3.7 Bonding, Fidelity & Commercial Crime Coverage
Key Takeaways
A fidelity bond or employee theft coverage protects an employer against dishonest acts of its own employees; a surety bond guarantees that a principal will perform an obligation to an obligee.
The ISO crime form's insuring agreements include employee theft, forgery or alteration, inside-the-premises theft of money and securities, inside-the-premises robbery or safe burglary of other property, outside-the-premises loss, computer and funds transfer fraud, and money orders and counterfeit money.
A custodian protects property inside the premises, while a messenger has care of property outside the premises; the distinction decides whether the inside or outside insuring agreement applies.
A discovery form covers loss discovered during the policy period or within 60 days after it ends; a loss-sustained form covers loss sustained during the policy period and discovered within one year after it ends.
Crime forms exclude indirect loss, loss proven only by inventory computation, and acts of the named insured or its partners, and employee theft coverage ends for an employee as soon as any authorized person learns of that employee's dishonesty.
3.7 Bonding, Fidelity & Commercial Crime Coverage
Outline item I.H lists bonding and crime: fidelity, and crime losses from theft, disappearance and destruction, robbery and safe burglary, premises burglary, custodians and messengers. Crime claims turn on precise definitions and on when the loss was discovered, not on when the money disappeared.
Bonds: Three Parties, Not Two
A bond is a three-party agreement. A surety (usually an insurer) guarantees to an obligee that a principal will perform or will be honest.
| Bond type | Principal | Obligee | Purpose |
|---|---|---|---|
| Surety bond (contract, license, court, public official) | Contractor, licensee, fiduciary, official | Project owner, state, court, public | Guarantees performance of an obligation; the surety can recover from the principal (indemnity agreement) |
| Fidelity bond | Employee | Employer | Guarantees the employee's honesty; pays the employer for theft by the employee |
Surety underwriting assumes no loss will occur. If the surety pays the obligee, it expects reimbursement from the principal. Fidelity coverage behaves more like insurance: it expects some employee theft losses and pays the employer.
Forms of Fidelity Coverage
- Individual bond — names one employee.
- Name schedule bond — lists specific employees, each with an amount.
- Position schedule bond — lists positions (such as "cashier"), covering whoever holds them.
- Blanket bond — covers all employees without naming them. Modern commercial crime forms provide blanket employee theft coverage.
- Financial institution bonds — specialized forms for banks, credit unions and brokerage firms.
The ISO Commercial Crime Form
ISO commercial crime coverage is written on a discovery form or a loss sustained form, as a policy or a coverage part in a CPP. It provides these insuring agreements, each purchased with its own limit:
- Employee Theft — loss of money, securities and other property from theft committed by an employee, acting alone or in collusion.
- Forgery or Alteration — loss from forgery or alteration of checks, drafts, promissory notes and similar instruments drawn on the insured's accounts.
- Inside the Premises — Theft of Money and Securities — theft, disappearance or destruction of money and securities inside the premises or a banking premises.
- Inside the Premises — Robbery or Safe Burglary of Other Property — other property (not money or securities) taken by robbery of a custodian or by safe burglary inside the premises.
- Outside the Premises — theft, disappearance or destruction of money and securities, and robbery of other property, while outside the premises in the care of a messenger or an armored car company.
- Computer and Funds Transfer Fraud — theft by fraudulent computer entries, or fraudulent instructions to a bank to transfer funds.
- Money Orders and Counterfeit Money — good-faith acceptance of money orders that are not paid and counterfeit currency received in the regular course of business.
Money means currency, coins and bank notes in current use, plus travelers checks and money orders held for sale. Securities are negotiable and non-negotiable instruments or contracts representing money or property, including tokens, tickets, revenue and other stamps in current use, and evidences of debt issued with credit or charge cards. Other property is any tangible property other than money and securities that has intrinsic value.
