Under certain circumstances, the Agency may select an organization to serve as a representative payee to receive benefits on behalf of a beneficiary.^[1] Under the Social Security Act, an authorized qualified organization can collect a monthly fee from a beneficiary for expenses incurred by the organization in providing services as a representative payee.^[2] These organizations are referred to as fee for service (FFS) representative payees. To serve as a FFS representative payee, any community-based nonprofit social service organization must generally be, among other requirements, bonded or insured in a sufficient amount to cover misuse and embezzlement by officers and employees of the organization.^[3]

Each bond or insurance policy must be carefully reviewed to ensure adequate coverage.^[4] We look to general principles of contract interpretation in analyzing these policies.^[5] When reviewing policy language, Washington courts are directed to give a “fair, reasonable, and sensible construction as would be given to the contract by the average person purchasing insurance.”^[6] Washington courts will also enforce “clear and unambiguous” provisions and will not create ambiguity where none exists.^[7] Finally, Washington courts do not allow an insured’s expectations to “override the plain language of the contract.”^[8]

When disputes arise, ambiguous terms are generally construed against the drafter.^[9] However, this principle is not absolute.^[10]

QUESTIONS PRESENTED

You provided us with insurance policies that both Kitsap Mental Health Services (KMH) and Payee Services of Tacoma (Payee Services), two separate Social Security Administration (SSA or Agency) representative payee organizations, obtained from Travelers Bond & Specialty Insurance (Travelers).^[11] You then asked for a legal opinion on the following issues:

1. a. 

   Whether the “Employee Theft” fidelity insuring agreement provides adequate coverage for misuse and embezzlement of Social Security beneficiaries’ funds by the payee’s employees.

2. b. 

   Whether the Travelers policy contains any legal deficiencies that prevent the Agency from accepting it as proof of compliance with the statutory insurance requirements.

BRIEF ANSWER

A. The Employee Theft coverage likely provides adequate coverage for misuse and embezzlement by employees of the payee organization, although not based on the reason the payee asserts.

B. There are no legal deficiencies that prevent the Agency from accepting the policy as proof of compliance. However, to minimize the small risk that compensated officers are not covered under the policy, the Agency may want to confirm the payees retain the right to direct and control compensated officers.

BACKGROUND

1. a. 

   Relevant legal framework

   Under certain circumstances, the Agency may select an organization to serve as a representative payee to receive benefits on behalf of a beneficiary.^[12] Under the Social Security Act, an authorized qualified organization can collect a monthly fee from a beneficiary for expenses incurred by the organization in providing services as a representative payee.^[13] These organizations are referred to as fee for service (FFS) representative payees. To serve as a FFS representative payee, any community-based nonprofit social service organization must generally be, among other requirements, bonded or insured in a sufficient amount to cover misuse and embezzlement by officers and employees of the organization.^[14]

   Each bond or insurance policy must be carefully reviewed to ensure adequate coverage.^[15] We look to general principles of contract interpretation in analyzing these policies.^[16] When reviewing policy language, Washington courts are directed to give a “fair, reasonable, and sensible construction as would be given to the contract by the average person purchasing insurance.”^[17] Washington courts will also enforce “clear and unambiguous” provisions and will not create ambiguity where none exists.^[18] Finally, Washington courts do not allow an insured’s expectations to “override the plain language of the contract.”^[19]

   When disputes arise, ambiguous terms are generally construed against the drafter.^[20] However, this principle is not absolute.^[21]

2. b. 

   Relevant facts

   • •

     Travelers offers several types of crime policies, including fidelity coverage. As relevant here, the fidelity insuring agreement consists of two different types of coverage: “Employee Theft” and “Employee Theft of Client Property.”^[22]

   • •

     KMH is a FFS representative payee organization that obtained Employee Theft coverage in the amount of $1,500,000 under the Travelers fidelity insuring agreement. Likewise, Payee Services procured $1,050,000 in Employee Theft coverage under the Travelers fidelity insuring agreement. Both KMH and Payee Services elected only Employee Theft coverage, thus forgoing coverage for Employee Theft of Client Property. Nevertheless, the payees assert that Employee Theft coverage is sufficient because policy provisions indicate Employee Theft coverage applies to property that they “hold for others,” which they interpret to include funds that belong to SSA beneficiaries.

ANALYSIS

1. a. 

   Adequacy of Employee Theft Coverage

   The Employee Theft fidelity insuring agreement of the crime policy covers theft, defined as “the intentional unlawful taking of Money, Securities, and Other Property to the insured’s deprivation” (i.e., misuse and embezzlement), committed by a payee’s employees.^[23] On its face, the plain language of this agreement appears adequate for purposes of employee theft coverage.^[24] However, this is a convoluted policy that requires further consideration of relevant definitions and conditions.

