11.6 Commercial Crime Insurance and Surety Bonds

1. Commercial Crime Insurance

Commercial property and general liability forms strictly exclude or severely restrict coverage for employee dishonesty and financial fraud. Businesses protect liquid assets using Commercial Crime Insurance under ISO forms.

Eight Core Insuring Agreements

1. Employee Theft: Covers loss of money, securities, and other property resulting directly from theft committed by an identified or identifiable employee.
2. Forgery or Alteration: Covers loss resulting directly from forgery or alteration of outgoing negotiable instruments (checks, drafts, promissory notes).
3. Inside the Premises - Theft of Money and Securities: Covers loss of money and securities from inside the premises or banking premises resulting from theft, disappearance, or destruction.
4. Inside the Premises - Robbery or Safe Burglary of Other Property: Covers robbery of a custodian or safe burglary involving property other than money and securities.
5. Outside the Premises: Covers loss of money, securities, and other property outside the premises while in the custody of a messenger or armored vehicle.
6. Computer Fraud: Covers loss of or damage to money, securities, and other property resulting from the use of any computer to fraudulently transfer assets.
7. Funds Transfer Fraud: Covers loss resulting from fraudulent instructions directing a financial institution to debit the insured's account.
8. Money Orders and Counterfeit Money: Covers acceptance in good faith of counterfeit currency or fraudulent money orders.

Crime Coverage Triggers: Loss Sustained vs. Discovery Form

• Loss Sustained Form: Covers losses that occurred during the policy period and are discovered during the policy period or within one (1) year after the policy expires (the one-year discovery period).
• Discovery Form: Covers losses that are discovered during the policy period or within 60 days after expiration, regardless of when the criminal act occurred (subject to an established retroactive date). This form is crucial for newly acquired businesses uncovering historical embezzlement.

2. Surety Bonds vs. Insurance Contracts

Adjusters must never confuse a surety bond with an insurance policy. While insurance companies often underwrite bonds through surety departments, suretyship is an extension of credit and financial guarantee, not risk transfer.

The Three Parties to a Surety Bond

1. The Principal (Obligor): The primary debtor or contractor who promises to perform the obligation or fulfill the contractual duty.
2. The Obligee: The party protected by the bond (such as a project owner or municipality) to whom the obligation is owed.
3. The Surety (Guarantor): The financial institution or insurer that guarantees that the principal will perform. If the principal defaults, the surety steps in to satisfy the obligation up to the penal sum of the bond.

Exam Trap: The Absolute Right of Indemnification

In an insurance contract, when an insurer pays a claim, it cannot sue its own insured to get its money back. In a surety bond, the principal remains legally responsible for their own default. Prior to issuing a bond, the surety requires the principal (and often company owners personally) to execute a General Indemnity Agreement (GIA). If the surety pays the obligee, it has the absolute legal right to seize the principal's assets and demand 100% financial reimbursement for all bond payouts and legal expenses.

Major Bond Classifications

• Contract Bonds (Construction):
  • Bid Bond: Guarantees that the bidding contractor, if awarded the contract, will formally enter into the agreement and furnish required performance and payment bonds.
  • Performance Bond: Guarantees that the contractor will complete the project in strict accordance with the contractual plans, specifications, and timeline.
  • Payment Bond: Guarantees that the contractor will pay all subcontractors, laborers, and material suppliers, protecting the property owner against mechanics' liens.
  • Maintenance Bond: Guarantees against defective workmanship or faulty materials for a specified period (typically 1 to 2 years) following project completion.
• Judicial Bonds:
  • Fiduciary Bonds: Guarantees that individuals appointed by a court to manage property (executors, administrators of estates, guardians of minors, bankruptcy trustees) will faithfully perform their duties.
  • Court / Litigation Bonds: Bail bonds (appearance in court), attachment bonds, and supersedeas (appeal) bonds which guarantee payment of a lower-court judgment if an appeal fails.
• License and Permit Bonds: Mandated by state or municipal laws to guarantee that licensed professionals (e.g., electrical contractors, auto dealers, liquor establishments) comply with statutory codes, tax filings, and local ordinances.