14.2 Crime and Fidelity Coverage
Key Takeaways
- ISO Commercial Crime is written on two trigger bases: a discovery form (loss discovered during the policy period) and a loss-sustained form (loss occurring during the period and discovered within an extended period, typically one year)
- The seven core insuring agreements include employee theft (fidelity), forgery or alteration, money and securities inside/outside the premises, money orders and counterfeit money, computer fraud, and funds transfer fraud
- Fidelity bonds (employee dishonesty) protect the employer against loss caused by its own employees; the exam distinguishes fidelity (covers the employer) from surety (a three-party guarantee of an obligor's performance)
- Key definitions: 'money' is currency and coins, 'securities' are negotiable and non-negotiable instruments and contracts, and 'theft' includes robbery, burglary, and other unlawful taking; employee theft excludes the dishonest employee once their dishonesty is discovered
- On the exam, recognize that crime forms cover the insured's loss of money/securities/property, exclude inventory shortages proven only by inventory computation, and that ERISA plans require a fidelity bond meeting the 10%-of-funds (min $1,000, max $500,000/$1,000,000 with employer securities) standard
The ISO Commercial Crime Program
Commercial crime insurance covers the insured's loss of money, securities, and other property from theft, fraud, forgery, and similar dishonest acts. ISO offers it as a standalone Commercial Crime Coverage Form (CR 00 20 series) and as a Crime and Fidelity coverage part inside a Commercial Package Policy. Two coverage triggers exist, and the exam loves to test which one responds:
| Trigger Form | Loss must... | Discovery rule |
|---|---|---|
| Discovery form | be discovered during the policy period | act can have occurred years earlier |
| Loss-sustained form | occur during the policy period | must be discovered during the period or within an extended discovery period (commonly 1 year) |
Quick Answer: Discovery form keys on when you find the loss; loss-sustained form keys on when the loss happened.
Definitions That Drive Coverage
- Money = currency, coins, and bank notes in current use.
- Securities = negotiable and non-negotiable instruments or contracts representing money or property (stock certificates, tokens, tickets, evidences of debt).
- Theft = the unlawful taking of property, broad enough to include robbery (taking by force/threat from a person) and burglary (forcible entry with visible marks).
A crucial exclusion: a loss proven only by an inventory computation or profit-and-loss calculation is not covered. The insured must show an actual theft, not merely a shortage on the books.
How Crime Differs From Property Theft Coverage
Standard commercial property forms cover theft of the insured's tangible property as a peril, but they do not reach money, securities, employee dishonesty, forgery, or computer/funds-transfer fraud. Those exposures live in the crime program. This is why a business that keeps significant cash, accepts checks, or wires funds needs crime coverage even after buying a full property policy.
Crime limits are also written per occurrence, and a single dishonest scheme by one employee — even spanning years and many transactions — is treated as one occurrence, capped at one limit. Candidates often assume each fraudulent act is a separate claim; it is not.
The Core Insuring Agreements
ISO Commercial Crime offers up to seven insuring agreements; an insured selects and schedules limits for each:
- Employee Theft (fidelity) — loss of money, securities, or property caused by employee dishonesty.
- Forgery or Alteration — loss from forged or altered checks, drafts, and similar instruments.
- Inside the Premises - Theft of Money and Securities — robbery/burglary/destruction inside.
- Inside the Premises - Robbery or Safe Burglary of Other Property.
- Outside the Premises — money/securities/property in the care of a messenger or armored carrier.
- Computer Fraud — fraudulent transfer of money/securities/property by computer.
- Funds Transfer Fraud — fraudulent instructions to transfer funds from the insured's account.
Many forms also add Money Orders and Counterfeit Money coverage.
Fidelity vs. Surety
The most-tested distinction in this unit:
| Fidelity bond | Surety bond | |
|---|---|---|
| Parties | Two (insurer/employer) | Three (surety, principal, obligee) |
| Protects | The employer against its own employees' dishonesty | The obligee if the principal fails to perform |
| Nature | First-party crime insurance | A guarantee of performance/obligation |
| Loss expectation | Insurer expects no loss recovery from employee | Surety expects reimbursement from the principal |
A fidelity bond (employee dishonesty) pays the employer when an employee steals; a surety bond guarantees that a contractor or other obligor will meet an obligation, and the surety can seek reimbursement from the principal. In surety, the principal is the party who must perform, the obligee is the party protected by the bond, and the surety is the company that backs the principal. Because the surety expects to be made whole by the principal, a surety bond functions more like a credit guarantee than insurance, while a fidelity bond is true first-party crime insurance.
Common fidelity arrangements include the blanket form (covering all employees up to a single limit, the modern default) versus the older schedule bond (naming specific employees or positions). The blanket form avoids the gap that arises when a thief is an employee who was simply never added to a schedule.
Worked Example: ERISA Fidelity Requirement
A retirement plan holds $3,000,000 in non-employer-securities assets. ERISA requires a fidelity bond of at least 10% of the funds handled, with a $1,000 minimum and a $500,000 maximum (the cap rises to $1,000,000 if the plan holds employer securities). 10% of $3,000,000 = $300,000, which is below the $500,000 cap, so the required bond is $300,000. Had the plan held $6,000,000, 10% would be $600,000, capped at $500,000 (no employer securities).
Common Exam Traps
- Discovery vs. loss-sustained — match the trigger to when found vs. when occurred.
- Inventory-shortage exclusion — a book shortage alone is not a covered theft.
- Employee-theft cutoff — coverage on a dishonest employee ends once their prior dishonesty is discovered by the insured.
- Fidelity = two parties; surety = three parties. Surety expects reimbursement; fidelity does not.
- ERISA cap — 10% of funds, max $500,000 (or $1,000,000 with employer securities).
An employee embezzled $40,000 over 2024. The company did not discover the theft until March 2026. The crime policy in force in 2026 is written on a DISCOVERY form; the company had a different insurer in 2024. Which policy responds?
A pension plan holds $3,000,000 in assets, none of which are employer securities. Under ERISA's fidelity bonding rule, what is the minimum required bond amount?