insuring Agreement expressly covers direct losses of First Step’s clients’ money (and securities and other property) due to theft by an employee of First Step (Adobe PDF Reader page 25). Employee theft is specifically designated as to the deprivation of the client, not the Insured (Adobe PDF Reader pages 153). An endorsement defines CLIENT as “any entity or individual for whom [First Step] provides goods or services under a written agreement or other agreed upon arrangement” (Adobe PDF Reader page 48). The money (Social Security benefits) belongs to the beneficiaries. See POMS GN 00506.002(A) (defining the terms beneficiary, benefit, and conserved funds for purposes of representative payees). It appears that the Social Security beneficiary would qualify as First Step’s CLIENT under this definition, as First Step provides services to the Social Security beneficiary as an individual, and SSA has selected First Step to serve as the beneficiary’s representative payee through a written authorization process between SSA and First Step. See 20 C.F.R. §§ 404.2040a(d)-(g), 416.640a(d)-(g). Further, as noted, the Crime Policy specifies that coverage applies to property that First Step holds for others, as well as property for which First Step is legally liable (Adobe PDF Reader page 34). Thus, Insuring Agreement A1.2 would appear to cover theft of SSA beneficiaries’ funds. As such, we believe that the agency may reasonably conclude that Insuring Agreements A1.1 and A1.2 provide adequate coverage of theft of SSA beneficiaries’ funds.

b. The Crime Policy’s Definition of “Employee” is Unclear and Does Not Appear to Include Coverage for Loss Caused by all of First Step’s Officers

As noted in the background, a search of the Arkansas Secretary of State registry confirms that First Step is registered as a domestic nonprofit corporation incorporated in Arkansas under the Arkansas Domestic Nonprofit Corporation Act, Ark. Code Ann. §§ 4-28-201 - 4-28-224. The Secretary of State registry identifies seven officer positions, consisting of a President, Vice President, Chief Executive Officer, Chief Financial Officer, and three Directors. Thus, it is our understanding that First Step has officers. SeeArk. Code Ann. § 4-28-213(a) (“The officers of a corporation shall consist of a president, vice president, secretary, treasurer, and such other officers and assistant officers as may be deemed necessary.”). Additionally, while we do not know whether First Step’s officers are compensated or non-compensated, Arkansas law provides that a nonprofit corporation may pay compensation to its officers for services rendered. See Ark. Code Ann. § 4-28-215(a).

Assuming that the Crime Policy’s Insuring Agreement A1, as discussed above, adequately covers an employee’s theft of SSA beneficiaries’ funds, the policy is deficient because it does not provide adequate coverage against financial loss caused by all of First Step’s officers given the definitions of “employee” (Adobe PDF Reader pages 37-38). Insuring Agreement A1 of the Crime Policy provides coverage for losses resulting from theft committed by First Step’s EMPLOYEE (Adobe PDF Reader page 25). Thus, whether First Step’s Crime Policy covers the organization against theft committed by an officer depends on whether First Step’s officers fall under the Crime Policy’s definition of EMPLOYEE in sections F and G (Adobe PDF Reader pages 25, 37-38). We consider the most relevant subsections (1), (4), (8), (9), and (10) of section F defining EMPLOYEE, as well as the subsequent explanation in section G that qualifies the definition of EMPLOYEE, below to determine whether the term EMPLOYEE would include all of First Step’s officers and believe that the agency could reasonably conclude that it does not (Adobe PDF Reader pages 37-38).[7]

Subsection (1) of the EMPLOYEE definition in Section F does not clearly include all of First Step’s officers (both compensated and non-compensated) (Adobe PDF Reader page 37). First, this provision limits the term EMPLOYEE to compensated individuals, indicating that dishonest or fraudulent acts committed by non-compensated officers would not be covered under this provision (Adobe PDF Reader page 37). Second, this provision limits an EMPLOYEE to an individual whom First Step “ha[s] the right to direct and control,” which arguably excludes officers (Adobe PDF Reader page 37).

Subsection (4) of the EMPLOYEE definition also does not sufficiently cover all of First Step’s officers, as it is limited to officers of an employee benefit plan while the officer handles funds or other property of an employee benefit plan (Adobe PDF Reader page 37). The SSA beneficiaries’ funds entrusted to First Step as representative payee are not part of an employee benefit plan. Thus, subsection (4) of the employee definition does not adequately cover all of First Step’s officers (Adobe PDF Reader page 37).

Subsection (8) of the EMPLOYEE definition could potentially provide coverage for an officer who is serving as a chairman or committee member (Adobe PDF Reader page 38). However, provision does not appear broad enough to cover all officers.

Subsection (9) of the EMPLOYEE definition as to directors or trustees does not include First Step’s officers (Adobe PDF Reader page 38). We note that the Arkansas Secretary of State website identifies three directors as part of First Step’s officers. Even if the reference to directors in subsection (9) intends to cover these three directors as officers, this subsection would not appear to cover the remaining officers, including the President, Vice President, Chief Executive Officer, and Chief Financial Officer. Further, subsection (9) of the EMPLOYEE definition provides coverage for directors and trustees only while a committee member performing specific, directorial acts (Adobe PDF Reader page 38). Misuse of benefits not a valid, specific directorial act for a committee member. Therefore, subsection (9) of the EMPLOYEE definition does not sufficiently cover all of First Step’s officers (Adobe PDF Reader page 38).

We are satisfied that subsection (10) of the EMPLOYEE definition provides adequate coverage for First Step’s non-compensated officers (Adobe PDF Reader page 38). However, this provision is silent regarding coverage for compensated officers. Applying the statutory interpretation principle of “expressio unius est exclusio alterius,” the express inclusion of coverage for non-compensated officers could reasonably be construed as intending to exclude coverage for compensated officers. See, e.g. ,Larry Hobbs Farm Equip., Inc. v. CNH Am., LLC, 291 S.W.3d 190, 195 (Ark. 2009) . First Step has not provided information as to whether its officers are compensated or non-compensated. However, we know that Arkansas law provides that a nonprofit corporation may compensate its officers for services rendered. See Ark. Code Ann. § 4-28-215(a). Thus, in the absence of specific information on First Step’s compensation of its officers and in light of the law allowing for such compensation, subsection (10) of the EMPLOYEE definition does not cover compensated officers that First Step might have either at the present time or in the future.

Finally, we note that the explanation in section G for the definition of EMPLOYEE expressly states that MANAGER, director, or trustee falls within the definition of EMPLOYEE only while they are performing acts within the scope of the usual duties of an EMPLOYEE (Adobe PDF Reader page 38). The Crime Policy specifically defines the term MANAGER as “a person serving in a directorial capacity for a limited liability company” (Adobe PDF Reader page 39). As a nonprofit corporation, the inclusion of the term MANAGER would be irrelevant to First Step. However, even if the term MANAGER could be construed to include all of First Step’s officers, misuse of SSA beneficiary funds is not a usual duty of an employee. Similarly, to the extent that the term directors intends to cover the three directors identified on the Secretary of State website as First Step’s officers, the EMPLOYEE definition would not provide coverage for theft of an SSA beneficiary’s funds, as misuse of SSA beneficiary funds is not a usual duty of an employee.

