The Social Security Act permits "qualified organizations"^[1] 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’s 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).

We believe that the agency may reasonably conclude that Kkarma Inc.’s Fidelity Bond with the Endorsement to Cover Officers sufficiently complies 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. 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.

Question Presented

You asked us to review Kkarma, Inc.’s Theft Guard Standard Fidelity Bond (Fidelity Bond), issued by Merchants Bonding Company and effective beginning December 16, 2019, for our opinion as to whether the Fidelity Bond satisfies the Social Security Administration’s (SSA’s or agency’s) bonding requirements for non-governmental fee-for-service (FFS) organizations, as set forth in 42 U.S.C. §§ 405(j)(10), 1383(a)(2)(I), 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2), and the Program Operations Manual Systems (POMS) GN 00506.105. We understand your specific question to concern whether the Fidelity Bond meets SSA’s requirement that bonding/insurance coverage for financial loss due to employee misuse and embezzlement includes officers.

ANSWER

We believe that the agency may reasonably conclude that Kkarma Inc.’s Fidelity Bond with the Endorsement to Cover Officers sufficiently complies 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. 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.

BACKGROUND

A. Kkarma, Inc.

We do not have any information on the legal status of Kkarma, Inc. or its employees and officers. You advised that Kkarma, Inc. is located in Amarillo, Texas. The entity’s website does not identify its legal status. See KKARMA.INC (last visited April 6, 2021). Given the entity’s name, we are under the impression that Kkarma, Inc. is a nonprofit corporation in Texas. The Texas Nonprofit Corporations Act requires each nonprofit corporation to have at least two officers (a president and a secretary) and provides that such nonprofit corporations may have other officers (vice president, treasurer, and other officers and assistant officers as necessary). See Tex. Bus. Orgs. Ann. § 22.231.

B. Kkarma, Inc.’s Fidelity Bond

The information you provided shows that on December 16, 2019, Kkarma, Inc. obtained the Fidelity Bond from Merchants Bonding Company effective December 16, 2019.^[2] The Fidelity Bond identifies Kkarma, Inc. as the Insured and states that Merchant Bonding Company, as the Surety, agrees to indemnify Kkarma, Inc. in the amount of $100,000.00 against actual loss of Money or Other Property, for which the Insured shall sustain or for which the Insured shall incur liability to any Subscriber of the Insured resulting directly from Employee Dishonesty of an Employee(s) of the Insured and for which the Insured is liable…

Fidelity Bond, ¶1 (Form FID 0013 (8/19)).

The Fidelity Bond defines “Employee” as

one or more of the natural persons (except directors or trustees of the Insured, if a corporation, who are not also officers or Employees thereof in some other capacity) while in the regular service of the Insured in the ordinary course of the Insured’s business during the term of this Bond, and who the Insured compensates by salary or wages and has the right to govern and direct in the performance of such service…

Fidelity Bond, § 2 and Texas Amendatory Endorsement (Form FID 0110 TX (8/19)).

Through an Endorsement To Cover Officers, effective December 16, 2019: “It is agreed and understood that the definition of an employee is hereby amended to include owners, officers, partners and members of the organization.” See Fidelity Bond and Endorsement To Cover Officers (Form FID 0032 (2/15)).

The Fidelity Bond defines “Employee Dishonesty” as “a fraudulent or dishonest act of an Employee(s) of the Insured, causing a loss which is punishable under the Criminal Code in the jurisdiction within which the Occurrence took place, for which said Employee(s) is convicted by a court of proper jurisdiction.” See Fidelity Bond § 2 and Texas Amendatory Endorsement.

ANALYSIS

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

The Social Security Act permits “qualified organizations” 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’s 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, it is our understanding that Kkarma, Inc. falls into the second category of qualified organizations as a community-based nonprofit social service organization, also referred to in the POMS as 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 Kkarma, Inc. 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, or 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). Rather, pursuant to your legal opinion request, our focus is upon whether the Kkarma, Inc. 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. See 42 U.S.C. §§ 405(j)(10), 1383(a)(2)(I) (requiring the community-based nonprofit social service organization be “bonded”); 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2) (requiring that the community-based nonprofit social service organization be “bonded/insured”); POMS GN 00506.105(A)-(C) (explaining that “bonding” means 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 42 U.S.C. §§ 405(j)(10), 1383(a)(2)(I); 20 C.F.R. §§ 404.2040a(a)(2), (d), 416.640a(a)(2), (d); POMS GN 00506.001(C); POMS GN 00506.105(A).^[3] 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).

Here, Kkarma, Inc. has presented what appears to be a fidelity bond. The POMS explains that a fidelity bond is a type of insurance that indemnifies the insured for loss caused by the dishonest or fraudulent acts of its employees, and that fidelity bonds typically cover the insured against forgery or alteration and loss inside the premises caused by theft. POMS GN 00506.105(C)(4)(b). Further, the POMS states that the fidelity bond covers only losses incurred by the insured and that claims may be made under the policy only by the insured and paid to the insured. Id. The fidelity bond does not cover losses caused by the insured’s owners or partners. Id. The POMS notes: “If this bond is secured, a separate rider or additional bond is required to cover the officer.” Id. Further, when such additional coverage for officers is provided, a “conviction clause” is often required, which means that in order for the bond or insurance company to be required to pay, the officer or employee must be convicted of a crime. POMS GN 00506.105(C)(3). We turn next to the specific provisions of Kkarma, Inc.’s Fidelity Bond to determine if it is sufficient under SSA’s requirements.

B. Review of Kkarma, Inc.’s Fidelity Bond to Determine If It Complies with Federal Law and SSA Policy^[4] As stated, we must determine whether Kkarma, Inc.’s Fidelity Bond 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).

1. Misuse and Embezzlement

We first considered whether the Fidelity Bond covers loss for an employee’s theft/misuse/embezzlement of SSA beneficiaries’ funds (Social Security benefits) held by Kkarma, Inc. as the beneficiaries’ representative payee. Here, the introductory paragraph specifies that the Bond provides coverage for “actual loss of Money or Other Property, for which the Insured shall sustain or for which the Insured shall incur liability to any Subscriber of the Insured resulting directly from Employee Dishonesty of an Employee(s) of the Insured and for which the Insured is liable….” Fidelity Bond ¶1. The “Insured” is Kkarma, Inc. Fidelity Bond ¶1. A “Subscriber” is defined as “any person, firm or corporation for whom the Insured provides services in his/her or its business capacity.” Fidelity Bond § 2. “Employee Dishonesty” is then defined as “a fraudulent or dishonest act of an Employee(s) of the Insured, causing a loss which is punishable under the Criminal Code in the jurisdiction within which the Occurrence took place, for which said Employee(s) is convicted by a court of proper jurisdiction.” Fidelity Bond § 2 and Texas Amendatory Endorsement. This language appears to sufficiently cover misuse and embezzlement, and therefore, the agency could reasonably find that such language satisfies SSA’s requirement that the bond or insurance policy cover financial loss attributable to such acts. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105(C)(4)(b).

We note that the Fidelity Bond limits recovery for fraudulent or dishonest acts to crimes for which an employee is tried and convicted (a so-called conviction clause).^[5] Fidelity Bond § 2 and Texas Amendatory Endorsement (defining “Employee Dishonesty” as “a fraudulent or dishonest act of an Employee(s) of the Insured, causing a loss which is punishable under the Criminal Code in the jurisdiction within which the Occurrence took place, for which said Employee(s) is convicted by a court of proper jurisdiction”) (emphasis added); POMS GN 00506.105(C)(3) (addressing conviction clauses). SSA’s bonding and insurance requirements do not prohibit a conviction clause. See POMS GN 00506.105(C)(3). Accordingly, the presence of that clause does not make the Fidelity Bond insufficient. However, we note the concern that such clause leaves open the possibility for Merchants Bonding Company to deny payment where a loss occurs, but an employee is not charged with and convicted of a crime for the dishonest or fraudulent acts. See POMS GN 00506.105(C)(3).

