Purpose: clarify bond type
- The circular resolves inquiries on why the bond required for directors, officers, and employees handling funds, securities, or property on behalf of a cooperative should be a surety bond instead of a fidelity bond.
- The circular provides definitions of surety bond and fidelity bond to guide understanding of the required coverage.
Legal reference: RA 9520
- The circular ties the required bond for directors, officers, and employees handling cooperative funds, securities, or property to Article 56 of Republic Act No. 9520.
Surety bond—definition and function
- A surety bond is a promise to pay one party (the obligee) a certain amount if a second party (the principal) fails to meet obligations.
- A surety bond applies when obligations include fulfilling the terms of a contract.
- A surety bond protects the obligee against losses that result from the principal’s failure to meet the obligation.
- A surety bond is a contract among at least three parties:
- the obligee as the recipient of an obligation;
- the principal as the primary party performing the contractual obligations; and
- the surety as the party that assures the obligee that the principal can perform.
- A surety bond is identified as a form of guarantee insurance.
Fidelity bond—definition and function
- A fidelity bond is a form of insurance protection that covers policy holders for losses they incur because of fraudulent acts by specified individuals.
- A fidelity bond typically protects a business from losses caused by the dishonest acts of employees.
- A fidelity bond provides coverage for losses of company monies, securities, and other property from employees who have a manifest intent to cause the company loss.
- A fidelity bond is described as covering other forms of crime insurance policies such as burglary, fire, general theft, computer theft, disappearance, fraud, forgery, among others, to protect company assets.
- A fidelity bond is identified as crime insurance.
Administrative guidance and compliance framing
- The circular instructs that the discussion of surety bond and fidelity bond definitions is for information and guidance.
- The circular frames the bond requirement for cooperative directors, officers, and employees handling cooperative funds, securities, or property as one that is to be covered by a surety bond in relation to Article 56 of Republic Act No. 9520.