Both the regulations and the POMS require that a policy provide coverage for all of the organization’s employees and officers. 20 C.F.R. §§ 404.2040a(a), 416.640a(a); POMS GN 00506.105(A). In the absence of policy language that unambiguously covers all of First Step’s officers, particularly in light of the express coverage extended to non-compensated officers, we believe that the agency could reasonably conclude that the Crime Policy’s definition of EMPLOYEE does not provide sufficient coverage for loss resulting from misuse and embezzlement committed by all of First Step’s employees and officers.

c. The Crime Policy Appears to Exclude Coverage for Officers

Even if we could reasonably conclude that the Crime Policy’s definition of EMPLOYEE sufficiently covered all of First Step’s employees and officers, the policy is still deficient because the policy expressly excludes the entity itself from coverage. As noted earlier in this legal opinion, SSA’s POMS instruct that the bond or insurance contract must protect the FFS representative payee organization “from financial loss caused by the action or inaction of the organization, or officer(s), or an employee of the organization .” POMS GN 00506.105(A) (emphasis added). Here, t he Exclusions section provides that the policy does not cover losses resulting from theft or dishonest acts committed by “You,” meaning First Step itself (Adobe PDF Reader page 27).[8] The Crime Policy also broadly excludes coverage for loss resulting from an employee’s THEFT or dishonest acts except when covered under Insuring Agreements A1 (Employee Theft and Client Property) and A2 (ERISA Fidelity) (Adobe PDF Reader page 27). It remains unclear whether the policy exclusion for loss resulting from theft or dishonest acts committed by “You” (First Step) could be interpreted as applying to First Step’s officers (Adobe PDF Reader page 27). The introduction to the Crime Policy states that “You” means First Step as the named insured, and as a non-profit corporation, officers act as agents for First Step (Adobe PDF Reader pages 11, 13, 25). See Rogers v. Tudor Ins. Co., 925 S.W.2d 395, 399-400 (Ark. 1996) (officers and directors routinely act as agents for a corporation; a corporate entity can only act through its directors and officers); Madison Bank & Trust v. First Nat’l Bank of Huntsville, 635 S.W.2d 268, 272 (Ark. 1982) (“The Bank of Kingston, as a legal entity, can only act through its agents, and the acts of its corporate officers are regarded as its acts.”) . Thus, this broad exclusion could be interpreted as encompassing theft and dishonest acts by First Step’s officers.

d. The Crime Policy’s Condition Regarding Consolidation and Merger Indicates That Coverage Does Not Automatically Extend to All Additional Employees First Step Obtains

Finally, an endorsement to the Crime Policy sets forth amendments to certain conditions on coverage that we believe are relevant to our review of the sufficiency of the Crime Policy (Adobe PDF Reader pages 42-54). The Crime Policy is potentially deficient because it does not automatically extend coverage to all new employees First Step acquires through a consolidation or merger (Adobe PDF Reader pages 44-45). See Ark. Code Ann. §§ 4-28-301 – 4-28-309 (statutory provisions pertaining to the merger or consolidation of nonprofit corporations). The endorsement’s condition amendments provide that the policy automatically extends coverage with respect to a consolidation, merger, or acquisition of some assets, of an entity that has less than 25% of First Step’s assets (Adobe PDF Reader pages 44-45). However, with respect to larger transactions, the Crime Policy requires that coverage applies to additional employees for the first 90 days after the effective date of the transaction, but requires that First Step obtain the Insurance Company’s written consent to extend coverage to additional employees beyond this 90-day period (Adobe PDF Reader pages 44-45). The requirement to obtain written consent to extend coverage to new employees leaves open the possibility that additional employees would not be covered if First Step did not obtain the proper consent or pay the additional premium. As such, in addition to all of the other above deficiencies of coverage, we believe that this provision is an additional basis for determining that the policy does not comply with SSA’s bonding requirements that require that all of First Step’s employees and officers are adequately covered. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105 (A)-(B).

In sum, in light of the uncertainties as to the definition of EMPLOYEE, the broad exclusion from coverage for acts committed by First Step itself, and the condition on coverage regarding consolidation and merger, we believe the agency could reasonably conclude that First Step’s Crime Policy does not provide sufficient coverage for loss resulting from misuse and embezzlement committed by all of First Step’s employees and officers. As such, we believe that there is legal support for the agency to determine that the Crime Policy does not comply with SSA’s bonding requirements for non-governmental FFS representative payee organizations. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105(A)-(B).

e. The Policy Change Document listing SSA as a Loss Payee does not Cure the Deficiencies Identified in the Crime Policy

We also analyzed the Policy Change Document dated August 30, 2019, which added SSA as a Loss Payee under the Crime Policy, in determining SSA’s rights to recover financial losses with respect to the Crime Policy.[9] The Policy Change Document notes that the policy is amended to add SSA as a Loss Payee, but is silent regarding SSA’s rights as a Loss Payee. Under Arkansas law, the “rights and liability of the parties to an insurance contract must be determined by considering the language of the entire policy.” Cont'l Cas. Co. v. Davidson, 463 S.W.2d 652, 655 (Ark. 1971). Looking to the Crime Policy itself, t he Conditions states that “this policy is for your benefit only. It provides no rights or benefits to any other person or organization. Any claim for loss that is covered under this policy must be presented by you” (Adobe PDF Reader page 34). Giving effect to the plain language of the Crime Policy, in conjunction with the Policy Change Document, the addition of SSA as a Loss Payee appears to be a simple, rather than standard, loss payee clause. SeeFarmers Home Mut. Fire Ins. Co. v. Bank of Pocahontas, 101 S.W.3d 867, 871 (Ark. Ct. App. 2003), aff’d, 129 S.W.3d 832 (Ark. 2003).[10] The addition of SSA as a Loss Payee sufficiently protects SSA’s right to recover payment if First Step is entitled to payment under the Crime Policy. However, SSA’s rights under the Crime Policy are no greater than First Step’s rights, and the Policy Change Document does not create an independent contract between SSA and Philadelphia Indemnity Insurance Company.[11] See Lucas Cty. Bank, 256 S.W.2d at 558; see also Adam D. Cornett, Andrew S. Kent, Who Can Recover Under A Fidelity Policy?, 20 Fidelity L.J. 139, 152–53 (2014) (noting that a loss payee to a fidelity policy has an assignment type interest and if the underlying insured is not entitled to payment under the policy, the loss payee is likewise not entitled to payment). Accordingly, because as discussed above, the Crime Policy does not sufficiently cover financial losses caused by all of First Step’s employees and officers, SSA would likewise be unable to recover payment for financial losses caused by all employees and officers. The Loss Payee provision itself is not a deficiency, but its presence does not cure the other deficiencies discussed above.