2. Officer Coverage

As noted in the background, it is our understanding that Kkarma, Inc. is a nonprofit corporation in Texas with at least two officers, as required by law. See Tex. Bus. Orgs. Ann. § 22.231. Considering the Fidelity Bond and endorsements, we believe that the agency may reasonably conclude that the Fidelity Bond provides sufficient coverage against financial losses caused by Kkarma, Inc.’s compensated and non-compensated officers. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2) (the FFS representative payee organization must be “bonded/insured to cover misuse and embezzlement by officers and employees”); POMS GN 00506.105(A)-(B) (explaining that a bond or insurance contract must cover the non-governmental FFS representative payee organization’s employees and officers).

The Fidelity Bond provides coverage for financial losses incurred through any fraudulent or dishonest acts committed by “an Employee(s) of the Insured.” Fidelity Bond, ¶1. The Bond defines an “Employee” as “one or more of the natural persons (except directors or trustees of the Insured, if a corporation, who are not also officers or Employees thereof in some other capacity) while in the regular service of the Insured in the ordinary course of the Insured’s business during the term of this Bond, and who the Insured compensates by salary or wages and has the right to govern and direct in the performance of such service….” Fidelity Bond, § 2 and Texas Amendatory Endorsement (Form FID 0110 TX (8/19)). The Fidelity Bond’s limitation of an “Employee” to an individual whom Kkarma, Inc. “has the right to govern and direct in the performance of such service” and “compensates” arguably excludes Kkarma, Inc.’s officers (both compensated and non-compensated). However, the Endorsement To Cover Officers amends this definition of “Employee” as follows: “It is agreed and understood that the definition of an employee is hereby amended to include owners, officers, partners and members of the organization.” See Fidelity Bond and Endorsement To Cover Officers (Form FID 0032 (2/15)) (emphasis added). Although this endorsement says officers of the organization, as opposed to officers of the Insured, we believe it is clear that the only organization that is the subject of the Fidelity Bond is Kkarma, Inc. and that the intent of this endorsement is clear that it is to extend coverage to the Kkarma, Inc.’s officers.

Therefore, we believe the agency may reasonably conclude that given this Endorsement amending the Fidelity Bond’s definition of “Employee,” it includes coverage for dishonest and fraudulent acts by Kkarma, Inc.’s officers, and therefore, the Fidelity Bond’s coverage is sufficient under SSA’s requirements. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2) (the FFS representative payee organization must be bonded/insured to cover misuse and embezzlement byall of the organization’s officers and employees); POMS GN 00506.105(A)-(B) (same); see also POMS PR 07115.040 Oklahoma, C. CPM-20-057 Coverage for Fee-For-Service Organizational Representative Payee (May 20, 2020) (reviewing Think Ability’s Travelers Casualty and Surety Company of America, Social Security Administration Representative Payee Surety Bond and Rider and advising that the Rider’s definition of “Principal” to “include all of the Think Ability’s employees and officers” satisfied SSA’s bonding coverage requirements for officers).

CONCLUSION

We believe that the agency may reasonably conclude that Kkarma Inc.’s Fidelity Bond with the Endorsement to Cover Officers sufficiently complies 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. 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.

The Social Security Act permits "qualified organizations"^[15] 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’s 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).

Based on the information we believe that the agency could reasonably conclude that McLennan’s Crime Policy does not comply with SSA’s bonding requirement for non-governmental FFS organizational representative payees for coverage for financial loss due to misuse and embezzlement by both employees and officers. The Crime Policy covers losses due to “employee theft,” which is sufficient to encompass financial loss due to misuse and embezzlement by employees. However, the policy’s definition of “employee” does not include all of McLennan’s officers. As the Crime Policy 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 McLennan’s officers. We also have concerns that the broad exclusion from coverage for loss due to dishonest acts by “You” - McLennan – could encompass McLennan’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 Joint Loss Payable Endorsement, does not cure the deficiencies in the Crime Policy. Thus, there is legal support for the agency to find that McLennan’s Crime Policy does not satisfy SSA’s bonding requirements of 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2), and POMS GN 00506.105 as it relates specifically to coverage for financial loss due to misuse and embezzlement of employees and officers.

QUESTION PRESENTED

You asked us to review ARC of McLennan County ’s (McLennan’s) Crime Protection Plus Policy (Crime Policy), issued by Philadelphia Indemnity Insurance Company, effective from July 31, 2020 to July 31, 2021, for our opinion as to whether the Crime Policy satisfies 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. We understand your specific question to concern whether McLennan’s Crime Policy meets SSA’s requirement that bonding/insurance coverage for financial loss due to employee misuse and embezzlement includes officers.

ANSWER

Based on the information provided, we believe that the agency could reasonably conclude that McLennan’s Crime Policy does not comply with SSA’s bonding requirement for non-governmental FFS organizational representative payees for coverage for financial loss due to misuse and embezzlement by both employees and officers. The Crime Policy covers losses due to “employee theft,” which is sufficient to encompass financial loss due to misuse and embezzlement by employees. However, the policy’s definition of “employee” does not include all of McLennan’s officers. As the Crime Policy 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 McLennan’s officers. We also have concerns that the broad exclusion from coverage for loss due to dishonest acts by “You” - McLennan – could encompass McLennan’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 Joint Loss Payable Endorsement, does not cure the deficiencies in the Crime Policy. Thus, there is legal support for the agency to find that McLennan’s Crime Policy does not satisfy SSA’s bonding requirements of 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2), and POMS GN 00506.105 as it relates specifically to coverage for financial loss due to misuse and embezzlement of employees and officers.

BACKGROUND

A. McLennan Is a Texas Nonprofit Organization

McLennan’s website indicates that it is a non-profit 501(c)(3) membership association^[16] , founded in 1954, and that it has a governing board consisting of 11 directors, including the following officers: president, vice president, second vice president, treasurer, secretary, and corresponding secretary.https://wacoarc.org/ and https://wacoarc.org/board-of-directors-and-staff/ (last visited Sept. 16, 2020).

B. McLennan’s Crime Policy

The information you provided shows that McLennan obtained a Crime Policy from the Philadelphia Indemnity Insurance Company naming McLennan as the Insured. We were provided with the Crime Policy, effective July 31, 2020 to July 31, 2020. Below are the policy provisions most relevant to SSA’s bonding requirement for coverage as to misuse and embezzlement by employees and officers.

i. Section I: Relevant Insuring Agreement

Section I.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 PROPERTYsustained by your CLIENT resulting directly from THEFTcommitted by an identified EMPLOYEE, acting alone or in collusion with other persons.

Crime Policy, Part I.A1, Insuring Agreements, Employee Theft and Client Property (Adobe PDF Reader p. 28). As this provision refers to certain specifically defined terms (including employee), we next review the relevant definitions.

ii. Section IV: Relevant Exclusions

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 any dishonest act committed by “You” (McLennan); any of your (McLennan’s) partners or Members; or any officer or employee who has a 25% interest or greater ownership interest in any one or more of those entities names as insureds. See Crime Policy, Part IV, Exclusions (Adobe PDF Reader p. 30).

iii. Section V: Relevant Conditions

The Crime Policy contains the following consolidation and merger condition that is relevant to our opinion:

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, Crime Protection Plus Pro-Pak Endorsement, Part V, Conditions, Consolidation – Merger (Adobe PDF Reader pp. 47-48).

The Crime Policy also limits property covered to property that the Insured owns or lease; that the Insured holds for others; or for which the Insured is legally liable except for property inside the premises of the Insured’s client. See Crime Policy, Part V, Conditions, Ownership of Property; Interests Covered (Adobe PDF Reader p. 37).

iv. Section VI: Relevant Definitions

In relevant part, McLennan’s 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 PLAN(S) insured under this policy; and

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

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

Crime Policy, Part VI.G, Definitions, Employee (Adobe PDF Reader pp. 40-41).

The policy further explains that the term EMPLOYEE does not include “any 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 (Adobe PDF Reader pp. 40-41).

The Crime Policy defines CLIENT as any entity or individual for whom you perform services under a written agreement or other agreed upon arrangement. Crime Policy, Fraudulent Inducement Exclusion, Part IV, Definitions, Client (Adobe PDF Reader p. 51) (replacing Part VI.B, Definitions, Client (Adobe PDF Reader p. 40)).

