Crime and Fidelity Coverage
Key Takeaways
- ISO writes commercial crime on two forms: the Loss Sustained form (covers losses discovered during the policy period and a 1-year extension after termination) and the Discovery form (covers losses discovered during the period regardless of when they occurred)
- Employee Theft (Insuring Agreement 1) covers dishonest acts by employees; the trigger is theft by a covered employee, and coverage applies to the employer's money, securities, and other property
- Fidelity bonds protect the employer from EMPLOYEE dishonesty; surety bonds guarantee performance to a THIRD party and involve three parties (principal, obligee, surety) with a right of recovery against the principal
- Common crime insuring agreements: Employee Theft, Forgery or Alteration, Inside the Premises (Theft of Money/Securities and Robbery/Safe Burglary), Outside the Premises, Computer Fraud, Funds Transfer Fraud, and Money Orders/Counterfeit Money
- Burglary requires visible signs of forced entry, robbery requires taking by force or threat against a person, and theft is the broad term encompassing any act of stealing
Defining the Crimes
Crime coverage lives or dies on definitions, and the exam tests them relentlessly. Memorize the trio:
- Theft — the broad, catch-all term: any unlawful taking of property. Burglary and robbery are specific types of theft.
- Burglary — taking of property from inside premises by a person who unlawfully enters or exits, with visible signs of forced entry (broken lock, pried door). No force against a person.
- Robbery — taking of property from a person by force, threat of force, or an obviously unlawful act witnessed by the victim.
- Safe Burglary — forced entry into a locked safe or vault, evidenced by visible marks, or removal of the safe from the premises.
Quick Answer: Force against a thing with marks = burglary; force or threat against a person = robbery; any stealing at all = theft.
Worked Distinction
A thief slips in through an unlocked door and pockets cash from the till while no one watches — that is theft, not burglary (no forced entry) and not robbery (no confrontation). If the thief had pried open a locked rear door overnight, it becomes burglary. If the thief brandished a weapon at the clerk, it becomes robbery. On a policy that insures only burglary and robbery (not broad-form theft), the unlocked-door loss is uncovered.
ISO Commercial Crime Insuring Agreements
ISO's Commercial Crime Coverage Form offers a menu of insuring agreements; the insured selects and schedules limits for each:
| # | Insuring Agreement | Covers |
|---|---|---|
| 1 | Employee Theft | Dishonest acts of employees |
| 2 | Forgery or Alteration | Forged/altered checks, drafts, notes |
| 3 | Inside the Premises — Theft of Money & Securities | Burglary/robbery of cash and securities on premises |
| 4 | Inside the Premises — Robbery/Safe Burglary of Other Property | Merchandise, equipment taken by robbery/safe burglary |
| 5 | Outside the Premises | Money/securities/property in a messenger's care |
| 6 | Computer Fraud | Fraudulent transfer caused by computer manipulation |
| 7 | Funds Transfer Fraud | Fraudulent wire/electronic transfer instructions |
| 8 | Money Orders & Counterfeit Money | Acceptance of bad money orders/counterfeit currency |
Two Coverage Triggers
- Loss Sustained form — covers loss sustained during the policy period and discovered during the period or within one year after termination (a built-in discovery extension).
- Discovery form — covers loss discovered during the policy period, no matter when the act occurred, plus a 60-day discovery window after termination.
The trap: an employee embezzled over three prior years but the scheme is uncovered today. Under a Discovery form, today's discovery triggers coverage; under a Loss Sustained form, only the portion sustained while the current policy was in force (plus prior continuous coverage) responds.
The ISO Crime Coverage Forms and Discovery vs. Loss-Sustained
ISO commercial crime is written on a discovery form (covers losses discovered during the policy period, even if they occurred before, back to a prior policy) or a loss-sustained form (covers losses sustained during the policy period and discovered within a year after it ends). The discovery basis is broader for newly insured risks. Crime coverage carries a per-occurrence limit and often a deductible (retention), and the single-loss definition aggregates a series of related acts by the same person into one loss.
Employee Theft, Computer Fraud, and Money Coverages
The core insuring agreements the exam tests are Employee Theft (dishonest acts by employees, covering money, securities, and other property), Forgery or Alteration (of checks and similar instruments), Inside the Premises - Theft of Money and Securities and Robbery/Safe Burglary of Other Property, Outside the Premises, Computer Fraud and Funds Transfer Fraud, and Money Orders and Counterfeit Money. A recurring trap distinguishes robbery (taking by force or threat from a person), burglary (forcible entry with visible signs), and theft (any act of stealing, the broadest term).
Social-engineering and fraudulent-instruction losses often require a specific add-on because plain computer-fraud agreements may not cover a voluntarily-induced transfer.
After hours, a burglar pries open a locked storeroom door — leaving visible tool marks — and removes $12,000 of inventory. The business carries an ISO crime policy with 'Inside the Premises — Robbery/Safe Burglary of Other Property' but did NOT purchase broad theft coverage. How does the claim resolve?
Fidelity Bonds vs Surety Bonds
This distinction is one of the most reliable exam points.
Fidelity Bonds (two-party in effect)
A fidelity bond protects an employer against financial loss from the dishonesty of its own employees — embezzlement, theft, forgery. It functions like insurance: premium in, the insurer pays the employer for employee dishonesty, with no expectation of repayment from the honest insured. Employee Theft (Insuring Agreement 1) is essentially fidelity coverage inside the crime form. Variants include the Blanket (all employees) and Scheduled/Name (listed employees or positions) forms.
Surety Bonds (three-party)
A surety bond guarantees that one party will fulfill an obligation to another. Three parties:
- Principal — the party who must perform (e.g., a contractor).
- Obligee — the party protected, who requires the bond (e.g., the project owner/government).
- Surety — the company guaranteeing performance.
If the principal defaults, the surety pays the obligee, then has a right of recovery (subrogation/indemnity) against the principal. That repayment expectation is the hallmark that separates surety from insurance.
Memory hook: Fidelity = faithfulness of employees (no payback). Surety = a promise to a third party (surety can recover from the principal).
Common surety types: bid bonds, performance bonds, payment bonds, and license/permit bonds.
Coverage Triggers and Limit Mechanics
Crime limits are stated per occurrence, and a single occurrence includes all acts of one employee or a group acting together — so a three-year embezzlement by one bookkeeper is typically one loss subject to one limit, not three annual limits stacked. Most ISO crime forms carry a per-loss deductible that the insured retains before recovery. Two more tested rules: the prior-insurance/loss-sustained continuity provision ties together successive policies so a long scheme is not denied just because it spanned renewals, and the termination as to any employee clause ends coverage for an employee the moment the insured learns of that person's dishonesty. The exam rewards candidates who can separate the fidelity (no payback) versus surety (right of recovery) logic and who recognize that surety underwriting evaluates the principal's capital, capacity, and character much like a credit decision rather than a pure insurance pricing exercise.
Which statement correctly distinguishes a fidelity bond from a surety bond?