CONCLUSION

Based on the information provided, we believe that the agency may reasonably conclude that First Step’s Crime Policy does not sufficiently comply with SSA’s bonding requirement for coverage of financial loss incurred due to the misuse and embezzlement by all employees and officers of the non-governmental FFS representative payee organization. Specifically, given the definitions and exclusions, the Crime Policy does not clearly cover financial losses due to the action or inaction of all of First Step’s officers. Further, the Crime Policy’s condition regarding consolidation and merger indicates that coverage does not automatically extend to all additional employees First Step obtains. Finally, the identification of SSA as a loss payee does not cure the deficiencies in the Crime Policy. Therefore, we believe the agency may reasonably find that First Step’s Crime Policy does not meet SSA’s bonding requirements set out in 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2), and POMS GN 00506.105. If you have any questions, or if we can provide further assistance, please contact Assistant Regional Counsel Whitney Livengood Thorp at (214) 767-3508.

Recommended Response to First Step

If you determine that the Crime Policy does not meet SSA’s bonding requirements, we recommend using the following language in your response to First Step to refer to the specific provisions that are deficient and to provide further explanation as to the specific deficiencies of Policy Number PHSD 1457582:

We reviewed Policy Number PHSD 1457582 for First Step, policy period June 30, 2019, to June 30, 2020, which includes a Crime Protection Plus Coverage Part, four associated endorsements, and a Policy Change Document listing SSA as a loss payee, to determine whether it complies with SSA’s bonding requirement for fee-for-service representative payee organizations. A non-governmental fee-for-service representative payee organization must be adequately bonded or insured before SSA will authorize the organization to collect a fee. See 20 C.F.R. §§ 404.2040a(a)(2), (d), 416.640a(a)(2), (d); POMS GN 00506.001(C); POMS GN 00506.105(A). A non-governmental fee-for-service representative payee organization must be “bonded/insured to cover misuse and embezzlement by officers and employees.” 20 C.F.R. §§ 404.2040a(a), 416.640a(a). The bond or insurance contract should provide coverage for financial loss from an organization’s employee’s and officer’s theft. See POMS GN 00506.105(B).

The Crime Policy does not sufficiently cover financial loss caused by misuse and embezzlement by all of First Step’s officers – both compensated and non-compensated. Specifically, the Crime Policy’s definition of the term EMPLOYEE does not appear to cover all officers (compensated and non-compensated). In addition, the Crime Policy broadly excludes from coverage loss resulting from theft or any other dishonest act committed by “You” – First Step itself, which would seem to encompass loss due to theft and other dishonest acts committed by First Step’s officers given that a corporation acts through its officers.

We are also concerned by a condition on coverage of employees. The Crime Policy, through an endorsement, provides a condition on coverage indicating that coverage of the Crime Policy does not automatically extend to all additional employees obtained through a consolidation or merger.

We recognize that the Policy Change Document lists SSA as a loss payee. However, SSA’s rights as a loss payee are no greater than First Step’s rights under the Crime Policy. Because the Crime Policy does not sufficiently cover financial losses caused by all of First Step’s employees and officers, SSA would likewise be unable to recover payment for financial losses from all employees and officers.

Therefore, in light of the uncertainties regarding whether compensated and non-compensated officers are included in the definition of EMPLOYEE;the broad exclusion from coverage for theft or dishonest acts by First Step itself; and the condition showing that coverage does not automatically extend to all additional employees obtainedthrough a consolidation or merger,Policy Number PHSD 1457582 does not comply with SSA’s bonding requirement for non-governmental fee-for-service representative payees.

If you wish to obtain a rider or endorsement to the Crime Policy that would clearly include your officers (compensated and non-compensated) within the definition of EMPLOYEE and therefore, covered under Insuring Agreement A1., the Employee Theft and Client Property provision, you may submit such a rider or endorsement to the agency for further consideration.

 

B. CPM 19-215 Adequacy of Coverage Provided by a Non-Governmental Organization

Date: October 30, 2019

1. SYLLABUS

A crime policy coupled with a letter submitted by a non-governmental organization meets Social Security’s bonding requirements.

2. OPINION

QUESTION

You asked us to review Pathfinder, Inc.’s (Pathfinder’s) Insurance PolicyNumber PHPK 1935974, consisting of the Philadelphia Indemnity Insurance Company’s Commercial Crime Coverage Part (Crime Policy), effective from February 1, 2019, through February 1, 2020, for our opinion as to whether the policy provisions satisfy the Social Security Administration’s (SSA’s or agency’s) bonding requirements for non-governmental fee-for-service (FFS) organizations, as set forth in 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2) and the Program Operations Manual Systems (POMS) GN 00506.105.[12] You also submitted a letter signed and dated May 20, 2019, on Philadelphia Insurance Companies letterhead from Joseph Pitassi, an underwriter at Philadelphia Insurance Companies, to SSA, informing the agency that Pathfinder’s policy number PHPK 1935974 “extend[s] coverage to the insureds officers and directors.” Specifically, you asked whether Pathfinder’s Crime Policy, along with Mr. Pitassi’s May 20, 2019, letter, meets SSA’s requirement that bonding/insurance coverage for employee theft include officers.

ANSWER

Based on the information provided, we believe that the agency could reasonably conclude that the Crime Policy, coupled with Mr. Pitassi’s May 20, 2019, letter stating that coverage extended to Pathfinder’s officers and directors, is sufficient to comply with SSA’s bonding requirements for non-governmental FFS organizational representative payees. Although it is unclear whether the Crime Policy viewed on its own would adequately cover financial losses due to the action or inaction of all of Pathfinder’s officers, we believe that if litigated, a court could consider Mr. Pitassi’s letter as parol evidence showing the insurance company’s intent that the Crime Policy provide coverage for all of Pathfinder’s officers. Therefore, there is legal support for the agency to find that Pathfinder’s Crime Policy together with the insurance company’s letter is sufficient to satisfy SSA’s bonding requirements of 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2), and POMS GN 00506.105.

BACKGROUND

The Arkansas Secretary of State’s on-line information shows that Pathfinder is registered with the Arkansas Secretary of State as a non-profit domestic corporation that was first incorporated in 1971 under the Arkansas Nonprofit Corporation Act of 1993. https://www.ark.org/sos_corpsearch_mobile/m.aspx/Corporation/Details/100039679 (last visited Sept. 6, 2019). Pathfinder’s website confirms the same and states that it is governed by a board of directors that includes a chairman, vice-chairman, and secretary, as well as six members. See http://pathfinderinc.org/welcome/history.php (last visited Sept. 6, 2019). In a letter signed and dated May 20, 2019, Joseph Pitassi, an underwriter at Philadelphia Insurance Companies, informed the agency that Pathfinder’s policy number PHPK 1935974 “extend[s] coverage to the insureds officers and directors.”