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 p. 43).

v. Joint Loss Payable Endorsement

The Crime Policy contains a Joint Loss Payable Endorsement listing SSA as a Loss Payee in connection with the Crime Protection Plus provision (Adobe PDF Reader pp. 13, 44). However, the endorsement states that “This insurance 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.” See Joint Loss Payable Endorsement (Adobe PRF Reader p. 44).

ANALYSIS

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

The Social Security Act permits “qualified organizations”^[17] 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’s 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 McLennan falls into the second category of qualified organizations as a community-based nonprofit social service organization, also referred to in the POMS as 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 McLennan 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, or 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). Rather, pursuant to your legal opinion request, our focus is upon whether the McLennan 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. See 42 U.S.C. §§ 405(j)(10), 1383(a)(2)(I) (requiring the community-based nonprofit social service organization be “bonded”); 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2) (requiring that the community-based nonprofit social service organization be “bonded/insured”); POMS GN 00506.105(A)-(C) (explaining that “bonding” means 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. See42 U.S.C. §§ 405(j)(10), 1383(a)(2)(I); 20 C.F.R. §§ 404.2040a(a)(2), (d), 416.640a(a)(2), (d); POMS GN 00506.001(C); POMS GN 00506.105(A)^[18] . 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).

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 McLennan’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 McLennan’s Crime Policy to Determine If It Complies with Federal Law and SSA Policy^[19]

As stated, we must determine whether McLennan’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).

1. Misuse and Embezzlement

We first considered whether the insuring agreement for employee theft and client property covers loss for an employee’s theft/misuse/embezzlement of SSA beneficiaries’ funds (Social Security benefits) held by McLennan as the beneficiaries’ representative payee.

Although Part A1.(1) covers losses resulting from an employee’s theft of money, securities, and other property, for purposes of this insuring agreement, the Crime Policy expressly defines theft as the “unlawful taking of money, securities or other property to the deprivation of the Insured ” (Adobe PDF Reader pages 28, 43) (emphasis added). 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 37). 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 McLennan 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 McLennan.

Additionally, Insuring Agreement A1(2) appears to adequately cover theft of SSA beneficiaries’ funds (Social Security benefits) held by McLennan (Adobe PDF Reader p. 28). This insuring agreement expressly covers direct losses of McLennan’s CLIENT’S money (and securities and other property) due to theft by an employee of McLennan (Adobe PDF Reader p. 28) (emphasis added). We note that a CLIENT is defined as an entity for which McLennan performs services as specified in a written agreement or other agreed upon arrangement (Adobe PDF Reader p. 51). 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 is somewhat unclear whether it is the Social Security beneficiary or SSA that is McLennan’s client under this definition where SSA has selected McLennan to serve as the beneficiary’s representative payee through a written authorization process between SSA and McLennan. See 20 C.F.R. §§ 404.2040a(d)-(g), 416.640a(d)-(g). But if coverage for a loss of money sustained by McLennan’s client means a loss of Social Security benefits sustained by a Social Security beneficiary , then this insuring agreement would appear to provide adequate coverage for theft/misuse/embezzlement.

2. Officer Coverage

As noted in the background, McLennan is registered as a domestic nonprofit organization. It is our understanding that McLennan has officers, including president, vice president, second vice president, treasurer, secretary, and corresponding secretary.https://wacoarc.org/ and https://wacoarc.org/board-of-directors-and-staff/ (last visited Sept. 16, 2020).

Assuming that the Crime Policy 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 McLennan’s employees and officers. Insuring Agreement A1 of the Crime Policy provides coverage for losses resulting from theft committed by McLennan’s EMPLOYEE (Adobe PDF Reader p. 28). Thus, whether McLennan’s Crime Policy covers the organization against theft committed by an officer depends on whether McLennan’s officers fall under the Crime Policy’s definition of EMPLOYEE (Adobe PDF Reader pp. 40-41). Although we are satisfied that the Crime Policy covers uncompensated officers, which are specifically included under the definition of EMPLOYEE by section (10), we believe that the policy does not adequately cover compensated officers (Adobe PDF Reader p. 41). We consider the most relevant sections (1) and (4), defining EMPLOYEE below to determine whether it would include officers (Adobe PDF Reader pages 79-80).^[20]

Section (1) of the EMPLOYEE definition does not clearly cover all of McLennan’s compensated officers, as this provision limits an EMPLOYEE to an individual whom McLennan has “the right to direct and control” (Adobe PDF Reader p. 40). Thus, we conclude that this language arguably excludes officers.

Section (4) of the “employee” definition also does not sufficiently cover all of McLennan’s officers, as it is limited to officers of an employee benefit plan insured under the Crime Policy (Adobe PDF Reader p. 40). We have no information showing that McLennan’s Crime Policy covers any employee benefit plans. Nor are the SSA beneficiaries’ funds entrusted to McLennan as representative payee part of an employee benefit plan. Thus, section (4) of the employee definition does not adequately cover all of McLennan’s compensated officers (Adobe PDF Reader p. 40).

3. Coverage Exclusions

Finally, as we previously explained in prior opinions, it is unclear whether McLennan’s officers would fall within the Crime Policy’s broad exclusion for loss resulting from theft or any other dishonest acts committed by “You.” See Part IV.A.1 Exclusions (Adobe PDF Reader, p. 30). The introduction to the Crime Policy states that “You” means McLennan as the named insured, and as a non-profit corporation, officers act as agents for McLennan. See Taub v. Houston Pipeline, Co., 75 S.W.3d 606, 621 (Tex. App. -- Texarkana 2002) (“the very nature of a corporation is that it must act through its officers or agents”).Thus, this exclusion could be interpreted as encompassing theft or dishonest acts by McLennan’s officers.

4. Condition Regarding Consolidation and Merger

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 pp. 47-48). The Crime Policy is potentially deficient because it does not automatically extend coverage to all new employees McLennan acquires through a consolidation or merger (Adobe PDF Reader pp. 47-48). 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 McLennan’s assets (Adobe PDF Reader pp. 47-48). 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 McLennan obtain the Insurance Company’s written consent to extend coverage to additional employees beyond this 90-day period (Adobe PDF Reader pp. 47-48). The requirement to obtain written consent to extend coverage to new employees leaves open the possibility that additional employees would not be covered if McLennan 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 McLennan’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).

5. Joint Loss Payable Endorsement

Finally, we analyzed the Joint Loss Payable Endorsement, 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^[21] . The Joint Loss Payable endorsement lists SSA as a Loss Payee, but explicitly states “This insurance 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. 44). Giving effect to the plain language of the Joint Loss Payable Endorsement, the addition of SSA as a Loss Payee appears to be a simple, rather than standard, loss payee clause. See Old Am. Mut. Fire Ins. Co. v. Gulf States Fin. Co., 73 S.W.3d 394, 395-96 (Tex. App. – Houston [1st Dist.] 2002, pet. denied); Don Chapman Motor Sales, Inc. v. National Savings Ins. Co., 626 S.W.2d 592, 596 (Tex. App. – Austin 1981, writ refused n.r.e.)^[22] . The addition of SSA as a Loss Payee sufficiently protects SSA’s right to recover payment if McLennan is entitled to payment under the Crime Policy. However, SSA’s rights under the Crime Policy are no greater than McLennan’s rights, and the Joint Loss Payable Endorsement does not create an independent contract between SSA and the Philadelphia Indemnity Insurance Company^[23] . See Old Am. Mut. Fire Ins. Co. v. Gulf States Fin. Co., 73 S.W.3d at 395-96; 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 McLennan’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.

In sum, given the definitions of EMPLOYEE and exclusion of loss resulting from theft committed by “You” (McLennan) we believe the agency could conclude that McLennan does not provide sufficient coverage for loss resulting from misuse and embezzlement committed by all of McLennan’s employees and officers. The Joint Loss Payable Endorsement does not cure the deficiencies in the policy itself. 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).

