Nearly every fidelity bond that is written is based on the obligee’s (or the person being guaranteed by the surety) “faithful” performance of their duties during the normal course of business. In the old days, the contracts would contain words like “well and truly” or even “well and faithfully” when discussing these duties.
These terms don’t just refer to the honesty of the employee, although that is certainly a very large part of the understanding. It is more than that. It also includes elements of hard work as well as an amount of reasonable competency. That is, it’s not enough to just show up at the job and not steal anything. Instead, it requires that the employee actively work at the job in a reasonable manner.
This understanding was put to the test in Union Bank v. Forrest, 3 Cr. C. C. 218. In the Union Bank case, the court held that the neglect by a cashier to settle up the daily accounts of the teller pursuant to the policies and procedures of the bank would not discharge the surety once an action was brought. Thus, the sureties were not relieved due to a lack of diligence or skill as that was considered a key part of the underlying terms of the fidelity bond itself.
However, an employer could just as easily waive the diligence portion of the bond on behalf of the employee. Thus, in Singer Mnfg. Co. v Boyette, 74 Ak 1, the court held that where a salesman was supposed to provide a weekly report pursuant to the terms of their employment agreement and where the employer waived this reporting, then the surety was discharged as well.
What constitutes faithful performance?
The case law can unfold in multiple strange ways. You need to remember that, many times, specific case have holdings that are specific to the facts of that case. Thus, weird case law gets borne as those holdings should not be used for further cases.
In the Odd Fellows’ Mutl. Assn. v. James case (63 Ca 598) a company was held liable (and by extension, the surety was forced to pay) due to a breach of his duties. The fidelity bond held that he was to “in all respect fully, faithfully, well and truly” executed all of his work according to the rules, policies and procedures that the job required. As a part of his duties, the secretary was to both keep all of the books and records of the company in a neat and orderly fashion and surrender them at the end of his employment with the company. Further, the secretary had a duty to remit to the employer any money that was paid directly to him. The secretary did not immediately pay over these funds, but instead put them in the company safe. When the safe was broken into and the funds stolen, then the company secretary was held to have breached the faithful performance of his duties and held liable.
A fidelity bond is issued based upon the character of the employee. This does not only include the character of the employer, but also includes such things as proper diligence and reasonableness in discharging the duties of the job. In a couple of situations, the courts have held that the fidelity bond company would have to pay funds based upon a breach of these duties, even in a couple of cases where the employee did not steal anything from the employer.