Pathfinder’s Crime Policy[13]

The information you provided shows that Pathfinder obtained a Crime Policy from Philadelphia Indemnity Insurance Company for Pathfinder, Inc. as the Insured. We were provided with Crime Policy Number PHPK 1935974, effective 02/01/2019 through 02/01/2020. Below are the policy provisions most relevant to SSA’s bonding requirements and the issue you have presented. As to the Insuring Agreement itself, the Crime Policy provides coverage as to “Employee Theft” as follows: We will pay for loss of or damage to “money”, “securities” and “other property” resulting directly from “theft” committed by an “employee”, whether identified or not, acting alone or in collusion with other persons. Crime Policy, Commercial Crime Coverage Form (Loss Sustained Form), Part A.1, Insuring Agreements, Employee Theft (Adobe PDF Reader p. 6). As this provision refers to certain specifically defined terms (including theft and employee), we next review the relevant definitions. The Crime Policy defines “theft” as “the unlawful taking of property to the deprivation of the Insured” and “[f]or the purposes of this Insuring Agreement, ‘theft’ shall also include forgery.” Crime Policy, Part A.1, Insuring Agreements, Employee Theft (Adobe PDF Reader p. 6); Part F.20, Definitions, Theft (Adobe PDF Reader p. 19). As the “theft” definition refers to “property,” we note that the Crime Policy specifies that it covers property that Pathfinder holds for others, and is not limited to property for which Pathfinder is legally obligated for losses. See Crime Policy, Part E.1.n (Adobe PDF Reader p. 15). However, the Crime Policy provides no rights to parties other than Pathfinder, and any claims under the Crime Policy must be made by Pathfinder. See Crime Policy, Part E.1.n, Conditions, Ownership of Property, Interests Covered (Adobe PDF Reader p. 15).

In relevant part, Pathfinder’s Crime Policy defines an “Employee” as

(1) Any natural person: (a) While in your service and for the first 30 days immediately after termination of service, unless such termination is due to “theft” or any dishonest act committed by the “employee”; (b) Who you compensate directly by salary, wages or commissions; and(c) Who you have the right to direct and control while performing services for you; . . .

(4) Any natural person who is:(a) A trustee, officer, employee, administrator or manager, except an administrator or manager who is an independent contractor, of any “employee benefit plan”; and(b) A director or trustee of yours while that person is engaged in handling “funds” or “other property” of any “employee benefit plan”; . . .

(8) Any of your “managers”, directors or trustees while:(a) Performing acts within the scope of the usual duties of an “employee”; or (b) Acting as a member of any committee duly elected or appointed by resolution of your board of directors or board of trustees to perform specific, as distinguished from general, directorial acts on your behalf.

Crime Policy, Part F.5, Definitions, Employee (Adobe PDF Reader pp. 17-18).

In addition to the scope of coverage provided for in the Insuring Agreement and the definitions of certain terms, the policy’s exclusions from coverage are also of relevance to this legal opinion. The Crime Policy specifically excludes coverage for losses caused by theft or other dishonest acts committed by Pathfinder, its partners, or its members. See Crime Policy, Part D.1.a, Exclusions, Acts Committed by You, Your Parents, or Your Members (Adobe PDF Reader p. 7). The Crime Policy also excludes coverage for losses caused by theft or other dishonest acts committed by Pathfinder’s employees, managers, directors, trustees, or authorized representatives unless covered under section A.1. See Crime Policy, Part D.1.c, Exclusions, Acts of Employees, Managers, Directors, Directors, Trustees, or Representatives (Adobe PDF Reader p. 7).

Finally, we note that the Crime Policy includes a joint loss payable clause listing SSA as a Loss Payee (Adobe PDF Reader p. 23). The joint loss payable clause provides that the Insurance Company will make any loss payable to SSA and Pathfinder jointly, but states that the Policy is “for your benefit only. It provides no rights or benefits to any other person or organization including the Loss Payee, other than payment of loss as set forth in this endorsement” (Adobe PDF Reader p. 23).

ANALYSIS

A. Federal Law: FFS Organizational Representative Payees

The Social Security Act permits “qualified organizations”[14] to collect a monthly fee from payments to a Social Security beneficiary or recipient for expenses the organization incurs in providing representative payee services for the beneficiary or recipient. See 42 U.S.C. §§ 405(j)(4)(A)(i), 1383(a)(2)(D)(i); 20 C.F.R. §§ 404.2040a(a), 416.640a(a). A “qualified organization” consists of either:

(1) [a]ny state or local government agency with fiduciary responsibilities or whose mission is to carry out income maintenance, social service, or health care-related activities; or

(2) [a]ny community-based nonprofit social service organization founded for religious, charitable, or social welfare purposes, which is tax exempt under section 501(c) of the Internal Revenue Code and which is bonded/insured to cover misuse and embezzlement by officers and employees, and which is licensed in each State in which it serves as representative payee (if licensing is available in the State).

20 C.F.R. §§ 404.2040a(a), 416.640a(a); POMS GN 00506.001(C). SSA authorization is required before an organization can begin collecting a fee from a beneficiary or recipient’s monthly payments. See 20 C.F.R. §§ 404.2040a(a), (d), 416.640a(a), (d); POMS GN 00506.001(B).

Here, you have indicated that Pathfinder is a non-governmental FFS representative payee organization. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2). We do not otherwise address whether Pathfinder is a “qualified organization” meeting all of the regulatory requirements. See 20 C.F.R. §§ 404.2040a(a)-(d), 416.640a(a)-(d); POMS GN 00506.001(C), GN 00506.100(B)(3).

Further, we do not address its section 501(c)(3) tax-exempt status, whether it is licensed in the state in which it serves, nor whether the amount of coverage under the bond is sufficient. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.001(C), GN 00506.105(B), GN 00506.010(B)(2), GN 00506.100(B)(2), GN 00506.105(C)(5), (D). Pursuant to your legal opinion request, our focus is upon whether the Crime Policy meets SSA’s requirement for bonding/insurance coverage for financial loss due to misuse and embezzlement by both officers and employees, as we discuss in the next section. 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105(A)-(C) (explaining that bonding constitutes a bond or insurance contract).

A non-governmental FFS representative payee organization must be adequately bonded or insured before the agency will authorize the organization to collect a fee. See 20 C.F.R. §§ 404.2040a(a)(2), (d), 416.640a(a)(2), (d); POMS GN 00506.001(C); POMS GN 00506.105(A).[15] The regulations instruct that the FFS representative payee organization must be “bonded/insured to cover misuse and embezzlement by officers and employees.” 20 C.F.R. §§ 404.2040a(a), 416.640a(a). Although the regulations require coverage for “misuse and embezzlement,” SSA law and policy do not specify what insurance or bonding product the FFS representative payee should use or the exact wording of the insurance or bonding contract. 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105(A)-(C). SSA’s POMS instruct that the bond or insurance contract must protect the FFS representative payee organization “from financial loss caused by the action or inaction of the organization, or officer(s), or an employee of the organization.” POMS GN 00506.105(A). POMS GN 00506.105(B) and (C) discuss in general terms various types of bonds and insurance policies that protect from financial loss due to such things as theft, dishonest acts, or fraudulent acts by employees and officers. The POMS states that the bond or insurance contract should provide coverage for financial loss from an organization’s employee’s or officer’s theft. See POMS GN 00506.105(B). Therefore, the bond or insurance contract must provide coverage for financial loss caused by the misuse of benefits and embezzlement of both the FFS representative payee organization’s employees and officers, and the POMS indicates that coverage for loss due to theft, dishonest acts, and fraudulent acts would suffice. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105(B), (C)(3), (4).