CONCLUSION

Based on the information provided, we believe that the agency may reasonably conclude that McLennan’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 and of most concern, given the definition of “Employee,” and relevant exclusions, the Crime Policy does not clearly cover financial losses due to the action or inaction of all of McLennan’s officers. Further, the Crime Policy’s condition regarding consolidation and merger indicates that coverage does not automatically extend to all additional employees McLennan may obtain. While that condition alone would likely not make the Crime Policy deficient, it is potentially problematic. 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 McLennan’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.

 

The Social Security Act permits a "qualified organization"^[24] 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’s 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).

 

Based on the information provided pertaining to the Policy, we believe that the agency could reasonably conclude that Friends for Life’s New 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.

QUESTION PRESENTED

You asked us to review Friends for Life’s Insurance Policy (New Policy), effective August 1, 2018, 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 the Program Operations Manual Systems (POMS) GN 00506.105^[25] . Specifically, you asked whether Friends for Life’s New Policy meets SSA’s requirement that employee theft coverage include officers.

ANSWER

Based on the information provided pertaining to the Policy, we believe that the agency could reasonably conclude that Friends for Life’s New 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^[26] .

With regard to the Crime Coverage provision (Crime Policy), 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 Friends for Life’s officers given the definition of “Employee.” In addition, we believe the Crime Policy is insufficient because the policy excludes from coverage loss resulting from theft or any other dishonest act committed by Friends for Life.

We also believe that the agency may reasonably conclude that Friends for Life’s Nonprofit Organization Directors and Officers Liability Coverage provision (D&O Liability Policy) does not adequately cover financial losses due to the action or inaction of all of Friends for Life’s employees and officers because the policy expressly excludes from coverage loss resulting from employees’ and officers’ fraudulent acts or omissions, willful violation of any statute or regulation, or gaining of profit, remuneration, or advantage to which they were not entitled.

Therefore, we believe that there is legal support for the agency to find that Friends for Life’s New 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 70-page PDF insurance package you submitted shows that Friends for Life obtained Insurance Policy from The Cincinnati Insurance Company, which includes a Crime Policy (Adobe PDF Reader pages 51-70) and a D&O Liability Policy (Adobe PDF Reader pages 29-38)^[27] . The Common Policy Declarations page lists Friends for Life as the Named Insured, and shows that policy is effective from August 1, 2018, through August 1, 2021 (Adobe PDF Reader page 5). Below, we have set forth what we believe are the provisions of the New Policy most relevant to SSA’s bonding requirements and your legal opinion request^[28] .

A. Friends for Life’s Crime Policy

Section I: Insuring Agreements Covering Employee Theft and Loss of Client Property

We believe the most relevant of the nine Insuring Agreements (A-I) of Section I of the Crime Policy relate to employee theft and client’s property.

Section I.A of the Crime Policy provides the following Insuring Agreement as to “employee theft”:

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, Insuring Agreements, Part I.A., Employee Theft (Adobe PDF Reader page 54).

Section I.H. of the Crime Policy includes a specific Insuring Agreement for “clients’ property”:

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.H., Clients’ Property (Adobe PDF Reader page 55).

Relevant to this coverage, Section II of the Crime Policy provides specific definitions for theft, client, and employee, as noted next.

Section II: Relevant Definitions

With respect to the Insuring Agreement Section I.H. regarding clients’ property, “theft” is defined as “the unlawful taking of property to the deprivation of your client.” Crime Policy, Part II.V.1, Definitions, Theft (Adobe PDF Reader page 58). With respect to all other insuring agreements, including the insuring agreement pertaining to employee theft in Section I.A., “theft” is defined as “the unlawful taking of property to the deprivation of the Insured.” Crime Policy, Part II.V.2, Definitions, Theft (Adobe PDF Reader page 58).

The Crime Policy defines “client” as “any entity for whom you perform services under a written contract.” Crime Policy, Part II.C., Definitions, Client (Adobe PDF Reader page 55).

In relevant part, the Crime Policy defines an “employee” as

a. Any natural person:

(1) While in your service and for the first 30 days immediately after termination of service, unless such termination is due to theft or any other dishonest act committed by the employee

(2) Who you compensate directly by salary, wages or commissions; and

(3) Who you have the right to direct and control while performing services for you;

. . .

d. Any natural person who is:

(1) A trustee, officer, employee, administrator or manager, except an administrator or manager who is an independent contractor, of any employee benefit plan; and

(2) a director or trustee of yours while that person is engaged in handling funds or other property of any employee benefit plan

. . .

h. Any of your managers, directors or trustees while:

(1) Performing acts within the scope of the usual duties of an employee; or

(2) Acting as a member of any committee duly elected or appointed by resolution of your board or directors or board of trustees to perform specific, as distinguished from general, directorial acts on your behalf.

Crime Policy, Part II.G, Definitions, Employee (Adobe PDF Reader page 56).

An endorsement to the Crime Policy amends the definition of “employee” to include any non-compensated natural person:

Other than one who is a fund solicitor, while performing services for you that are usual to the duties of an employee ; or

1. a. 

   While acting as a fund solicitor during fund raising campaigns.

Crime Policy, Endorsements (Adobe PDF Reader page 70).

Sections III and VI:Relevant Exclusions & Conditions

Section III of the Crime Policy sets out exclusions from coverage and of relevance here, specifically excludes coverage for theft and dishonest acts committed by “You” (Friends for Life), or any of your partners or members (defined as an owner of a limited liability company). See Crime Policy, Part III.A.1-2, Exclusions (Adobe PDF Reader page 58).

The Crime Policy also excludes coverage for an employee’s theft or dishonest acts except when covered under Insuring Agreement A or H. See Crime Policy, Part III.C, Exclusions (Adobe PDF Reader pages 58-59).

Section VI of the 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

That you own or lease; or

1. a. 

   That you hold for others whether or not you are legally liable for the loss of such property.

Crime Policy, Part VI.A.12, Conditions Applicable to All Insuring Agreements; Ownership of Property; Interests Covered (Adobe PDF Reader page 64).

With respect to coverage for theft of clients’ property, the Crime Policy states that coverage is limited to property

That your client owns or leases; or

1. a. 

   That your client holds for others whether or not your client is legally liable for the loss of such property.

Crime Policy, Part VI.F.1, Conditions Applicable to Insuring Agreement H; Ownership of Property; Interests Covered (Adobe PDF Reader page 67).

B. Friends for Life’s D&O Liability Policy

Section I: Insuring Agreements

Friends for Life’s D&O Liability Policy provides the following insuring agreements:

A. We will pay on behalf of the insured persons all loss which they shall be legally obligated to pay, except for such loss which the organization actually pays as indemnification, resulting from any claim first made during the policy period, or any extended reporting period included in or endorsed to the policy, for a wrongful act.

B. We will pay on behalf of the organization all loss which the organization is required to pay as indemnification to the insured persons resulting from any claim first made during the policy period, or any extended reporting period included in or endorsed to the policy, for a wrongful act.

C. We will pay on behalf of the organization all loss which the organization is required to pay resulting from any claim first made during the policy period, or any extended reporting period included in or endorsed to the policy, against the organization for a wrongful act.

D&O Liability Policy, Part I, Insuring Agreements (Adobe PDF Reader page 32).

Relevant to these insuring agreements, Section II of the D&O Liability Policy provides definitions for insured persons, organization, and wrongful act, as detailed next.

Section II:Relevant Definitions

The D&O Liability Policy defines “Insured persons” as

1. Directors and officers;2. All natural persons who were, now are, or shall become an employee or committee member, whether or not they were, are or shall be compensated, of the organization;

2. All natural persons who were, now are, or shall become an employee or committee member, whether or not they were, are or shall be compensated, of the organization;

3. All natural persons who were, now are, or shall become members or volunteers of the organization while acting on behalf of the organization in a voluntary capacity at the direction of the directors and officers; and

4. Any natural person who is an independent contractor as determined by federal, state or local law, but only while acting in the capacity as such for the organization pursuant to an express written agreement between the independent contractor, or any entity on behalf of the independent contractor, and the organization and only if the organization agrees in writing to provide indemnification to such independent contractor; provided, however, that any coverage under this Coverage Part for any such independent contractor shall be excess of any indemnification or insurance otherwise available to such independent contractor from any other source.

