QUESTION
You asked us to review First Step, Inc.’s (First Step’s) Philadelphia Insurance Company
Insurance PolicyNumber *, 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 #, 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 # 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 # 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. 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. That you own or lease;
2. That you hold for others; or
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. Any natural person:
a. While in your service or for 60 days after termination of service;
b. Whom you compensate directly by salary, wages or commissions; and
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. 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).
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.