Pathfinder’s Crime Policy is titled “Commercial Crime Coverage Form” (Adobe PDF Reader pp. 6-19). The POMS describes an insurance policy as a document “intended to protect the employer from financial loss due to the fraudulent activities of an employee or group of employees,” such as a simplified crime policy covering employee theft and dishonesty. POMS GN 00506.105(C)(4)(d). Although most employee theft and dishonesty policies include employees, the agency must also determine whether all officers are covered under the policy. Seeid.We turn next to the specific provisions of Pathfinder’s Crime Policy to determine if it is sufficient to satisfy SSA’s bonding requirement for non-governmental FFS representative payee organizations.

B. Review of Pathfinder’s Crime Policy to Determine if it Complies with Federal Law and SSA Policy [16]

1. Pathfinder’s Crime Policy Is Insufficient Because (1) The Definition of Employee is Unclear and Does Not Appear to Cover All Officers; and (2) It is Unclear Whether Pathfinder’s Officers Would Fall Within the Exclusion for Losses Resulting from Theft of Dishonest Acts committed by Pathfinder. However, the Insurance Company’s May 20, 2019, Letter Provides Parol Evidence to Support the Interpretation that the Crime Policy Extends Coverage to Pathfinder’s Officers.

a. Pathfinder’s Crime Policy on its own does not appear to provide adequate coverage against theft committed by all officers of the organization

As stated, we must determine whether Pathfinder’s Crime Policy satisfies SSA’s requirement that a non-governmental FFS representative payee organization be bonded to cover financial loss due to misuse and embezzlement by all employees and officers. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105(A)-(C).

The Crime Policy’s Coverage under the Insuring Agreements for Loss due to “Employee Theft” Sufficiently Covers for Loss of Social Security Benefits Due to “Misuse and Embezzlement”

We first considered whether the Crime Policy’s insuring agreement for employee theft covers loss for an employee’s theft/misuse/embezzlement of SSA beneficiaries’ funds (Social Security benefits) held by Pathfinder as the representative payee for the beneficiaries (Adobe PDF Reader pages 6-19). Insuring Agreement A.1 covers losses resulting from an employee’s theft of money, securities, and other property, and the Crime Policy expressly defines theft as the “unlawful taking of property to the deprivation of the Insured” (Adobe PDF Reader pages 6, 19). The Crime Policy specifies that coverage applies to property that the Insured holds for others, whether or not the Insured is legally liable for the loss of such property (Adobe PDF Reader page 15). Once a misuse determination has been made, the agency holds organizational representative payees liable for the misused benefits. Because the Crime Policy covers property that Pathfinder holds for others, and because an organizational representative payee would be liable for misused benefits, we believe that the agency may reasonably conclude that an employee’s theft of SSA beneficiaries’ funds would be to the deprivation of Pathfinder.

The Crime Policy’s Definition of “Employee” is Unclear and Does Not Appear to Include Pathfinder’s Officers

Assuming that the Crime Policy adequately covers an employee’s theft of SSA beneficiaries’ funds, the policy is deficient because it is unclear and does not appear to provide adequate coverage against financial loss caused by Pathfinder’s officers given the definition of “employee.” Insuring Agreement A.1 of the Crime Policy provides coverage for losses resulting directly from theft committed by Pathfinder’s “employee.” See Crime Policy, Part A.1, Insuring Agreement, Employee Theft (Adobe PDF Reader page 6). Thus, whether Pathfinder’s Crime Policy covers the organization against theft committed by an officer depends on whether Pathfinder’s officers fall under the Crime Policy’s definition of “employee.” See Crime Policy, Part F.5.a.(1)-(8), Definitions, Employee (Adobe PDF Reader pages 17-18). We consider the most relevant sections (1), (4), and (8) defining “employee” below to determine whether it would include officers.[17]

Section (1) of the “employee” definition does not clearly include Pathfinder’s officers (both compensated and non-compensated). See Crime Policy, Part F.5.a.(1), Definitions, Employee (Adobe PDF Reader page 17). First, this provision limits the term “employee” to compensated individuals, indicating that dishonest or fraudulent acts committed by non-compensated officers would not be covered under the Crime Policy. See Crime Policy, Part F.5.a.(1)(b), Definitions, Employee. Second, this provision limits an “employee” to an individual whom Pathfinder “has the right to direct and control,” which arguably excludes officers. See Crime Policy, Part F.5.a.(1)(c), Definitions, Employee.

Section (4) of the “employee” definition also does not sufficiently cover all of Pathfinder’s officers, as it is limited to officers of an employee benefit plan while the officer handles funds or property of an employee benefit plan. See Crime Policy, Part F.5.a.(4), Definitions, Employee (Adobe PDF Reader page 18). The SSA beneficiary funds entrusted to Pathfinder as representative payee are not part of Pathfinder’s employee benefit plan.

Section (8) of the “employee” definition as to “‘managers,’ directors, or trustees” does not include Pathfinder’s officers. See Crime Policy, Part F.5.a(8), Definitions, Employee (Adobe PDF Reader page 18). The Crime Policy specifically defines the terms “manager” as “a person serving in a directorial capacity for a limited liability company.” See Crime Policy, Part F.10, Definitions, Manager (Adobe PDF Reader page 18). Pathfinder is registered with the Arkansas Secretary of State as a non-profit domestic corporation incorporated under The Arkansas Nonprofit Corporation Act of 1993, Ark. Code Ann. §§ 4-33-101 – 4-33-1707. As such, inclusion of “managers” – relevant only to a limited liability company - within the definition of “employee” is not relevant to Pathfinder – a non-profit domestic corporation with members, directors, and officers. See Ark. Code Ann. §§ 4-33-601 – 4-33-640 (provisions related to members and membership), 4-33-801 – 4-33-819 (provisions related to the board of directors and requiring a minimum of three directors), 4-33-840 – 4-33-849 (provisions related to officers and requiring a president, secretary, and treasurer, unless otherwise provided in the articles or bylaws).

Therefore, as the Crime Policy’s Insuring Agreement extends coverage for loss due to employee theft, it is significant to SSA’s bonding/insurance requirement that the definition of “employee” does not clearly include Pathfinder’s officers.

The Crime Policy’s Exclusions from Coverage are Unclear and May Encompass Pathfinder’s Officers

We also have a concern that the Crime Policy’s exclusions are unclear and that Pathfinder’s officers may fall within the exclusions from coverage. The Crime Policy’s “Exclusions” from coverage indicate officers may not be covered. See Crime Policy, Part D.1.a, Exclusions, Acts Committed by You, Your Partners, or Your Members. The “Exclusions” section of Pathfinder’s Crime Policy states that the policy does not cover “[l]oss resulting from ‘theft’ or any other dishonest act committed by: (1) You; or (2) Any of your partners or ‘members’. . .” Crime Policy, Part D.1.a, Exclusions (Adobe PDF Reader page 7).

