TN 6 (08-18)

A. CPM 18-078 Bond Coverage for Organizational Representative Payee, Guardian Angels

Date: April 19, 2018

1. Syllabus

The Social Security Act permits “qualified organizations”¹ to collect a monthly fee from payments to a Social Security beneficiary or recipient for expenses the organization incurs in providing representative payee services for the beneficiary or recipient. See 42 U.S.C. §§ 405(j)(4)(A)(i), 1383(a)(2)(D)(i); 20 C.F.R. §§ 404.2040a(a), 416.640a(a). A “qualified organization” consists of either:

a. [a]ny state or local government agency with fiduciary responsibilities or whose mission is to carry out income maintenance, social service, or health care-related activities;

or

b. [a]ny community-based nonprofit social service organization founded for religious, charitable, or social welfare purposes, which is tax exempt under section 501(c) of the Internal Revenue Code and which is bonded/insured to cover misuse and embezzlement by officers and employees, and which is licensed in each State in which it serves as representative payee (if licensing is available in the State).

A non-governmental FFS representative payee organization must be adequately bonded or insured for financial loss due to misuse and embezzlement by both officers and employees before the agency will authorize the organization to collect a fee. See 20 C.F.R. §§ 404.2040a(a)(2), (d), 416.640a(a)(2), (d); POMS GN 00506.001(C); POMS GN 00506.105(A).² The regulations instruct that the FFS representative payee organization must be “bonded/insured to cover misuse and embezzlement by officers and employees.” 20 C.F.R. §§ 404.2040a(a), 416.640a(a).

The Bond does not unequivocally cover compensated and non-compensated officers, it does not comply with SSA’s bonding requirements for non-governmental FFS representative payee organizations. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105(A)-(B).

We believe that the agency may reasonably conclude that the Bond does not sufficiently comply with SSA’s requirement that a bond or insurance policy cover financial loss incurred due to the misuse and embezzlement by officers of the non-governmental FFS representative payee organization. Further, neither the Additional Insured Rider nor SSA’s status as a loss payee in the Loss Payee Rider cures the deficiency in the Bond’s coverage. Finally, the Bond is also deficient due to an insufficient coverage amount.

2. Opinion

QUESTION PRESENTED

You asked us to review Guardian Angels Representative Payee’s (Guardian Angels) dishonesty bond (Bond) for our opinion as to whether the Bond satisfies the Social Security Administration’s (SSA’s or agency’s) bonding requirements for non-governmental fee-for-service (FFS) organizational representative payees, as set forth in the Program Operations Manual Systems (POMS) GN 00506.105. Specifically, you asked whether the Bond meets SSA’s requirement that employee theft coverage include officers.

QUICK ANSWER

Based on the information provided, we believe that the agency could reasonably conclude that the Bond does not comply with SSA’s bonding requirements for non-governmental FFS organizational representative payees. Specifically, the Bond does not cover financial loss due to misuse and embezzlement by Guardian Angels’ officers and the additional insured rider does not cure this deficiency. Further, although a loss payee rider lists SSA as a loss payee, SSA’s rights match Guardian Angels’ rights, and thus SSA could not recover payment beyond the terms of the Bond. Finally, the Bond’s coverage amount is insufficient. Therefore, we believe that there is legal support for the agency to find that Guardian Angels’ Bond does not meet SSA’s bonding requirements of 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2), and POMS GN 00506.105.

BACKGROUND

Although P~ has informed you that the Guardian Angels is limited liability company (L.L.C.) and has identified herself as the “owner,” the New Mexico Secretary of State’s website shows that Guardian Angels is actually organized as and registered with the State of New Mexico as a domestic nonprofit corporation with three officers (president, vice president, and manager) and three directors (with the same three individuals serving both as the directors and the officers). See N.M. Stat. Ann. §§ 53-8-1 – 53-8-99 (New Mexico Nonprofit Corporation Act); see also https://portal.sos. state.nm.us/BFS/online/CorporationBusinessSearch/Corporation BusinessInformation (last visited March 21, 2018). Additionally, Guardian Angels’ website identifies itself as a nonprofit corporation. See https://www.guardianangelsreppayee.org/blank-page (last visited March 22, 2018).