D&O Liability Policy, Part II.L, Definitions, Insured Persons (Adobe PDF Reader page 33).

“Organization” means the named insured (Friends for Life) and any subsidiary. D&O Liability Policy, Part II.P, Definitions, Insured Persons (Adobe PDF Reader page 34).

The D&O Policy defines “wrongful act” as

any actual or alleged error, misstatement, misleading statement, act, omission, neglect or breach of duty including any personal injury or publishers liability committed, attempted or allegedly committed or attempted on or after the Retroactive Date, if any, set forth in the Nonprofit Organization Directors and Officers Liability Coverage Part Declarations and prior to the end of the policyperiod by:

1. Any of the insured persons in the discharge of their duties solely in their capacity as insured persons of the organization;

2. Any of the insured persons of the organization in the discharge of their duties solely in their capacity in an outside position in any outside organization;

3. Any of the insured persons solely by reason of their status as such; or

4. The organization.

D&O Liability Policy, Part II.W, Definitions, Wrongful Act (Adobe PDF Reader pages 34-35).

Section III: Relevant Exclusions

Friends for Life’s D&O Liability Policy excludes coverage for conduct as described below:

We are not liable to pay, indemnify or defend any claim based upon, arising out of, or in consequence of any of the insureds or any person for whose actions the insureds are legally responsible:

1. Committing any deliberately fraudulent act or omission;

2. Committing any willful violation of any statute or regulation; or

3. Gaining any profit, remuneration or advantage to which they were not legally entitled;

if established by a final and non-appealable judgment or adjudication in any underlying action or proceeding adverse to the insureds as to such conduct.

With respect to determining the applicability of this exclusion, no conduct pertaining to any insured person shall be imputed to any other insured person; however, any conduct pertaining to any executive shall be imputed to the organization to determine if coverage is available.

D&O Liability Policy, Part III.B, Exclusions, Conduct (Adobe PDF Reader page 35).

ANALYSIS

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

The Social Security Act permits “qualified organizations”^[29] 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 Friends for Life 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 Friends for Life 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 Friends for Life’s New 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)^[30] . 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 00506.001(B), (C)(3), (4).

B. Review of Friends for Life’s New Policy to Determine if the Policy Complies with Federal Law and SSA Policy

1. Friends for Life’s Crime Policy is Insufficient Because the Definition of “Employee” Does Not Provide Sufficient Coverage for Misuse and Embezzlement by all Officers and Because the Crime Policy Excludes from Coverage Loss Resulting from Theft or Any Other Dishonest Act Committed by Friends for Life

We first analyzed whether Friends for Life’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 (Adobe PDF Reader pages 51-70). See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105(A)-(C). As explained below, we believe that the agency could conclude that the Crime Policy does not meet SSA’s bonding requirements for non-governmental FFS organizations.

As noted in the background, the Crime Policy provides for the following Insuring Agreements as to “employee theft” and “clients’ property”:

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.

(Adobe PDF Reader pages 54-55).

a. Coverage under the Insuring Agreements for Loss of Social Security Benefits Due to Theft/Misuse/Embezzlement

We considered whether the Crime Policy’s insuring agreements for employee theft and clients’ property covers loss for an employee’s theft/misuse/embezzlement of SSA beneficiaries’ funds (Social Security benefits) held by Friends for Life as the representative payee for the beneficiaries (Adobe PDF Reader pages 54-55). Insuring Agreement A 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” with the exception of Insuring Agreement H (Adobe PDF Reader pages 54, 58). 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 64). 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 Friends for Life 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 Friends for Life.

However, even if Insuring Agreement A does not provide adequate coverage, Insuring Agreement H appears to adequately cover theft of SSA beneficiaries’ funds (Social Security benefits) held by Friends for Life (Adobe PDF Reader pages 55, 58). This insuring agreement expressly covers losses of Friends for Life’s clients’ money (and securities and other property) due to theft by an employee of Friends for Life (Adobe PDF Reader pages 55). For purposes of this insuring agreement only, employee theft is specifically designated as to the deprivation of the client, not the Insured (Adobe PDF Reader page 58). We note that a “client” is defined as “any entity for whom [Friends for Life] perform[s] services under a written agreement (Adobe PDF Reader page 55). The Request To Be Selected As Payee (SSA-11-BK) that Friends for Life submitted might serve as such a written agreement^[31] . The request would show Friends for Life requesting to be appointed as representative payee for each beneficiary served, and it sets out the representative payee’s responsibilities. 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). Thus, if coverage for a loss of money sustained by Friends for Life’s client means a loss of Social Security benefits sustained by a Social Security beneficiary , then this Insuring Agreement H would appear to provide adequate coverage for theft/misuse/embezzlement^[32] .

b. Definition of “Employee” and Coverage for Loss Caused by Both Employees and Officers

Assuming that the Crime Policy’s Insuring Agreements A and H, as discussed above, adequately cover 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 Friends for Life’s employees and officers (Adobe PDF Reader pages 54-56). Insuring Agreements A and H of the Crime Policy provide coverage for losses resulting from theft committed by Friends for Life’s “employee” (Adobe PDF Reader pages 54-55). Thus, whether Friends for Life’s Crime Policy covers the organization against theft committed by an officer depends on whether Friends for Life’s officers fall under the Crime Policy’s definition of “employee” (Adobe PDF Reader pages 56, 70). We consider the most relevant sections (a), (d), and (h), and the applicable endorsement, defining “employee” below to determine whether it would include all of Friends for Life’s officers as well and believe that the agency could reasonably conclude that it does not (Adobe PDF Reader page 56, 70)^[33] .

Section (a) of the “employee” definition does not clearly include all of Friends for Life’s officers (both compensated and non-compensated) (Adobe PDF Reader page 56). 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 32). Second, this provision limits an “employee” to an individual whom Friends for Life “has the right to direct and control,” which arguably excludes officers (Adobe PDF Reader page 32).

Section (d) of the “employee” definition also does not sufficiently cover all of Friends for Life’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 32). The SSA beneficiaries’ funds entrusted to Friends for Life as representative payee are not part of an employee benefit plan. Thus, section (d) of the employee definition does not adequately cover all of Friends for Life’s officers (Adobe PDF Reader page 32).

Section (h) of the “employee” definition as to “‘managers’, directors, or trustees” does not include Friends for Life’s officers (Adobe PDF Reader page 32). 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 33). The information we found on their website does not indicate that Friends for Life is a limited liability company governed by managers or members, but indicates instead that it is a nonprofit corporation. This information shows that Friends for Life is a “Texas private nonprofit organization chartered in September 1989” that was granted tax-exempt status under section 501(c)(3) of the Internal Revenue Code and that has a governing board consisting of four non-compensated officers of president, vice president, treasurer, and secretary, as well as six non-compensated directors and one compensated executive director^[34] . Additionally, section (h) provides coverage for managers, directors, or trustees only while performing acts usual to an employee or when a committee member performing specific, directorial acts (Adobe PDF Reader page 33). Misuse of SSA beneficiary funds is not usual to the duty of a manager. Nor is misuse of benefits a valid, specific directorial act for a committee member. As such, the inclusion of “managers” within the definition of “employee” does not sufficiently cover Friends for Life’s officers. We therefore believe that the agency could reasonably conclude that the definition of “employee” in Friends for Life’s New Policy does not sufficiently cover all of Friends for Life’s officers.

