14.2 Crime and Fidelity Coverage

Why Crime Insurance Exists

Standard property forms exclude dishonest acts, theft of money and securities, and employee theft. The ISO Commercial Crime program (forms in the CR series) fills that gap. It is built from a set of optional insuring agreements the insured selects, each addressing a distinct peril.

Fidelity refers specifically to coverage for loss caused by the insured's own employees — historically sold as a fidelity bond. Third-party crime (outsiders) is covered under separate agreements.

The Insuring Agreements

The modern crime form lets the insured buy any combination of:

• Employee Theft (Fidelity) — loss of money, securities, or property caused by employee dishonesty.
• Forgery or Alteration — forged checks, drafts, or promissory notes.
• Inside the Premises — Theft of Money and Securities (includes burglary and robbery of a custodian).
• Inside the Premises — Robbery or Safe Burglary of Other Property.
• Outside the Premises — loss while a messenger transports property.
• Computer and Funds Transfer Fraud.
• Money Orders and Counterfeit Money.

Critical Definitions (Exam Favorites)

Exam trap: if money is simply missing with no signs of forced entry, it is theft but not burglary — a burglary-only policy would not respond.

Loss-Sustained vs. Discovery Trigger

The program offers two coverage triggers:

• Loss-Sustained Form — pays for loss that occurs during the policy period (plus a limited extended-discovery period after expiration).
• Discovery Form — pays for loss discovered during the policy period, even if the dishonest act happened years earlier (subject to the retroactive date).

Because employee theft is often hidden for a long time, the discovery form is broadly favored for fidelity exposure.

Worked Example — Employee Theft Limit

A retailer carries $50,000 Employee Theft coverage with a $1,000 deductible on a discovery form. A bookkeeper embezzled $70,000 over three years, discovered this policy period.

• Covered loss = lesser of actual loss and the limit = $50,000.
• Less the $1,000 deductible = $49,000 paid.
• The $20,000 above the limit is uninsured. Because the form is discovery-triggered, the full multi-year scheme is eligible even though much of it occurred in prior periods.

Financial Institutions

Banks, credit unions, and similar institutions do not use the commercial crime forms. They buy a Financial Institution Bond (historically the Bankers Blanket Bond), which blends fidelity, on-premises and in-transit theft, forgery, and securities coverage tailored to banking operations. Knowing that distinction is a frequent exam point.

Who is an employee, and the position-vs-blanket choice

Employee theft coverage hinges on the definition of employee, which generally includes current employees, certain leased and temporary workers, and (by endorsement) volunteers or directors performing acts within their duties - but excludes independent agents and the named insured's own owners acting as owners. Coverage can be written on a blanket basis (one limit applying to a loss caused by any covered employee) or a named-position / named-schedule basis (coverage tied to specific positions or individuals).

Blanket is broader and more common because the insured need not identify the dishonest employee in advance; named forms are used where only certain high-trust positions warrant coverage.

Loss valuation and the prior-insurance trap

Crime losses of money are valued at face value; securities at value on the day of discovery; other property at ACV or replacement cost as scheduled. A recurring exam trap involves a multi-year embezzlement that spans a prior policy: the modern discovery form, with its prior-insurance/loss-sustained-during-prior-insurance provision, can bridge acts that began under an earlier policy so long as coverage was continuous - but it will not stack limits across periods; the single applicable limit governs.

This is why fidelity is almost always written on a discovery trigger, and why producers stress continuous coverage to avoid a gap that lets a long-running scheme escape both the old and new policies.

Exam Tip: Burglary needs forcible, visible entry; robbery needs a person put in fear; theft is the broad catch-all. Employee theft (fidelity) covers insiders; discovery triggers beat loss-sustained for hidden schemes; banks use a Financial Institution Bond.

Exclusions and Conditions

Crime forms carry important exclusions. Loss from acts of the owners, partners, or named insured themselves is excluded (the policy protects the entity, not the principal who commits the act). Inventory shortage proven only by a count or profit-and-loss computation is excluded — the insured must show specific dishonest acts. Indirect loss, such as lost income while a scheme is investigated, is also excluded.

The territory is typically the United States and Canada, and most agreements require the insured to keep records and report loss promptly.

Computer Fraud and Funds Transfer

As theft moved online, two agreements grew central:

• Computer Fraud covers loss of money, securities, or property resulting directly from the use of a computer to fraudulently transfer property to an outside party.
• Funds Transfer Fraud covers fraudulent instructions to a financial institution to pay or transfer the insured's funds.

Exam trap: social-engineering losses (an employee tricked into voluntarily wiring funds) often fall outside basic computer-fraud agreements and require a specific social engineering endorsement. The distinction between unauthorized transfer and a deceived-but-authorized transfer is heavily tested.