The information you provided shows that Guardian Angels obtained the Bond from Western Surety Company (Western Surety) effective March 12, 2013. The Bond identifies Guardian Angels as the Insured Party and states that Western Surety agrees to indemnify Guardian Angels

against any loss of money or other property which the Insured shall sustain or for which the Insured shall incur liability to any Customer or Subscriber of the Insured through any fraudulent or dishonest act or acts committed by any Employee or Employees of the Insured acting alone or in Collusion with others…

Bond, ¶1. The Bond defines “Employee” as

one or more of the natural persons (except directors or trustees of the Insured, if a corporation, who are not also officers or employees thereof in some other capacity) while in the regular service of the Insured in the ordinary course of the Insured’s business during the term of this bond, and whom the Insured compensates by salary, or wages and has the right to govern and direct in the performance of such service…

Bond, § 4. The Bond also limits the definition of a “fraudulent or dishonest act” to crimes for which an employee is tried and convicted by a court exercising proper jurisdiction. See Bond § 5.

The Bond originally indemnified Guardian Angels in the amount of $10,000.00. See Bond ¶ 1. On October 1, 2017, Guardian Angels and Western Surety executed a rider increasing the amount of indemnity to $100,000.00. See Bond Faxed February 28, 2018, p. 3.

On March 12, 2013, Guardian Angels and Western Surety executed a rider adding Guardian Angels’ Customer or Subscriber as an additional insured (Additional Insured Rider). On March 13, 2014, Guardian Angels and Western Surety executed a rider adding SSA as a loss payee under the Bond (Loss Payee Rider).

The agency is in the process of re-certifying Guardian Angels’ continuing eligibility as a FFS representative payee organization and has sought our assistance in reviewing Guardian Angels’ Bond. See POMS GN 00506.420.

ANALYSIS

a. Federal Law: FFS Organizational Representative Payees

The Social Security Act permits “qualified organizations” to collect a monthly fee from payments to a Social Security beneficiary or recipient for expenses the organization incurs in providing representative payee services for the beneficiary or recipient. See 42 U.S.C. §§ 405(j)(4)(A)(i), 1383(a)(2)(D)(i); 20 C.F.R. §§ 404.2040a(a), 416.640a(a). A “qualified organization” consists of either:

(1) [a]ny state or local government agency with fiduciary responsibilities or whose mission is to carry out income maintenance, social service, or health care-related activities;

or

(2) [a]ny community-based nonprofit social service organization founded for religious, charitable, or social welfare purposes, which is tax exempt under section 501(c) of the Internal Revenue Code and which is bonded/insured to cover misuse and embezzlement by officers and employees, and which is licensed in each State in which it serves as representative payee (if licensing is available in the State).

20 C.F.R. §§ 404.2040a(a), 416.640a(a); POMS GN 00506.001(C). SSA authorization is required before an organization can begin collecting a fee from a beneficiary or recipient’s monthly payments. See 20 C.F.R. §§ 404.2040a(a), (d), 416.640a(a), (d); POMS GN 00506.001(B).

Here, you have indicated that Guardian Angels is a non-governmental FFS representative payee organization. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2). We do not otherwise address whether Guardian Angels is a “qualified organization” meeting all of the regulatory requirements. See 20 C.F.R. §§ 404.2040a(a)-(d), 416.640a(a)-(d); POMS GN 00506.001(C), GN 00506.100(B)(3). Further, we do not address its section 501(c)(3) tax-exempt status, or whether it is licensed in the state in which it serves. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.001(C), GN 00506.105(B), GN 00506.010(B)(2), GN 00506.100(B)(2), GN 00506.105(C)(5), (D). Pursuant to your legal opinion request, rather, our specific focus is upon whether the Bond meets SSA’s requirement for bonding coverage for financial loss due to misuse and embezzlement by both officers and employees, as we discuss in the next section. 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105(A)-(C) (explaining that bonding constitutes a bond or insurance contract). However, we also briefly address whether the amount of coverage under the bond is sufficient and we note an issue with the named insured. 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105B.

