14.2 Crime and Fidelity Coverage

Commercial Crime and Fidelity

Crime insurance responds to loss of money, securities, and other property caused by dishonest acts and certain perils that standard property forms exclude (theft by employees, robbery, burglary, computer fraud, forgery). ISO writes crime on the CR 00 20 (Commercial Crime - Discovery Form) and CR 00 21 (Commercial Crime - Loss Sustained Form). The distinction between these two trigger types is the single most tested crime concept.

• Discovery form (CR 00 20): covers losses discovered during the policy period, regardless of when they actually occurred (as long as before the policy began within a stated retroactive window).
• Loss sustained form (CR 00 21): covers losses that occurred during the policy period and are discovered during the period or within an extended discovery window (often one year).

A practical reason this matters: an embezzlement scheme can run undetected for years. With a Discovery form, switching insurers is seamless because the new insurer covers whatever is discovered while it is on risk. With a Loss Sustained form, gaps can open when changing carriers because each insurer only answers for losses that occurred during its own term, requiring a 'superseded suretyship' or bridge endorsement to avoid coverage gaps.

The insuring agreements

Commercial crime is built from selectable insuring agreements, each with its own limit. Key ones:

Employee Theft is the fidelity heart of the form and may be written per loss, per employee, or per position.

Key definitions and traps

• Burglary requires forcible entry with visible signs (marks of forced entry). No signs = no burglary.
• Robbery is taking property by force or threat from a person who has care/custody.
• Theft is the broadest term: any act of stealing, including the above.
• Money = currency, coins, and bank notes; Securities = negotiable/non-negotiable instruments (not money). 'Other property' is tangible property other than money and securities.

A classic trap: a janitor who is not your employee is excluded under Employee Theft - but acts of independent contractors can be added by endorsement. Also, loss caused by the named insured, partner, or owner is excluded under Employee Theft - you cannot insure your own dishonesty.

Two more tested limitations: the Employee Theft agreement terminates as to any employee as soon as the named insured learns of a prior dishonest act by that employee (a 'prior knowledge' cancellation). And inventory shortage losses provable only by a profit-and-loss computation or inventory count are excluded - you must show specific dishonest acts. These rules stop crime coverage from being used as a catch-all for unexplained shrinkage.

Worked example - employee theft limit and deductible

A bookkeeper embezzles $85,000 over two years, discovered this year. The crime policy is a Discovery form with an Employee Theft limit of $50,000 and a $2,500 deductible.

Because the loss is discovered in the policy period, the Discovery form responds. The single-loss limit caps recovery at the policy limit: $50,000. The deductible reduces it once per occurrence: $50,000 - $2,500 = $47,500 paid. The remaining $35,000 of the embezzlement is the insured's uninsured exposure - a reason to set fidelity limits to the true exposure, not a token amount.

Why Crime Coverage Is Separate

Standard property forms exclude or sharply limit employee dishonesty, theft of money and securities, forgery, and computer fraud, so a Commercial Crime policy or coverage form fills these gaps. Crime coverage protects against loss of money, securities, and other property caused by dishonest acts of employees and third parties. The fundamental distinction the exam tests is between fidelity coverage (loss caused by the insured's own employees) and the other insuring agreements that address outside criminals, because the cause of the loss determines which agreement responds.

The Crime Insuring Agreements

A Commercial Crime form offers a menu of insuring agreements the insured selects: Employee Theft (the fidelity coverage, paying for loss of money, securities, or property caused by employee dishonesty); Forgery or Alteration (loss from forged checks and similar instruments); Inside the Premises Theft of Money and Securities and Inside the Premises Robbery/Safe Burglary of Other Property; Outside the Premises (loss while a messenger transports property); Computer Fraud and Funds Transfer Fraud; and Money Orders and Counterfeit Money.

Each agreement carries its own limit and applies to a specific cause of loss, so matching the crime to the agreement is the analytical key.

Key Definitions and Traps

Crime forms define employee, theft, and occurrence in ways that create exam traps. An employee usually excludes the owners and directors acting in that capacity, so an owner who steals is not an employee theft loss. The forms can be written on a loss-sustained basis (covering losses sustained during the policy period and discovered within a discovery period after expiration) or a loss-discovered basis (covering losses discovered during the policy period regardless of when sustained). Because employee theft often spans years before discovery, the difference between sustained and discovered triggers is heavily tested.

Worked Example: Employee Theft Limit and Deductible

Suppose a bookkeeper embezzles 75,000 dollars over two years, discovered during the current policy period, and the Employee Theft agreement carries a 50,000-dollar limit with a 5,000-dollar deductible. On a loss-discovered form, the loss is covered because it was discovered during the period; the insurer pays the limit of 50,000 dollars (the loss exceeds the limit), and the deductible applies, so recovery is 50,000 dollars (the limit caps the payment before the deductible could further reduce a smaller loss). The insured absorbs the 25,000-dollar shortfall above the limit.

The exam tests applying the limit, the deductible, and the loss-discovered trigger to a multi-year embezzlement.