Finally, the endorsement amending the definition of “employee” for the Crime Policy does not sufficiently cover non-compensated officers because of the limiting language provided as to their coverage (Adobe PDF Reader page 70). The endorsement specifically limits coverage to non-compensated persons while performing services usual to the duties of an employee or while acting as a fund solicitor during fund raising campaigns (Adobe PDF Reader page 70). Officers must be insured or bonded for misuse, theft, or embezzlement in their role as officers, and the limiting language concerns only when officers are performing duties of an employee. In addition, misuse of SSA beneficiary funds is not usual to the duties of an employee. Further, fundraising campaigns are inapplicable to handling SSA beneficiary funds. Thus, we believe it would be reasonable for the agency to find that this endorsement does not sufficiently cover for misuse or embezzlement by non-compensated officers in their role as officers.

c. Coverage Exclusions

Even if we could reasonably conclude that the Crime Policy’s definition of “employee” sufficiently covered all of Friends for Life’s employees and officers, it remains unclear whether Friends for Life’s officers would fall under the exclusion for loss resulting from theft or dishonest acts committed by “You” (Friends for Life). See Crime Policy, Part III.A.1-2, Exclusions (Adobe PDF Reader page 58). 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 Friends for Life itself, or any of Friends for Life’s partners or members (Adobe PDF Reader page 34). As a non-profit corporation, officers act as agents for Friends for Life. See Latch v. Gratty, Inc., 107 S.W.3d 543, 545 (Tex. 2003) (citing Holloway v. Skinner, 898 S.W.2d 793, 795 (Tex. 1995)) (“The acts of a corporate agent on behalf of his or her principal are ordinarily deemed to be the corporation’s acts.”); Ardoin v. Anheuser-Busch, Inc., 267 S.W.3d 498, 504 (Tex. App. 2008) (noting that a corporation can only act through individuals); see also Matter of World Hosp. Ltd., 983 F.2d 650, 652 (5th Cir. 1993) (“All of these courts have recognized that there is a strong policy reason for denying the corporation coverage under the bonds in question. A corporation can only act through its officers and directors. When one person owns a controlling interest in the corporation and dominates the corporation’s actions, his acts are the corporation’s acts. Allowing the corporation to recover for the owner’s fraudulent or dishonest conduct would essentially allow the corporation to recover for its own fraudulent or dishonest acts. The bonds, however, were clearly designed to insure the corporations against their employee's dishonest acts and not their own dishonest acts.”) (citation omitted). Thus, this exclusion would seem to apply to loss resulting from theft or any other dishonest act committed by Friends for Life’s officers.

In sum, for the specific reasons addressed above, Friends for Life’s Crime Policy does not provide sufficient coverage for loss resulting from misuse and embezzlement committed by all employees and officers. 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).

• •

  Friends for Life’s D&O Liability Policy is Insufficient because the Policy Excludes from Coverage an Employee’s and Officer’s Deliberately Fraudulent Acts or Omissions, Willful Violation of any Statute or Regulation, or Gaining any Profit, Remuneration or Advantage to which They Were Not Entitled

We also reviewed Friends for Life’s D&O Liability Policy to determine if the policy adequately covers losses from theft committed by Friends for Life’s employees and officers ( Adobe PDF Reader pages 29-38) . See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105(A)-(B). Despite the insuring agreements provisions of coverage for an officer or employee’s “wrongful acts,” the policy expressly excludes coverage for the insureds’ deliberately fraudulent acts or omissions, willful violation of any statute or regulation, or gaining any profit, remuneration or advantage to which they were not legally entitled “if established by a final and non-appealable judgment or adjudication in any underlying action or proceeding adverse to the insureds as to such conduct.” D&O Liability Policy, Part III.B, Exclusions, Conduct (Adobe PDF Reader page 35). “Insureds” is defined as the organization (the named insured, Friends for Life) and the insured persons, which is further defined as including officers and employees. D&O Liability Policy, Part II.A, Definitions (Adobe PDF Reader pages 33-34). Accordingly, in light of these exclusions directly related to the focus of SSA’s bonding requirement, Friends for Life’s D&O Liability Policy does not sufficiently provide coverage for losses resulting from misuse and embezzlement committed by Friends for Life’s employees and officers.

CONCLUSION

Based on the information provided in the 70-page PDF insurance package pertaining to this Policy, we believe that the agency may reasonably conclude that neither Friends for Life’s Crime Policy nor its D&O Liability Policy sufficiently complies 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 of the policy, the Crime Policy does not clearly cover financial losses due to the action or inaction of all of Friends for Life’s officers. With respect to Friends for Life’s D&O Liability Policy, the policy expressly excludes coverage for dishonest or fraudulent acts or omissions deliberately committed by Friends for Life’s employees and officers. Therefore, we believe the agency may reasonably find that Friends for Life’s Crime Policy and D&O Liability Policy do not meet SSA’s bonding requirements of 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2), and POMS GN 00506.105.

The Social Security Act permits a "qualified organization"^[35] 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’s 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).

 

Based on the information provided, we believe that the agency could reasonably conclude that neither the Crime Policy nor the Bond comply with SSA’s bonding requirements for non-governmental FFS organizational representative payees. Specifically, the Bond does not cover financial loss due to misuse and embezzlement for all of Pathfinder’s employees and officers. Further, the Crime Policy does not adequately cover financial losses due to the action or inaction of all of Pathfinder’s employees and officers. Additionally, although SSA is listed as a loss payee in an endorsement, this endorsement does not cure the deficiencies in the Crime Policy. Finally, the fact that the agency previously determined that a similar Insurance Policy satisfied SSA’s bonding requirements does not prevent the agency from now finding that neither Pathfinder’s Crime Policy nor its Bond satisfies SSA regulations and policy. Therefore, there is legal support for the agency to find that Pathfinder’s Crime Policy and Bond do not meet SSA’s bonding requirements of 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2), and POMS GN 00506.105. At the conclusion of our legal opinion, we are providing recommended language to assist with responding to Pathfinder’s October 31, 2018, inquiry on this matter.

You asked us to review Pathfinder, Inc.’s (Pathfinder’s) Insurance Policy, consisting of the 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^[36] . You also submitted a copy of Pathfinder’s Surety Bond (Bond). Specifically, you asked whether Pathfinder’s Crime Policy and Bond meet SSA’s requirement that employee theft coverage include officers.^[37]

ANSWER

Based on the information provided, we believe that the agency could reasonably conclude that neither the Crime Policy nor the Bond comply with SSA’s bonding requirements for non-governmental FFS organizational representative payees. Specifically, the Bond does not cover financial loss due to misuse and embezzlement for all of Pathfinder’s employees and officers. Further, the Crime Policy does not adequately cover financial losses due to the action or inaction of all of Pathfinder’s employees and officers. Additionally, although SSA is listed as a loss payee in an endorsement, this endorsement does not cure the deficiencies in the Crime Policy. Finally, the fact that the agency previously determined that a similar Insurance Policy satisfied SSA’s bonding requirements does not prevent the agency from now finding that neither Pathfinder’s Crime Policy nor its Bond satisfies SSA regulations and policy. Therefore, there is legal support for the agency to find that Pathfinder’s Crime Policy and Bond do not meet SSA’s bonding requirements of 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2), and POMS GN 00506.105. At the conclusion of our legal opinion, we are providing recommended language to assist with responding to Pathfinder’s October 31, 2018, inquiry on this matter.

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 March 8, 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 March 8, 2019). Pathfinder’s 2018 Operations Manual found on its website provides an administration organizational chart showing a board of directors, an executive director of operations, a chief financial officer, and numerous other directors. On October 31, 2018, Patricia Walker submitted a letter to SSA identifying herself as Pathfinder’s Chief Financial Officer.

Pathfinder’s Bond^[38]

The information you provided shows that on August 16, 2013, Pathfinder obtained the Bond from Travelers Casualty and Surety Company of America (Travelers) effective August 16, 2013. The Bond identifies Pathfinder as the Principal, SSA as the Obligee, and Travelers as the Surety, and states that Travelers agrees to reimburse SSA

all funds paid by the Social Security Administration (SSA) to a beneficiary or the beneficiary’s alternative representative payee on account of the Principal’s (Pathfinder’s) conversion of benefits for use other than for the beneficiary.

Bond, ¶4 (Adobe PDF Reader p. 6). The Bond includes no reference to Pathfinder’s employees or officers.

Pathfinder’s Crime Policy^[39]

The information you provided also shows that Pathfinder obtained a Crime Policy from Philadelphia Indemnity Insurance Company for Pathfinder, Inc. as the Insured. We were provided with Crime Policy, effective 02/01/2019 through 02/01/2020.

The Crime Policy provides coverage

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).

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; Part F.20, Definitions, Theft (Adobe PDF Reader p. 19).

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).

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).

