AFSB common mistakes
AFSB · Understand the traps and how to avoid them.
Dates an employee theft loss to the date the money disappeared and analyzes coverage on an occurrence basis, then concludes the policy that was in force at that earlier date responds.
Candidates carry a general liability or property 'occurrence' mindset into crime coverage and overlook that the insuring agreement is written on a discovery basis.
What to do instead
Before answering any crime timing question, write out the chain: dishonest act, discovery by the insured, proof of loss, discovery period, extended discovery. Analyze which policy was in force on the discovery date, not the theft date.
Picks Computer Fraud for every fact pattern involving a wire or an email, even when the loss arose from a fraudulent instruction directing the insured's own bank to move funds, or from a vendor impersonation scheme.
All three insuring agreements sound alike and candidates rely on the surface facts instead of the mechanism of loss.
What to do instead
Build a three-column chart of Computer Fraud, Funds Transfer Fraud, and Social Engineering Fraud: who is deceived, whose system is accessed, and what authorization was obtained. Map the facts to the mechanism before selecting a coverage.
Assumes that client money, securities, or property held in trust is automatically covered under the employee dishonesty insuring agreement, and treats the 'care, custody, or control' exclusion as irrelevant.
Candidates read employee dishonesty broadly and forget that property of others, money, and securities are separately defined and separately limited, and that some property is flatly excluded.
What to do instead
For every crime question, list the property involved and test it against the definitions of money, securities, and other property, then against the care-custody-control and property-of-others provisions before concluding coverage exists.
States that a performance bond pays unpaid subcontractors and suppliers, or describes the surety's role as paying the contractor's bills.
The two contract bonds are purchased together and candidates blur the obligee and the beneficiary of each instrument.
What to do instead
Anchor the distinction in one sentence: the performance bond protects the owner's cost to complete, the payment bond protects subcontractors and suppliers. Then state who may claim under each and what damages are measured.
Measures a bid bond forfeiture at a flat ten percent of the bid in every scenario, without comparing the defaulting bid to the next responsive bid and without applying the penal sum cap.
Candidates memorize the ten percent figure as a rule and never test it against the actual bond language or the difference in bid amounts.
What to do instead
Recite the bid bond measure as the lesser of the penal sum or the difference between the defaulting bid and the next responsive bid, and check the bond's stated percentage rather than assuming a fixed penalty.
Treats the performance bond penal sum as a per-claim limit that renews, or as an unlimited completion guarantee, rather than a single ceiling on the surety's total obligation.
Insurance habits lead candidates to look for aggregate versus per-occurrence structures that do not exist in the bond.
What to do instead
State affirmatively that the penal sum is the maximum liability for all claims under the bond, that it does not replenish, and that change orders, multiple bonded contracts, and partial payments must be reviewed to see how the penal sum is affected.
Describes the surety's response to a contractor default as simply 'paying the bond' and cannot distinguish completion, financing the contractor, and tendering the penal sum.
Candidates learn the three options as a list but never practice applying them to a fact pattern that turns on which option the surety selected and when.
What to do instead
Practice a short scenario for each option, noting who performs the work, who pays, and what the obligee's recovery is. Include the tender-of-penal-sum option and the effect of a takeover versus a tender of a replacement contract.
Underwrites a license and permit bond, a fiduciary bond, or a miscellaneous commercial bond using contract surety tools, asking for work-in-progress schedules and equipment lists instead of credit and financial statements.
Candidates over-learn the contract surety underwriting framework and apply it to every bond account.
What to do instead
Classify the bond first as contract or non-contract. For non-contract bonds, underwrite the applicant's net worth, liquidity, character, and indemnity, and reserve WIP and backlog analysis for construction exposures.
Describes a court or fiduciary bond as if it were an insurance policy, expecting a deductible, a claims-made trigger, or a limit that responds to each separate claim.
Insurance terminology is more familiar, and candidates do not separate the three-party surety guarantee from a two-party insurance contract.
What to do instead
For every judicial or fiduciary bond question, state the three parties, the penal sum as a fixed ceiling, the absence of a deductible, and the surety's right of indemnity against the principal before discussing coverage.
Ignores the statutory fidelity bond requirement for ERISA plans, or confuses that requirement with a commercial crime policy purchased by the plan sponsor.
The ERISA bond is a distinct, statutorily mandated instrument and candidates mix it up with employee dishonesty insurance.
What to do instead
Memorize the ERISA fidelity bond parameters, including the ten percent of plan assets measure and the minimum and maximum bond amounts, and state clearly that the bond protects the plan while a crime policy may supplement but not replace it.