14.2 Crime and Fidelity Coverage

Crime coverage purpose

Commercial crime insurance fills a gap left by property policies, which exclude or sharply limit employee dishonesty, theft of money and securities, and fraud. ISO writes crime on the Commercial Crime Coverage Form, available in two trigger versions: the Discovery Form (CR 00 22) and the Loss Sustained Form (CR 00 23). The insuring agreements are identical; only the trigger differs.

Discovery vs loss-sustained trigger

• Discovery form (CR 00 22): covers loss discovered during the policy period (or the extended discovery period), no matter when the act occurred.
• Loss-sustained form (CR 00 23): covers loss sustained during the policy period (or during the period of any prior cancelled policy, subject to the superseded-coverage condition).

Exam trap: a theft that happened years ago but is found this year is covered by the discovery form, not the loss-sustained form.

Key insuring agreements

The form offers several insuring agreements; an insured selects and schedules a separate limit for each one it wants:

Employee theft / fidelity

The Employee Theft agreement is the classic fidelity bond function: it pays for loss of money, securities, and other property resulting directly from dishonest acts of an employee committed with the manifest intent to cause loss and to obtain financial benefit. The policy excludes dishonesty of the named insured, partners, or members - an owner cannot steal from himself and collect. Coverage can be written on a per-loss basis with limits applying per occurrence regardless of the number of employees involved.

Valuation and key conditions

Crime forms generally pay actual cash value of property (or the cost to repair/replace, whichever is less), and money at face value. Securities are valued at the close of business on the day the loss is discovered. Important conditions include the territory (usually US, its territories, and Canada), the requirement to keep records, and the ownership condition (covered property must be owned, held, or for which the insured is legally liable).

Computer fraud vs funds transfer fraud

These two electronic agreements are frequently confused:

• Computer Fraud: loss resulting directly from the use of any computer to fraudulently cause a transfer of money, securities, or property from inside the premises to a person or place outside.
• Funds Transfer Fraud: loss resulting from a fraudulent instruction directing a financial institution to transfer funds from the insured's transfer account, without the insured's knowledge or consent.

The key distinction: computer fraud involves manipulating a computer system; funds transfer fraud involves a fraudulent instruction to a bank.

Worked example - employee theft limit

A bookkeeper embezzles $85,000 over 14 months by writing checks to a fake vendor. The crime policy carries an Employee Theft limit of $50,000 per occurrence with a $1,000 deductible. Because the per-occurrence limit applies regardless of the number of acts or employees, the insurer pays $50,000 minus the $1,000 deductible = $49,000. The remaining $35,000 of embezzlement is an uninsured loss - illustrating why limits should reflect realistic exposure.

Robbery, burglary, and theft definitions

The exam tests precise crime definitions. Theft is the broadest term - any act of stealing. Robbery requires taking property from a person by force, threat, or an obvious act witnessed by that person. Burglary requires unlawful entry into or exit from premises with visible signs of forced entry (marks of forcible entry). Safe burglary specifically requires forcible entry into a locked safe or vault. Note that simple mysterious disappearance is theft, not robbery or burglary - so coverage depends on which insuring agreement is purchased.

Bonds versus crime policies

A traditional fidelity bond guarantees the honesty of employees, while a surety bond guarantees performance of an obligation by a principal to an obligee (a three-party relationship). Modern ISO commercial crime coverage absorbs the fidelity function into the Employee Theft insuring agreement, written as insurance rather than a bond. Producers should know that crime insurance is first-party theft protection, whereas a surety bond is a guarantee that typically allows the surety to seek reimbursement from the principal after paying a loss.

The Major Crime Insuring Agreements at a Glance

ISO commercial crime (CR 00 20/21) packages several insuring agreements the exam expects candidates to distinguish. Employee Theft (fidelity) covers loss of money, securities, and other property caused by an employee's dishonest acts. Forgery or Alteration covers loss from forged or altered checks and similar instruments drawn on the insured. Inside the Premises — Theft of Money and Securities covers robbery/safe burglary on premises, while Inside the Premises — Robbery or Safe Burglary of Other Property covers non-money property. Outside the Premises covers money and property in a messenger's care off-site.

Two electronic agreements are routinely confused: Computer Fraud covers loss from a third party using a computer to fraudulently transfer the insured's property to another place, while Funds Transfer Fraud covers a fraudulent instruction to a financial institution to transfer the insured's funds. Money Orders and Counterfeit Money rounds out the list. Distinguishing employee theft (an insider) from computer/funds-transfer fraud (an outsider) and matching each loss to the correct agreement is the recurring exam task.