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, 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”^[40] 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 Bond and Crime Policy meet 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)^[41] . 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 Bond is labeled as a “surety bond.” The POMS explains that a surety bond involves three parties—the surety, the obligee, and the principal. POMS GN 00506.105(C)(4)(a). The Surety obligates itself to the obligee to cover a default by the principal, and a surety bond covers company employees. POMS GN 00506.105(C)(4)(a). 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 Bond and Crime Policy to determine if either document is sufficient to satisfy SSA’s bonding requirement for non-governmental FFS representative payee organizations.

B. Review of Pathfinder’s Bond and Crime Policy to Determine if Either One Complies with Federal Law and SSA Policy

1. Pathfinder’s Bond is Insufficient Because It Does Not Specify Whether the Bond Covers Financial Losses Caused by Pathfinder’s Officers.

We first analyzed whether Pathfinder’s Bond 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 Bond provides reimbursement to SSA for the Principal’s “conversion of benefits for use other than for the beneficiary” but defines Principal only as Pathfinder. As before, the primary issue with the Bond is the failure to include a definition of Principal that expressly includes all of Pathfinder’s employees as well as officers. Therefore, as we previously determined, although the Bond’s language appears sufficient to cover misuse and embezzlement, the Bond is deficient because it provides coverage for Pathfinder as the Principal without specifying whether it covers financial losses caused by all of Pathfinder’s officers^[42] . See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2) (the FFS representative payee organization must be bonded/insured to cover misuse and embezzlement byall of the organization’s officers and employees); POMS GN 00506.105(A)-(B) (same ).

Pathfinder has presented no evidence that it obtained a rider or endorsement that specifies that coverage extends to all employees and officers. As such, the Bond remains deficient and does not satisfy 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).

2. Pathfinder’s Crime Policy Is Insufficient Because (1) The Definition of Employee Does Not 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

Pathfinder’s Policy does not provide adequate coverage against theft committed by all officers of the organization

We next analyzed 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).

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.

Assuming that the Crime Policy 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 Pathfinder’s officers. 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. 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. We consider the most relevant sections (1), (4), and (8) defining “employee” below to determine whether it would include officers^[43] .

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. 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. 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. 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. Pathfinder is registered with the Arkansas Secretary of State as a non-profit domestic corporation. As such, inclusion of “managers” within the definition of “employee” is not relevant to Pathfinder.

Further, 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.

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. A “manager” is “a person serving in a directorial capacity for a limited liability company.” Crime Policy, Part F.11, Definitions, Manager. 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, it is unclear whether Pathfinder’s officers would fall within this exclusion for loss resulting from theft or dishonest acts committed by “You.” See Crime Policy, Part D.1.a, Exclusions. 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.”) . As such, we cannot reasonably conclude that Pathfinder’s Crime Policy provides coverage against theft committed by all officers of the organization.

• •

  The Joint Loss Payable endorsement does not cure the deficiencies identified in the Crime Policy

We also analyzed the Joint Loss Payable endorsement, 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 (Adobe PDF Reader p. 23)^[44] . The Joint Loss Payable endorsement lists SSA as a loss payee under the Crime Policy, but also states that, “This insurance 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). Thus, the Joint Loss Payable endorsement 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).^[45] The Loss Payable endorsement sufficiently protects SSA’s right to recover payment if Pathfinder is entitled to payment under the Crime Policy. However, SSA’s rights under the Crime Policy are no greater than Pathfinder’s rights, and the Loss Payable endorsement does not create an independent contract between SSA and Philadelphia Indemnity Insurance Company.^[46] 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 Pathfinder’s employees and officers, SSA would likewise be unable to recover payment for financial losses from all employees and officers.

SSA’s previous determination that Pathfinder’s Insurance Policy was sufficient does not preclude SSA from now finding that the Crime Policy/Bond do not meet SSA’s bonding requirements

In her October 31, 2018, letter to the agency, Pathfinder’s Chief Financial Officer Patricia Walker emphasized that Pathfinder was approved to collect fees as a non-governmental FFS representative payee organization effective January 1, 2012 and that “we have had the same policy and bond since.” In making this argument, Ms. Walker appears to assert that the agency is estopped from finding Pathfinder’s Bond and Crime Policy insufficient because the agency previously found that the policy language satisfied SSA’s bonding requirement for non-governmental FFS representative payees.

The Supreme Court has stated that the “Government may not be estopped on the same terms as any other litigant.” Heckler v. Comm. Health Servs. of Crawford Cty., 467 U.S. 51, 60 (1984). In order to successfully bring a claim of equitable estoppel against the government, a party must prove all the elements of estoppel: (1) false representation by the government; (2) the government intended to induce the party to act on the misrepresentation; (3) the party had a lack of knowledge or inability to obtain the true facts; and (4) the party relied on the government’s misrepresentation to his detriment. Bartlett v. U.S. Dep’t of Agriculture, 716 F.3d 464, 475-76 (8th Cir. 2013). Additionally, the party must prove that the government committed affirmative misconduct—a heavy burden to prove. See id. Affirmative misconduct is more than mere negligence. See id. Inaccurate statements or advice do not rise to the level of affirmative misconduct. See, e.g., Clason v. Johanns, 438 F.3d 868, 872 (8th Cir. 2006); U.S. v. Manning, 787 F.2d 431, 436-37 (8th Cir. 1986).

In this case, it is unlikely that a court would conclude that the agency’s prior finding that Pathfinder’s policy language was sufficient rises to the level of “affirmative misconduct.” Thus, we believe that the agency’s past finding that Pathfinder’s bond and insurance policy were sufficient does not preclude the agency from now finding that Pathfinder’s Bond and Crime Policy do not satisfy SSA’s bonding requirement for non-governmental FFS representative payees. Moreover, SSA’s determination as to whether an organization may collect a fee for serving as a representative payee (as a fee-for-service representative payee), per 20 C.F.R. §§ 404.2040a, 416.640a, is not an initial determination subject to the administrative and judicial review processes. See 20 C.F.R. §§ 404.903(q), 416.1403(a)(11).

In sum, because Pathfinder’s Crime Policy does not clearly provide adequate coverage for loss resulting from theft committed by all officers, the insurance 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).

CONCLUSION

We believe that the agency may reasonably conclude that neither the Bond nor the Crime Policy sufficiently comply 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, the Bond does not specify whether it covers financial loss due to misuse and embezzlement for all of Pathfinder’s officers. Further, the Crime Policy does not clearly cover financial losses due to the action or inaction of all of Pathfinder’s employees and officers. Additionally, Pathfinder’s endorsement adding SSA as a loss payee does not cure the deficiency in coverage of the insurance policy. Finally, SSA is not precluded from finding the Bond and the current Crime Policy deficient even though SSA previously found that Pathfinder satisfied the bonding requirements. Therefore, we believe the agency may reasonably find that Pathfinder’s Bond and Crime Policy do not meet SSA’s bonding requirements of 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2), and POMS GN 00506.105.

 

The Social Security Act permits “qualified organizations”^[47] 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).

Based on the information provided, we believe that the agency could reasonably conclude that the Bond does not comply with SSA’s bonding requirements for non-governmental FFS organizational representative payees. Specifically, the Bond does not cover financial loss due to misuse and embezzlement for all of Payee Express’s employees and officers. The surety company’s explanation that the Bond covers three specific positions does not cure this deficiency. Additionally, although SSA is listed as a loss payee, SSA’s rights match Payee Express’s rights and thus SSA could not recover payment beyond the terms of the Bond. Therefore, we believe that there is legal support for the agency to find that Payee Express’s Bond 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

QUESTION PRESENTED

You asked us to review Payee Express, Inc.’s (Payee Express) dishonesty bond (Bond) for our opinion as to whether the Bond satisfies the Social Security Administration’s (SSA’s or agency’s) bonding requirements for non-governmental fee-for-service (FFS) organizational representative payees, as set forth in the Program Operations Manual Systems (POMS) GN 00506.105. Specifically, you asked whether the Bond meets SSA’s requirement that employee theft coverage include officers.