As to the exclusion for acts committed by members, the Crime Policy defines “member” as “an owner of a limited liability company represented by its membership interest, who may also serve as a “manager.” Crime Policy, Part F.11, Definitions, Member (Adobe PDF Reader page 18). A “manager” is “a person serving in a directorial capacity for a limited liability company.” Crime Policy, Part F.11, Definitions, Manager (Adobe PDF Reader page 18). This policy language therefore indicates that a “member” could serve in a directorial capacity equivalent to an officer. As Pathfinder is a registered non-profit corporation in Arkansas and not a partnership or a limited liability company, this exclusion as to acts committed by partners or members would not seem relevant to Pathfinder. However, under Arkansas law, non-profit corporations may have members rather than stockholders or shareholders. See, e.g., Ark. Code. Ann. §§ 4-33-601 - 4-33-640 (describing membership rights and procedures). The existence of non-profit corporation Pathfinder’s members, along with the Crime Policy’s definition of a “member” and “manager” as pertaining to a limited liability company only, creates an ambiguity as to whether the Crime Policy is intended to cover Pathfinder’s members.

Finally, as we previously explained in prior opinions, it is unclear whether Pathfinder’s officers would fall within this broad exclusion for loss resulting from theft or dishonest acts committed by “You.” See Crime Policy, Part D.1.a, Exclusions (Adobe PDF Reader page 7). The introduction to the Crime Policy states that “You” means Pathfinder as the named insured, and as a non-profit corporation, officers act as agents for Pathfinder. See Rogers v. Tudor Ins. Co., 925 S.W.2d 395, 399-400 (Ark. 1996) (officers and directors routinely act as agents for a corporation; a corporate entity can only act through its directors and officers); Madison Bank & Trust v. First Nat’l Bank of Huntsville, 635 S.W.2d 268, 272 (Ark. 1982) (“The Bank of Kingston, as a legal entity, can only act through its agents, and the acts of its corporate officers are regarded as its acts.”) . Thus, this exclusion could be interpreted as encompassing acts by Pathfinder’s officers.

As such, in light of the uncertainties as to the definition of “employee” and the exclusions from coverage noted above, we believe that the agency could reasonably conclude that Pathfinder’s Crime Policy, viewed on its own, does not provide sufficient coverage against theft committed by all officers and employees of the organization, as required by SSA law and policy.

b. Mr. Pitassi’s May 20, 2019, letter provides written parol evidence to clarify the parties’ intention to cover officers

Although the Crime Policy itself does not appear to provide adequate coverage against theft committed by all of Pathfinder’s officers, we believe that a court might find the terms of the Crime Policy to be ambiguous as to coverage for Pathfinder’s officers and if so, would consider the insurance company’s May 20, 2019, letter as parol evidence when analyzing the scope of coverage under the Crime Policy as it relates specifically to coverage for officers.[18]

As to construction of insurance policies, the Arkansas Supreme Court has stated: “Where the terms of the insurance policy are clear and unambiguous, the policy language controls.” Scottsdale Ins. Co. v. Morrowland Valley Co., LLC, 411 S.W.3d 184, 191 (Ark. 2012). A court will “not resort to rules of construction in order to ascertain the meaning of an insurance policy when no ambiguity exists.” Id. Further, a court “will not rewrite the terms of an insurance contract under the rule of strict construction against the insurer so as to bind the insurer to a risk that the contract plainly excluded and for which it was not paid.” Id. However, if an ambiguity exists, a court may admit parol evidence to explain the meaning of an ambiguity in a written contract. C. & A. Const. Co. v. Benning Const. Co., 509 S.W.2d 302, 303 (Ark. 1974). When an ambiguity exists, a court construes the policy liberally in favor of the insured and strictly against the insurer. SeeNorris v. State Farm Fire & Cas. Co. , 16 S.W.3d 242 (Ark. 2000). The Arkansas Supreme Court has explained that “[l]anguage is ambiguous when there is doubt or uncertainty as to its meaning and it is fairly susceptible to more than one reasonable interpretation.” Id.

Our discussion above with regard to the definition of “employee” and exclusions from coverage highlights what we believe an Arkansas court might find to constitute ambiguities in the Crime Policy coverage as it relates to coverage for losses attributable to theft by Pathfinder’s officers in particular. Given such ambiguities, an Arkansas court would likely consider Mr. Pitassi’s May 20, 2019, letter as written parol evidence to determine the extent of coverage as to officers. See McGrew v. Farm Bureau Mut. Ins. Co. of Arkansas, Inc., 268 S.W.3d 890, 896-897 (Ark. 2007) (given ambiguities in the insurance policy, extrinsic evidence could be considered to determine the definitions of certain terms in the insurance policy). In this case, considering Mr. Pitassi’s May 20, 2019, letter and construing the Crime Policy liberally in favor of Pathfinder and against Philadelphia Insurance Companies, we believe an Arkansas court could interpret the Crime Policy as providing coverage for losses attributable to theft by Pathfinder’s employees and officers.

We also note that the agency’s POMS indicate that the agency can rely on such extrinsic letters explaining coverage under an insurance policy as the POMS instruct that “the insurance agent should advise if the officer(s) are covered under the employee dishonesty or theft clause and exhibited in the policy,” POMS GN 00506.105(C)(4)(d); see also POMS PR 07115.006 (finding policy language sufficient, based in part on an insurance agent’s letter stating “you should be all set with this request from the Social Security Administration. . . . The policy form extends coverage to your . . . Officers.”); POMS PR 07115.053 (advising the agency to consider contacting the representative payee to confirm that the payee retains the right to direct and control compensated officers). Thus, there is legal support for the agency to find that Pathfinder’s Crime Policy, combined with Mr. Pitassi’s May 20, 2019, letter on behalf of the insurance company unequivocally stating that the Crime Policy extended coverage to Pathfinder’s officers, meets SSA’s bonding requirements of 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2), and POMS GN 00506.105.

CONCLUSION

We believe that the agency may reasonably conclude that the Crime Policy, in conjunction with Mr. Pitassi’s May 20, 2019, letter, sufficiently complies with SSA’s requirement that a bond or insurance policy cover financial loss incurred due to the misuse and embezzlement by all employees and officers of the non-governmental FFS representative payee organization. Specifically, although the Crime Policy language itself does not clearly cover financial losses due to the action or inaction of all of Pathfinder’s employees and officers due to ambiguities in the definitions and exclusions, a court would likely treat Mr. Pitassi’s May 20, 2019, letter as written parol evidence and interpret the Crime Policy’s coverage for loss attributable to employee theft as including loss attributable to theft by Pathfinder’s officers as well. Therefore, we believe the agency may reasonably find that Pathfinder’s Crime Policy together with the insurance company’s letter meets SSA’s bonding requirements of 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2), and POMS GN 00506.105. If you have any questions, or if we can provide further assistance, please contact Assistant Regional Counsel Whitney Livengood Thorp at (214) 767-3508.