Definitions That Decide Crime Claims
| Term | Meaning in the crime form |
|---|---|
| Theft | The unlawful taking of property to the deprivation of the insured; the broadest term, which includes robbery and burglary |
| Robbery | Unlawful taking of property from the care and custody of a person by one who has caused or threatened bodily harm to that person, or committed an obviously unlawful act witnessed by that person |
| Safe burglary | Unlawful taking of property from within a locked safe or vault by a person unlawfully entering it, shown by marks of forcible entry on its exterior, or removal of the entire safe from the premises |
| Premises burglary | Taking property from inside the premises by a person unlawfully entering or exiting, shown by visible marks of forcible entry or exit (a term from older ISO burglary forms and optional coverages) |
| Custodian | The named insured, a partner or member, or an employee who has care and custody of property inside the premises, excluding a watchperson or janitor |
| Messenger | The named insured or a relative, a partner or member, or an employee who has care and custody of property outside the premises |
| Watchperson | A person retained specifically to look after property inside the premises who has no other duties |
Applying Them
- A clerk at a Kona surf shop hands over cash after a man shows a gun. That is robbery from a custodian, so the money and securities agreement responds.
- Thieves pry open a back door overnight and take an unlocked display of watches. That is premises burglary of other property. It is not covered by agreement 4, which covers other property only by robbery or safe burglary, unless a burglary-of-other-property option was purchased.
- An employee carrying the day's deposit to the bank is mugged two blocks away. The employee is a messenger, so the outside the premises agreement applies.
Discovery Versus Loss Sustained
| Feature | Discovery form | Loss sustained form |
|---|---|---|
| Trigger | Loss discovered during the policy period | Loss sustained (occurring) during the policy period |
| When the theft happened | May be before the policy period, subject to any retroactive date | Must be during the policy period |
| Extended discovery window | Loss discovered within 60 days after the policy ends | Loss discovered within one year after the policy ends |
| Prior insurance | Generally not needed for prior thefts | Prior-insurance provisions may pick up losses from a prior policy that would otherwise fall in a gap |
Discovery means the time when the insured first becomes aware of facts that would cause a reasonable person to assume a covered loss has occurred, even if the exact amount or details are unknown.
Example: A bookkeeper embezzles $40,000 a year for three years, and the shortage is discovered in the fourth year. A discovery form in force in year four can pay the entire $120,000, up to its limit. A loss sustained form pays the portion sustained in its policy period and discovered within its one-year extended window. The non-cumulation condition prevents stacking limits from several policy years for the same loss.
Exclusions and Conditions Adjusters Apply
- Acts committed by the named insured, partners or members are excluded; owners cannot insure against their own dishonesty.
- Employee theft coverage is cancelled as to any employee immediately when the insured (or a partner, member, manager or officer not in collusion) learns of a theft or other dishonest act by that employee, whether committed before or during employment.
- Indirect loss is excluded: lost income, interest, or the cost of proving the loss beyond what the form allows.
- Inventory shortages are excluded when the only proof of loss is an inventory computation or a profit-and-loss comparison. The insured may use inventory records to support the amount once the theft itself is proven by other evidence.
- Legal fees for defending the insured are excluded.
- The insured must notify the police if it believes a law was broken, cooperate, and submit a detailed sworn proof of loss within 120 days after discovery.
A cashier at a Waikīkī shop is threatened with a knife and hands over the register cash. Under the ISO crime form, which term describes this loss and which insuring agreement applies?
Robbery of a custodian, under the inside-the-premises money and securities agreement
Safe burglary, under the forgery or alteration agreement
Premises burglary of a custodian, under the employee theft agreement
Robbery of a messenger, under the outside-the-premises agreement for money and securities
An employer's crime coverage is written on a discovery form. In the current policy year, the employer discovers that an employee has stolen money over the previous three years. How does a discovery form generally respond?
It covers the loss only if each prior insurer agrees to share it equally
It covers the loss because it was discovered during the policy period, up to the limit
It excludes the loss because thefts committed by employees are never covered under a crime form
It covers only the thefts that occurred during the current policy year, and earlier thefts are excluded
A distributor's year-end inventory count shows $25,000 of missing stock. There is no other evidence of theft. How does the commercial crime form treat this claim?
It pays half, because inventory losses are shared under the non-cumulation condition
It pays in full, because inventory records are the best evidence of theft
It excludes the loss, because a loss proven only by inventory computation is excluded
It treats the shortage as robbery of a custodian
Sections you finish are checked off in the contents.