A non-governmental FFS representative payee organization must be adequately bonded or insured for financial loss due to misuse and embezzlement by both officers and employees before the agency will authorize the organization to collect a fee. See 20 C.F.R. §§ 404.2040a(a)(2), (d), 416.640a(a)(2), (d); POMS GN 00506.001(C); POMS GN 00506.105(A). The regulations instruct that the FFS representative payee organization must be “bonded/insured to cover misuse and embezzlement by officers and employees.” 20 C.F.R. §§ 404.2040a(a), 416.640a(a). Although the regulations require coverage for “misuse and embezzlement,” SSA law and policy do not specify what insurance or bonding product the FFS representative payee should use or the exact wording of the insurance or bonding contract. 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105(A)-(C). SSA’s POMS instruct that the bond or insurance contract must protect the FFS representative payee organization “from financial loss caused by the action or inaction of the organization, or officer(s), or an employee of the organization.” POMS GN 00506.105(A). POMS GN 00506.105(B) and (C) discuss in general terms various types of bonds and insurance policies that protect from financial loss due to such things as theft, dishonest acts, or fraudulent acts by employees and officers. The POMS states that the bond or insurance contract should provide coverage for financial loss from an organization’s employee’s or officer’s theft. See POMS GN 00506.105(B). Therefore, the bond or insurance contract must provide coverage for financial loss caused by the misuse of benefits and embezzlement of both the FFS representative payee organization’s employees and officers, and the POMS indicates that coverage for loss due to theft, dishonest acts, and fraudulent acts would suffice. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.001(B), (C)(3), (4). Guardian Angels’ Bond is labeled as a “dishonesty bond.” The POMS explains that an employee dishonesty bond is usually a blanket bond covering all company employees except officers. POMS GN 00506.105(C)(3), (4)(b). A separate rider or clause is often required to provide coverage for officers. Id. Further, when such additional coverage for officers is provided, a “conviction clause” is often required, which means that in order for the bond or insurance company to be required to pay, the officer or employee must be convicted of a crime. POMS GN 00506.105(C)(3). We turn next to the specific provisions of Guardian Angels’ Bond, the Additional Insured Rider, and Loss Payee Rider to determine if it is sufficient under SSA’s requirements.

b. Review of Guardian Angels’ Bond, Additional Insured Rider, and Loss Payee Rider

1. Named Insured

Although not the focus of this opinion, we noticed as an initial matter that the Named Insured on the Bond appears to be incorrect. The Bond refers to the Named Insured as Guardian Angels Representative Payee, L.L.C. However, a review of the FFS’s corporate registration with the New Mexico Secretary of State shows its official name is Guardian Angels Representative Payee, and it is registered as a domestic nonprofit corporation, not an L.L.C. Additionally, Guardian Angels’ website identifies itself as a nonprofit corporation. While it is unlikely that Western Surety would argue Guardian Angels was not the named insured, the parties should correct this error.

2. Coverage Amount

Similarly, we noticed another matter concerning the Bond’s coverage amount. The amount of bonding or insurance coverage the representative payee organization purchases must be sufficient to compensate the beneficiary for any loss of Title II, Title VIII, or Title XVI benefits and any conserved funds on hand. 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2) (the minimum amount of bonding or insurance coverage must equal the average monthly amount of social security payments received by the organization plus the amount of the beneficiaries’ conserved funds (i.e., beneficiaries’ saved social security benefits) plus interest on hand.); POMS GN 00506.105B. You informed us that per P~ (registered agent, director, and president of Guardian Angels per the corporate registration filed with the New Mexico Secretary of State), as of March 2018, the average monthly benefit amount is $331,396.00 and the amount of conserved funds is $640,677.00. Therefore, the Bond’s coverage for $100,000.00 is insufficient.

3. Coverage for Financial Loss Due to Misuse and Embezzlement by All Employees and Officers

a. The Bond

We next considered whether the Bond satisfies SSA’s requirement that a non-governmental FFS representative payee organization be bonded to cover financial loss due to misuse and embezzlement. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105(A)-(C). Here, the introductory paragraph of the Bond provides coverage for “any loss of money or other property which the Insured shall sustain or for which the Insured shall incur liability to any Customer or Subscribers of the Insured through any fraudulent or dishonest act or acts committed by any Employee or Employees of the Insured.” See Bond, ¶1. This language appears to sufficiently cover misuse and embezzlement and therefore satisfies SSA’s requirement that the bond or insurance policy cover financial loss attributable to such acts. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105(C)(4)(d). We note that the Bond limits recovery for fraudulent or dishonest acts to crimes for which an employee is tried and convicted (a so-called conviction clause). See Bond § 5 (defining a fraudulent or dishonest act to mean “an act which is punishable under the criminal code within which act occurred, for which said employee is tried and convicted by a court of proper jurisdiction”); POMS GN 00506.105(C)(3). SSA’s bonding and insurance requirements do not prohibit a conviction clause. Accordingly, the presence of that clause does not make the Bond insufficient. However, we note the concern that such clause leaves open the possibility for Western Surety to deny payment where a loss occurs, but an employee is not charged with and convicted of a crime for the dishonest or fraudulent acts. See POMS GN 00506.105(C)(3).