Footnotes:

[1]

 

The materials that you provided with your original opinion request include a 50-page policy from Philadelphia Insurance, policy number PHSD 1457582 effective from June 30, 2019, through June 30, 2020. You also provided a separate two page Policy Change Document dated August 30, 2019, adding SSA as a Loss Payee under the Crime Policy. As to the 50-page PDF insurance packet with multiple policies and endorsements, in citing to the location of the relevant provision in the background of our legal opinion we will identify the Adobe PDF Reader page number and the specific provision discussed, but in our analysis, we will refer only to the Adobe PDF Reader page number. We will refer to the Policy Change Document dated August 30, 2019 simply as the Policy Change Document without referencing the PDF page number.

[2]

 

The bonding requirement can be met by a bond or an insurance policy. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105(A)-(C) (explaining that bonding constitutes a bond or insurance contract).

[4]

 

In addition to being a “qualified organization,” the representative payee must also regularly provide representative payee services concurrently to at least five beneficiaries and, with certain exceptions, demonstrate that it is not a creditor of the beneficiary. 20 C.F.R. §§ 404.2040a(b), 416.640a(b).

[5]

 

If a representative payee misuses a beneficiary’s benefits, the representative payee is liable for the amount misused. See 42 U.S.C. §§ 405(j)(7)(A), 1383(a)(2)(H); 20 C.F.R. §§ 404.2041(a), 416.641(a). The Act states that “misuse of benefits by a representative payee occurs in any case in which the representative payee receives payment under this subchapter for the use and benefit of another person and converts such payment, or any part thereof, to a use other than for the use and benefit of such other person.” 42 U.S.C. §§ 405(j)(9), 1383(a)(2)(A)(iv). SSA will make “every reasonable effort to obtain restitution of misused benefits” from the representative payee so that SSA can repay those benefits to the beneficiary. 20 C.F.R. §§ 404.2041(a), 416.641(a). In certain cases, SSA will repay the benefits to ensure the beneficiary receives full restitution. 20 C.F.R. §§ 404.2041(b), (c), 416.641(b), (c). To help ensure SSA’s own reimbursement, SSA requires each non-governmental FFS representative payee organization to obtain a bond or insurance policy for coverage for misuse of benefits. See 42 U.S.C. §§ 405(j)(10), 1381(a)(2)(I); 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105; see also POMS GN 00506.001 (effective April 1, 2005, Section 102 of the Social Security Protection Act of 2004 requires non-governmental FFS representative payees to be bonded and licensed in each state in which they serve as representative payees). It is this bonding/insurance requirement that is at issue in this request.

[6]

 

We apply general principles of contract interpretation in reviewing the Crime Policy. When no choice of law provision exists, Arkansas courts apply the “most significant relationship” test when determining which law governs in a contract dispute. See Crisler v. Unum Ins. Co. of Am., 233 S.W.3d 658, 660 (Ark. 2006). Because First Step was incorporated in Arkansas, operates its business in Arkansas, and entered into the insurance policy in Arkansas, Arkansas law likely governs the interpretation of the Crime Policy. See id. Arkansas law treats an insurance policy as a contract between the insurer and insured. See Certain Underwriters at Lloyd’s, London v. Bass, 461 S.W.3d 317, 326 (Ark. 2015).Therefore, in reviewing an insurance policy, Arkansas courts submit to the principle that “when the terms of the policy are clear, the language in the policy controls.” See Vincent v. Prudential Ins. Brokerage, 970 S.W.2d 215, 216 (Ark. 1998). If a policy provision is unambiguous, i.e., subject to only one reasonable interpretation, Arkansas courts give effect to the plain language of the policy without resorting to rules of construction. SeeElam v. First Unum Life Ins. Co., 57 S.W.3d 165, 169 (Ark. 2001). If, however, the policy language is ambiguous, i.e., susceptible to more than one reasonable interpretation, they construe the policy liberally in favor of the insured and strictly against the insurer. SeeNorris v. State Farm Fire & Cas. Co., 16 S.W.3d 242 (Ark. 2000).

[7]

 

Some of the sections defining “employee” more clearly do not apply to officers, including section (2) concerning temporary employees, section (3) concerning leased employees, section (5) concerning consultants, section (6) concerning guest students and interns, and section (7) concerning volunteers (Adobe PDF Reader pages 37-38).

[8]

 

The Crime Policy also excludes loss resulting from theft or dishonest acts committed by MEMBERS and MANAGERS but the policy defines MEMBERS and MANAGERS as relevant to a limited liability company only (Adobe PDF Reader 27, 39). First Step is not a limited liability company. Thus, although as an Arkansas nonprofit corporation, First Step may have members, given the narrow definition of MEMBERS in the Crime Policy, we believe this exclusion does not pertain to First Step. See Ark. Code Ann. § 4-28-210(a) (“A corporation may have one (1) or more classes of members, or may have no members, as provided in the articles of incorporation.”).

[9]

 

Effective July 23, 2014, the POMS GN 00506.105 no longer requires that the agency be listed as a loss payee under an insurance policy.

[10]

 

Arkansas allows use of, and recovery under, loss payee clauses at least in the context of property and casualty insurance policies. See, e.g., Rea v. Ruff, 580 S.W.2d 471, 472-73 (Ark. 1979) (mortgagee named as a loss payee in the insurance policy was entitled to the insurance proceeds). In the mortgage and property/fire insurance context, Arkansas courts recognizes two types of loss payee clauses: a “simple” or “open” loss payee clause (simple clause), and a “standard” or “union” loss payee clause (standard clause). SeeFarmers Home Mut. Fire Ins. Co. v. Bank of Pocahontas, 101 S.W.3d 867, 871 (Ark. Ct. App. 2003), aff’d, 129 S.W.3d 832 (Ark. 2003) (mortgage); Newcourt Financial, Inc. v. Canal Ins. Co., 15 S.W.3d 328, 329 (Ark. 2000) (property/fire). A simple clause typically declares that the loss, if any, is payable to a loss payee as its interest might appear. SeeFarmers Home Mut. Fire Ins. Co., 101 S.W.3d at 871. The rights of the mortgagee under a simple clause are no greater than those of the insured. Lucas Cty. Bank of Toledo, Ohio v. Am. Cas. Co., 256 S.W.2d 557, 558 (Ark. 1953). In contrast, a standard clause contains the same language as a simple clause, but also provides that the insurance policy, as to the loss payee’s interest, will not be invalidated by any act or neglect of the insured. SeeLucas Cty. Bank, 256 S.W.2d at 558. A standard clause therefore serves as a separate contract between the loss payee and the insurer, as if the loss payee had applied for insurance independently of the insured. SeeFarmers Home Mut. Fire Ins. Co., 129 S.W.3d at 835; Fireman’s Fund Ins. Co. v. Rogers, 712 S.W.2d 311, 314 (Ark. Ct. App. 1986). Consequently, the rights of a named loss payee in an insurance policy with a standard clause are not affected by any act of the insured, including improper and negligent acts. SeeFarmers Home Mut. Fire Ins. Co., 129 S.W.3d at 835; Hatley v. Payne, 751 S.W.2d 20 (Ark. App. 1988).