   For example, the policy specifically defines Money, Securities, and Other Property in three distinct ways:

   • •

     Money means a medium of exchange in current use and authorized or adopted by a domestic or foreign government, including currency, coins, bank notes, bullion, travelers’ checks, registered checks and money orders held for sale to the public.^[25]

   • •

     Securities means written negotiable and non-negotiable instruments or contracts representing Money or property, such as tokens, tickets, revenue, and stamps – but does not include Money.^[26]

   • •

     Other Property means any tangible property other than Money and Securities that has intrinsic value.^[27]

   Under these definitions, SSA beneficiary funds would fall within the term “money,” but are excluded from the term “other property,” because funds are not physical property.

   But there is a Conditions provision that limits the Employee Theft fidelity insuring agreement, which complicates matters. Section V(A)(5)(a)—the provision upon which the payee relies to support its interpretation of the policy—is entitled “Ownership of Property; Interests Covered.”^[28] This section explicitly “limit[s]” the crime policy at issue to covering only “property:”

   • •

     That the Insured owns or leases;

   • •

     That the Insured holds for others:

     • –

       On the Insured’s Premises or the Insured’s Financial Institution Premises, or

     • –

       While in transit and in the care and custody of a Messenger; or

   • •

     For which the Insured is legally liable (except for property located in the Insured’s Client’s Premises or the Insured Client’s Financial Institution Premises).^[29]

   However, the policy does not define “property,” and this is potentially problematic. This ambiguity leaves open the possibility that a court interpreting the policy during litigation could find that the crime policy (a) does not include money, or (b) refers to “Other Property,” which, as discussed above, also does not include money.^[30] Consequently, there is some risk that a court could conclude that beneficiaries’ funds do not constitute property that falls within those contractual conditions.^[31]

   Nevertheless, the more reasonable interpretation is that the term “property” encompasses money.^[32] Furthermore, if this issue was litigated, we would cite the ambiguity with respect to the undefined term “property” and argue that beneficiary funds are “property…for which the Insured is legally liable.”^[33] Indeed, under the regulations, a payee who misuses a beneficiary’s benefits “is responsible for paying back misused benefits.”^[34] The regulations also specifically reference a “representative payee’s liability” in this context.^[35] Thus, even considering the potential issues with this convoluted policy, there is likely adequate coverage in the case of misuse and embezzlement by employees of the payee organization.

   While the payee organizations cite the “holds for others” provision to argue there is sufficient coverage, this argument does not hold water. Under Section V(A)(5)(a), the crime policy covers, in relevant part, property that the Insured “holds for others” either on the “Insured’s Premises” or in the “Insured’s Financial Institution Premises.”^[36] But the policy defines “Premises” as “the interior of that portion of any building the Insured occupies in conducting the Insured’s business.”^[37] And the policy defines “Financial Institution Premises” as “the interior of that portion of any building occupied by a Financial Institution,” including a night depository chute or a safe deposit.^[38] Because beneficiary funds are highly unlikely to be kept in the payee’s place of business or in a safety deposit box, this provision does not provide adequate coverage. Nevertheless, given the “legally liable” language discussed above, the policy remains likely sufficient.

   Finally, we considered whether requesting the payee to obtain coverage under the “Employee Theft of Client Property” fidelity insuring agreement of the crime policy would mitigate any potential risk.^[39] We conclude that it would not. There are a variety of reasons why that coverage would be unlikely to cover employee theft of beneficiary funds, including that the policy definition of “Client” means “an entity”—not a natural person, such as a beneficiary.^[40]

   In sum, though we cannot say that there is no risk in accepting this coverage, it is likely adequate coverage in the case of misuse and embezzlement by a payee’s employees.

2. b. 

   Adequacy of Officer Theft Coverage^[41]

   The regulations require coverage in the case of misuse or embezzlement not only by employees but also officers of the payee organization.^[42]

   While the policy defines “Employee” to include a “non-compensated officer,” the policy does not explicitly provide that a compensated officer is an “Employee.”^[43] More specifically, the policy defines “Employee” to mean, among other things, any natural person who (1) serves the Insured; (2) receives compensation directly by salary, wages, or commissions; and (3) the Insured has the right to direct and control while performing services for the Insured.^[44]

   There is a risk that the insurance company may try to deny coverage for a compensated officer on the theory that the payee organizations did not have the right to direct and control those officers. However, under Washington law, which is likely controlling under this particular policy,^[45] this argument is likely to fail, as a non-profit corporation’s board of directors appears to have control over the corporation and its officers.^[46] Because we would argue that officers are subject to the board’s direction and control as a matter of Washington law, the policy is likely sufficient with respect to both non-compensated and compensated officers.

   Nevertheless, to reduce this risk, the Agency may want to confirm with KMH and Payee Services that they retain the right to direct and control their compensated officers.

CONCLUSION

In sum, the Employee Theft coverage alone is likely sufficient under SSA regulations.^[47] Nevertheless, there is some risk associated with accepting this coverage. While not necessary to accept the policy as adequate, the Agency may consider asking the payee organizations to confirm that they retain the right to direct and control compensated officers.