More importantly, however, the Bond, providing coverage for loss due to acts of the Insured’s “Employees” is deficient because it does not provide sufficient coverage against financial losses caused by Guardian Angels’ compensated and non-compensated officers. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2) (the FFS representative payee organization must be “bonded/insured to cover misuse and embezzlement by officers and employees”); POMS GN 00506.105(A)-(B) (explaining that a bond or insurance contract must cover the non-governmental FFS representative payee organization’s employees and officers). Rather, it states

that coverage is provided for financial losses incurred through any fraudulent or dishonest acts committed by “any Employee or Employees of the Insured.” Bond, ¶1. The Bond defines an “Employee” as “one or more natural persons (except directors or trustees of the Insured, if a corporation, who are not also officers or employees thereof in some other capacity) while in the regular service of the Insured in the ordinary course of the Insured’s business during the terms of this bond, and whom the Insured compensates by salary, or wages and has the right to govern and direct in the performance of such service…” Bond § 4. The Bond’s limitation of an “Employee” to an individual whom Guardian Angels “has the right to govern and direct in the performance of such service” and “compensates,” arguably excludes Guardian Angels’ officers (both compensated and non-compensated). Thus, it is not clear whether Western Surety contemplated coverage for compensated and non-compensated officers under this definition of “Employee.” Per the corporate registration filed with the New Mexico Secretary of State, Guardian Angels has the following officers: P~, president; A~, vice president; and R~, manager. See N.M. Stat. Ann. §§ 53-8-2, 53-8-11, 53-8-17, 53-8-23 (a nonprofit corporation shall have officers and a board of directors and may have members).

Therefore, because the Bond does not unequivocally cover Guardian Angels’ compensated and non-compensated officers, it does not comply with SSA’s bonding requirements for non-governmental FFS representative payee organizations. See 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105(A)-(B).

b. Customer/Subscriber Additional Insured Rider

We also analyzed the Customer/Subscriber Additional Insured Rider. This Additional Insured Rider, effective March 12, 2013, provided that:

In the event that the Insured’s Customer or Subscriber shall sustain

a direct loss by reason of the fraudulent or dishonest act or acts …

committed by the Insured . . . then and only then, the Insured shall be

considered an Employee and the Customer or Subscriber an additional

insured, subject to all terms and conditions thereof.

This Additional Rider expands the Bond’s definition of “Employee” to include “the Insured” (Guardian Angels, a nonprofit corporation) where there is a direct loss due to the fraudulent or dishonest acts “committed by the Insured,” but it remains unclear if the Rider’s reference to acts committed by “the Insured” means acts committed by the Insured’s officers and if inclusion of “the Insured” as an “Employee” under the terms of the Bond also means inclusion of the Insured’s officers within this definition of “Employee.” As noted, the Insured is Guardian Angels, which is a nonprofit corporation, and, a separate legal entity from its officers. See Scott v. AZL Resources, Inc., 753 P.2d 897, 900 (N.M. 1988) (“A basic proposition of corporate law is that a corporation will ordinarily be treated as a legal entity separate from its shareholders . . . Only under special circumstances will the courts disregard the corporate to pierce the corporate veil holding individual shareholders or a parent corporation liable.”); see also Holsclaw v. Kenilworth Ins. Co., 644 S.W.2d 353, 355 (Ky.App. 1982) (a corporation is normally considered a distinct entity from its shareholders, officers, and directors). We also recognize that a corporation can act only through its officers and employees. See Bourgeous v. Horizon Healthcare Corp., 872 P.2d 852, 855 (N.M. 1994) (“A corporation can act only through its officers and employees, and any act or omission of an officer or an employee of a corporation, within the scope or course of his or her employment, is an act or omission of the corporation.”). Although officers act as agents for the corporation, we believe it is unclear whether the Rider’s reference to “acts . . . committed by the Insured,” a separate legal entity, includes acts committed by the Insured’s officers. Similarly, the Additional Insured Rider expands the Bond’s definition of “Employee” to include “the Insured,” but it is unclear whether this includes the Insured’s officers. Therefore, we believe the agency may reasonably find that the broad language in this Additional Insured Rider as to “the Insured” does not cure the deficiency discussed above as to the Bond, namely that the Bond does not clearly cover fraudulent or dishonest acts by officers of this nonprofit corporation. This Additional Insured Rider essentially serves to add coverage under the Bond to include Guardian Angels’ “Customers” or “Subscribers” in certain circumstances. Such expansion does not cure the deficiency in that it does not clearly provide coverage for losses caused by Guardian’s officers, who are not considered employees.