[11]

 

In explaining that the Loss Payee clause in this case is a simple, rather than a standard, loss payee clause, we do not suggest that the agency require a standard loss payee clause. Instead, we note that addition of a loss payee to the Crime Policy does not cure the Crime Policy’s insufficient coverage of officers.

[12]

 

We previously reviewed both Pathfinder’s Policy Number PHPK 1935974 , effective from 02/01/2019 through 02/01/2020 , and Pathfinder’s Bond, effective August 16, 2013, and determined that the agency could reasonably conclude that neither the Crime Policy nor the Bond complied with SSA’s bonding requirements for non-governmental FFS organizational representative payees because the Insurance Policy and Bond did not cover financial losses due to misuse and embezzlement of all of Pathfinder’s employees and officers. With respect to the current opinion request, you provided only the 23-page Crime Policy effective from 02/01/2019 through 02/01/2020. This opinion will therefore only analyze the Crime Policy.

[13]

 

All page references to the Insurance Policy are to the 23-page PDF document.

[14]

 

In addition to being a “qualified organization,” the representative payee must also regularly provide representative payee services concurrently to at least five beneficiaries and, with certain exceptions, demonstrate that it is not a creditor of the beneficiary. 20 C.F.R. §§ 404.2040a(b), 416.640a(b).

[15]

 

[1] If a representative payee misuses a beneficiary’s benefits, the representative payee is liable for the amount misused. See 42 U.S.C. §§ 405(j)(7)(A), 1383(a)(2)(H); 20 C.F.R. §§ 404.2041(a), 416.641(a). The Act states that “misuse of benefits by a representative payee occurs in any case in which the representative payee receives payment under this subchapter for the use and benefit of another person and converts such payment, or any part thereof, to a use other than for the use and benefit of such other person.” 42 U.S.C. §§ 405(j)(9), 1383(a)(2)(A)(iv). SSA will make “every reasonable effort to obtain restitution of misused benefits” from the representative payee so that SSA can repay those benefits to the beneficiary. 20 C.F.R. §§ 404.2041(a), 416.641(a). In certain cases, SSA will repay the benefits to ensure the beneficiary receives full restitution, whether or not SSA obtains restitution from the misuser. 20 C.F.R. §§ 404.2041(b), (c), 416.641(b), (c). To help ensure SSA’s own reimbursement, SSA requires each non-governmental FFS representative payee organization to obtain a bond or insurance policy for coverage for misuse of benefits. See 42 U.S.C. §§ 405(j)(10), 1383(a)(2)(I); 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105; see also POMS GN 00506.001 (effective April 1, 2005, Section 102 of the Social Security Protection Act of 2004 requires non-governmental FFS representative payees to be bonded and licensed in each state in which they serve as representative payees). It is this bonding/insurance requirement that is at issue in this request.

[16]

 

[1] We apply general principles of contract interpretation in reviewing the Crime Policy. When no choice of law provision exists, Arkansas courts apply the “most significant relationship” test when determining which law governs in a contract dispute. See Crisler v. Unum Ins. Co. of Am., 233 S.W.3d 658, 660 (Ark. 2006). Because Pathfinder was incorporated in Arkansas, operates its business in Arkansas, and entered into the insurance policy in Arkansas, Arkansas law likely governs the interpretation of the Crime Policy. See id. Arkansas law treats an insurance policy as a contract between the insurer and insured. See Certain Underwriters at Lloyd’s, London v. Bass, 461 S.W.3d 317, 326 (Ark. 2015).Therefore, in reviewing an insurance policy, Arkansas courts submit to the principle that “when the terms of the policy are clear, the language in the policy controls.” See Vincent v. Prudential Ins. Brokerage, 970 S.W.2d 215, 216 (Ark. 1998). If a policy provision is unambiguous, i.e., subject to only one reasonable interpretation, Arkansas courts give effect to the plain language of the policy without resorting to rules of construction. SeeElam v. First Unum Life Ins. Co., 57 S.W.3d 165, 169 (Ark. 2001). If, however, the policy language is ambiguous, i.e., susceptible to more than one reasonable interpretation, they construe the policy liberally in favor of the insured and strictly against the insurer. SeeNorris v. State Farm Fire & Cas. Co., 16 S.W.3d 242 (Ark. 2000).

[17]

 

Some of the sections defining “employee” more clearly do not apply to officers, including section (2) concerning temporary employees, section (3) concerning leased employees, section (5) concerning consultants, section (6) concerning guest students and interns, and section (7) concerning employees of an entity merged or consolidated with Pathfinder prior to the effective date of the policy. See Crime Policy, Part F.5.a.(1)-(8), Definitions, Employee (Adobe PDF Reader pages 17-18).

[18]

 

We also considered whether a court could interpret Mr. Pitassi’s May 20, 2019, letter as a rider or endorsement extending coverage to Pathfinder’s officers. “A rider or endorsement is a writing added or attached to a policy or certificate of insurance which expands or restricts its benefits or excludes certain conditions from coverage.” 2 Couch on Insurance § 18:19 Riders and endorsements (3rd ed. June 2019 Update). Endorsements to an insurance policy are considered part of the contract. Schultz v. Farm Bureau Mut. Ins. Co., 940 S.W.2d 871 (Ark. 1997). Under Arkansas law, where a rider or endorsement conflicts with language in the body of the policy, the rider or endorsement controls. George v. Great Lakes Reinsurance (UK) PLC , 454 S.W.3d 243, 245–46 (Ark. Ct. App. 2015).

 

We note that the Crime Policy includes three specific endorsements issued together with the policy and states at the top of the page for each, “This endorsement changes the policy. Please read it carefully.” Crime Policy, Arkansas Changes, Binding Arbitration, Joint Loss Payable (Adobe PDF Reader pages 20-23). It appears that Mr. Pitassi’s May 20, 2019, letter was issued subsequent to entering into the policy, but it is unclear whether this letter has been attached to the Crime Policy to serve as an endorsement to change coverage under such policy. In this letter addressed “To whom it may concern – Social Security Administration,” Mr. Pitassi, identified as an Underwriter for Philadelphia Insurance Companies, states: “This letter is to inform you that the insured’s current insurance policy has Crime employee theft coverage that extends per the [Commercial Crime Coverage Form]. This form does extend coverage to the insureds officers and directors.” However, this letter does not expressly state it is serving as an endorsement to change Pathfinder’s Crime policy, and it is directed to SSA (as a third party outside of the insurance policy). It also appears to explain the terms of the current Crime Policy, as opposed to changing the terms of the policy. Thus, we believe the stronger possibility is that a court would construe Mr. Pitassi’s May 20, 2019, letter as written parol evidence clarifying the policy coverage.


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http://policy.ssa.gov/poms.nsf/lnx/1507115004
PR 07115.004 - Arkansas - 05/29/2020
Batch run: 05/29/2020
Rev:05/29/2020