The Eighth Circuit Appeals Court in St Louis USA dealt with a question that often arises under fidelity guarantee policies, namely what is a direct financial loss. It held that even though the loss was suffered by third party bank customers who recovered their loss from the bank, it was a direct financial loss for the bank itself.

A vice president loan officer of the bank persuaded two customers to invest in a not very sophisticated scam by putting up money to help the alleged heir of an African millionaire to move $9 million from the Netherlands to the USA. The customers contributed and lost $405 000 and $80 000.

The bank was insured under a fidelity bond which required the insurer to indemnify the bank for any loss resulting directly from dishonest or fraudulent acts committed by an employee. The employee was found to have acted dishonestly. The court ruled that under the “loosely worded” language of the bond it provided coverage for losses that resulted directly from an employee’s fraud. The bank suffered a loss of property in its possession because the bank wired the customers’ money from the bank to an unverified Hong Kong bank account.

A similar finding is likely under a fidelity guarantee policy in South Africa though we would not call money in a bank account the customer’s money in the bank’s possession.