c. Loss Payee Rider

We also analyzed the Loss Payee Rider, adding SSA as “a loss payee” under the Bond effective March 13, 2014, in determining SSA’s rights to recover financial losses with respect to the Bond. The Loss Payee Rider added SSA as a loss payee under the Bond, but also states that “[a]ll other terms and conditions of the bond remain unchanged.” While the Loss Payee Rider sufficiently protects SSA’s right to recover payment if Guardian Angels is entitled to payment under the Bond, SSA’s rights under the Bond are no greater than Guardian Angels’ rights, and the Loss Payee Rider does not create an independent contract between SSA and Western Surety. See Young v. Seven Bar Flying Serv., Inc., 685 P.2d 953, 956-57 (N.M. 1984) (“[U]nder a loss-payable clause no contract of insurance is made between the insurer and the loss-payee and the right of recovery of the loss-payee cannot rise above that of the named insured, so that a breach of the conditions of the policy by the insured which precludes his recovery likewise defeats the recovery of his appointee, the loss-payee.” (quoting Fulwiler v. Traders & General Ins. Co., 285 P.2d 140, 143 (N.M. 1955)); see also Adam D. Cornett, Andrew S. Kent, Who Can Recover Under A Fidelity Policy?, 20 Fidelity L.J. 139, 152–53 (2014) (noting that a loss payee to a fidelity policy has an assignment type interest and if the underlying insured is not entitled to payment under the policy, the loss payee is likewise not entitled to payment). Accordingly, because as discussed above, the Bond does not sufficiently cover financial losses caused by Guardian Angels’ officers, SSA would likewise be unable to recover payment for financial losses from officers.

CONCLUSION

We believe that the agency may reasonably conclude that the Bond does not sufficiently comply with SSA’s requirement that a bond or insurance policy cover financial loss incurred due to the misuse and embezzlement by officers of the non-governmental FFS representative payee organization. Further, neither the Additional Insured Rider nor SSA’s status as a loss payee in the Loss Payee Rider cures the deficiency in the Bond’s coverage. Finally, the Bond is also deficient due to an insufficient coverage amount.

Footnotes:

[1]

^. In addition to being a “qualified organization,” the representative payee must also regularly provide representative payee services concurrently to at least five beneficiaries and, with certain exceptions, demonstrate that it is not a creditor of the beneficiary. 20 C.F.R. §§ 404.2040a(b), 416.640a(b).

[2]

^. If a representative payee misuses a beneficiary’s benefits, the representative payee is liable for the amount misused. See 42 U.S.C. §§ 405(j)(7)(A), 1383(a)(2)(H); 20 C.F.R. §§ 404.2041(a), 416.641(a). The Act states that “misuse of benefits by a representative payee occurs in any case in which the representative payee receives payment under this subchapter for the use and benefit of another person and converts such payment, or any part thereof, to a use other than for the use and benefit of such other person.” 42 U.S.C. §§ 405(j)(9), 1383(a)(2)(A)(iv). SSA will make “every reasonable effort to obtain restitution of misused benefits” from the representative payee so that SSA can repay those benefits to the beneficiary. 20 C.F.R. §§ 404.2041(a), 416.641(a). In certain cases, SSA will repay the benefits to ensure the beneficiary receives full restitution. 20 C.F.R. §§ 404.2041(b), (c), 416.641(b), (c). To help ensure SSA’s own reimbursement, SSA requires each non-governmental FFS representative payee organization to obtain a bond or insurance policy for coverage for misuse of benefits. See 42 U.S.C. §§ 405(j)(10), 1381(a)(2)(I); 20 C.F.R. §§ 404.2040a(a)(2), 416.640a(a)(2); POMS GN 00506.105; see also POMS GN 00506.001 (effective April 1, 2005, Section 102 of the Social Security Protection Act of 2004 requires non-governmental FFS representative payees to be bonded and licensed in each state in which they serve as representative payees). It is this bonding requirement that is at issue in this request.