14.2 Crime and Fidelity Coverage

Commercial crime coverage

Crime insurance covers loss of money, securities, and other property caused by criminal acts such as theft, robbery, burglary, forgery, and computer fraud. ISO writes this through the Commercial Crime Coverage Forms:

• CR 00 20 — Discovery Form
• CR 00 21 — Loss Sustained Form

These forms package insuring agreements the insured selects, the most common being:

1. Employee Theft (employee dishonesty / fidelity)
2. Forgery or Alteration (of checks, drafts, promissory notes)
3. Inside the Premises — Theft of Money & Securities (robbery/safe burglary)
4. Inside the Premises — Robbery/Safe Burglary of Other Property
5. Outside the Premises (messenger coverage)
6. Computer Fraud and Funds Transfer Fraud
7. Money Orders and Counterfeit Money

Discovery vs. loss-sustained trigger

The coverage trigger is the single most tested crime topic.

Trap: With the discovery form, a dishonest act that happened years ago but is found this year can be covered. With the loss-sustained form, both the act and the discovery must fall within (or just after) the policy term. Exam questions describe a timeline and ask which form responds.

Worked example — discovery trigger

An employee embezzled $30,000 over three years (years 1–3). The theft is discovered in year 4.

• The employer has a Discovery Form in force in year 4. Because the loss was discovered during the current policy period, the form responds (subject to the limit and any retroactive date), even though the acts predate this policy.
• If the employer instead had a Loss Sustained Form only in year 4, the acts in years 1–3 did not occur during that policy period, so the year-4 policy would not cover those earlier acts — prior policies (if any, with loss-sustained continuity) would have to respond.

The testable distinction: discovery follows the date you find the loss; loss-sustained follows the date the loss happened.

Fidelity bonds vs. surety bonds

Both are "bonds," but they protect different parties — a classic two-party-versus-three-party exam contrast.

• Fidelity bond (a form of crime insurance): a two-party arrangement protecting the employer against loss from dishonest employees. Employee theft coverage in the crime form is fidelity coverage.
• Surety bond: a three-party agreement among the principal (who performs an obligation), the obligee (who is protected), and the surety (who guarantees performance). If the principal defaults, the surety pays the obligee and then seeks reimbursement from the principal.

Trap: A surety bond is not insurance for the principal — the principal must repay the surety. A fidelity bond is loss coverage for the named insured employer.

ERISA fidelity bonding

Federal ERISA law requires that anyone who handles funds of an employee benefit (pension/welfare) plan be covered by a fidelity bond.

• Bond amount: at least 10% of the funds handled
• Minimum bond: $1,000
• Maximum bond: $500,000 per plan — $1,000,000 if the plan holds employer securities

Also commonly tested: crime forms exclude loss caused by an employee after the insured learned of a prior dishonest act by that employee (coverage terminates for that person upon knowledge of dishonesty).

ERISA worked example: A 401(k) plan handles $2,000,000 in plan assets and holds no employer securities. The required bond is 10% x $2,000,000 = $200,000, which is above the $1,000 minimum and below the $500,000 cap — so the fiduciary must carry at least a $200,000 bond. If the plan handled $8,000,000, 10% would be $800,000, but the $500,000 maximum caps the requirement at $500,000 (or $1,000,000 if employer securities were held). Memorizing the 10% / $1,000 / $500,000 / $1,000,000 figures is essential for the national exam.

Employee Theft vs. Outside Crime

ISO crime coverage separates employee dishonesty from crimes committed by outsiders. The exam tests the standard insuring agreements:

Trap: employee theft is fidelity (dishonesty by your own people); burglary/robbery is crime by outsiders — distractors swap them.

Key Crime Definitions and Coverage Triggers

Precise definitions drive crime questions:

• Robbery — taking property by force or threat of force from a person who is aware.
• Burglary — unlawful entry/exit with visible signs of forced entry (marks of force are required).
• Theft — the broadest term: any act of stealing, including robbery and burglary.

Crime coverage can be written on a loss-sustained basis (covers losses sustained during the policy period and discovered within a year after) or a discovery basis (covers losses discovered during the policy period regardless of when they occurred). The ERISA-compliant fidelity bond is a separate requirement: plan officials handling employee-benefit funds must be bonded for at least 10% of the funds handled, with a $1,000 minimum and $500,000 maximum (or $1,000,000 if the plan holds employer securities).