ANSWER

Based on the information provided, we believe that the agency could reasonably conclude that the Bond does not comply with SSA’s bonding requirements for non-governmental FFS organizational representative payees. Specifically, the Bond does not cover financial loss due to misuse and embezzlement for all of Payee Express’s employees and officers. The surety company’s explanation that the Bond covers three specific positions does not cure this deficiency. Additionally, although SSA is listed as a loss payee, SSA’s rights match Payee Express’s rights and thus SSA could not recover payment beyond the terms of the Bond. Therefore, we believe that there is legal support for the agency to find that Payee Express’s Bond 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 information you provided shows that on November 1, 2010, Payee Express obtained the Bond from Western Surety Company (Western Surety) effective October 29, 2010. The Bond identifies Payee Express as the Insured Party and states that Western Surety agrees to indemnify Payee Express against any loss of money or other property which the Insured shall sustain or for which the Insured shall incur liability to any Customer or Subscriber of the Insured through any fraudulent or dishonest act or acts committed by any Employee or Employees of the Insured acting alone or in Collusion with others…

Bond, ¶1. The Bond defines “Employee” as one or more of the natural persons (except directors or trustees of the Insured, if a corporation, who are not also officers or employees thereof in some other capacity) while in the regular service of the Insured in the ordinary course of the Insured’s business during the term of this bond, and whom the Insured compensates by salary, or wages and has the right to govern and direct in the performance of such service…

Bond, § 4. The Bond also limits the definition of a “fraudulent or dishonest act” to crimes for which an employee is tried and convicted by a court exercising proper jurisdiction. See Bond § 5.

The Bond originally indemnified Payee Express in the amount of $5,000.00. See Bond ¶ 1. Subsequent riders to the Bond have increased the penalty amount, and the current penalty is listed as $100,000.00. On January 22, 2013, Payee Express and Western Surety executed a rider adding SSA as a loss payee under the Bond (Loss Payee Rider).

You also provided information indicating that the District Manager of the Shawnee, Oklahoma SSA Field Office, contacted CNA Surety to inquire about the positions covered under the Bond. A CNA Surety Underwriting Specialist explained to the District Manager that the Bond covered three individual positions of owner, bookkeeper, and secretary. The Underwriting Specialist advised the District Manager that if a covered loss involving one of the three individuals occurred, CNA Surety’s claim department would investigate. The agency is in the process of re-certifying Payee Express’s continuing eligibility as a FFS representative payee organization and has sought our assistance in reviewing Payee Express’s Bond. See POMS GN 00506.420.

ANALYSIS

A. Federal Law: FFS Organizational Representative Payees

The Social Security Act permits “qualified organizations”^[48] 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 Payee Express 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 Payee Express 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 Bond meets SSA’s requirement for bonding 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).^[49] 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 00506.001(B), (C)(3), (4). Payee Express’s Bond is labeled as a “dishonesty bond.” The POMS explains that an employee dishonesty bond is usually a blanket bond covering all company employees except officers. POMS GN 00506.105(C)(3), (4)(b). A separate rider or clause is often required to provide coverage for officers. Id. Further, when such additional coverage for officers is provided, a “conviction clause” is often required, which means that in order for the bond or insurance company to be required to pay, the officer or employee must be convicted of a crime. POMS GN 00506.105(C)(3). We turn next to the specific provisions of Payee Express’s Bond to determine if it is sufficient under SSA’s requirements.

B. Review of Payee Express’s Bond

1. Coverage for Financial Loss Due to Misuse and Embezzlement by All Employees and Officers

We first considered whether the Bond satisfies SSA’s requirement that a non-governmental FFS representative payee organization be bonded to cover financial loss due to misuse and embezzlement. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105(A)-(C). Here, the introductory paragraph of the Bond provides coverage for “any loss[es] of money or other property which the Insured (Payee Express) shall sustain or for which the Insured shall incur liability to any Customer or Subscribers of the Insured through any fraudulent or dishonest act or acts.” See Bond, ¶1. This language appears to sufficiently cover misuse and embezzlement and therefore satisfies SSA’s requirement that the bond or insurance policy cover financial loss attributable to such acts. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105(C)(4)(d). We note that the Bond limits recovery for fraudulent or dishonest acts to crimes for which an employee is tried and convicted (a so-called conviction clause). See Bond § 5 (defining a fraudulent or dishonest act to mean “an act which is punishable under the criminal code within which act occurred, for which said employee is tried and convicted by a court of proper jurisdiction”); POMS GN 00506.105(C)(3). SSA’s bonding and insurance requirements do not prohibit a conviction clause. Accordingly, the presence of that clause does not make the Bond insufficient. However, we note that such clause leaves open the possibility for Western Surety to deny payment where a loss occurs but an employee is not charged with and convicted of a crime for the dishonest or fraudulent acts. See POMS GN 00506.105(C)(3).

More importantly, however, the Bond is deficient because it does not provide sufficient coverage against financial losses caused by all of Payee Express’s employees and officers. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2) (the FFS representative payee organization must be “bonded/insured to cover misuse and embezzlement by officers and employees”); POMS GN 00506.105(A)-(B) (explaining that a bond or insurance contract must cover the non-governmental FFS representative payee organization’s employees and officers). The Bond defines an “employee” as “one or more natural persons (except directors or trustees of the Insured, if a corporation, who are not also officers or employees thereof in some other capacity) while in the regular service of the Insured in the ordinary course of the Insured’s business during the terms of this bond, and whom the Insured compensates by salary, or wages and has the right to govern and direct in the performance of such service…” Bond § 4. Thus, the Bond limits who is considered an “employee” in two ways relevant to SSA’s bonding requirement for coverage of acts of all employees and officers. First, the Bond limits the term “employee” to compensated individuals, indicating that dishonest or fraudulent acts committed by non-compensated officers would not be covered under the Bond. Second, the Bond limits an “employee” to an individual whom the Insured “has the right to govern and direct in the performance of such service,” which arguably excludes officers. See, e.g., Ins. Co. of N. Am. v. Greenberg, 405 F.2d 330, 332–33 (10th Cir. 1969) (applying Oklahoma law and concluding that two officers were employees for purposes of coverage under a dishonesty bond notwithstanding the requirement that the insured have the right to direct and control the individuals because the officers did not have sole control of the company; in other words, the company had the right to direct and control these officers). The surety company’s explanation that the Bond covers three positions (owner, bookkeeper, and secretary) does not cure the Bond’s language ambiguity as to whether the term “employee” includes all officers. Although such an explanation might cover all persons presently working at Payee Express, it would not protect against theft committed by any new employees Payee Express may hire, or any of the current employees if that individual’s job title changes. Therefore, because the Bond does not unequivocally cover all employees and officers, it 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).

2. Loss Payee Rider

We also analyzed the Loss Payee Rider, adding SSA as “a loss payee” under the Bond effective January 22, 2013, in determining SSA’s rights to recover financial losses with respect to the Bond.^[50] The Loss Payee Rider added SSA as a loss payee under the Bond, but also states that “[a]ll other terms and conditions of the bond remain unchanged.” Thus, the Loss Payee Rider appears to be a simple, rather than standard, loss payee clause. See Conner v. Nw. Nat’l Cas. Co., 774 P.2d 1055, 1056-57 (Okla. 1989).^[51] The Loss Payee Rider sufficiently protects SSA’s right to recover payment if Payee Express is entitled to payment under the Bond. However, SSA’s rights under the Bond are no greater than Payee Express’s rights, and the Loss Payee Rider does not create an independent contract between SSA and Western Surety.^[52] See Hensley v. State Farm Fire & Cas. Co., 398 P.3d 11, 21 (Okla. 2017); Conner, 774 P.2d at 1057; 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 Bond does not sufficiently cover financial losses caused by all of Payee Express’s employees and officers, SSA would likewise be unable to recover payment for financial losses from all employees and officers.

CONCLUSION

We believe that the agency may reasonably conclude that the Bond does not sufficiently comply with SSA’s requirement that a bond or insurance policy cover financial loss incurred due to the misuse and embezzlement by officers of the non-governmental FFS representative payee organization. Further, SSA’s status as a loss payee does not cure the deficiency in the Bond’s coverage.