14.2 Crime and Fidelity Coverage
Key Takeaways
- Commercial crime insurance pays only for direct loss of money, securities, and other property caused by intentional human wrongdoing - employee theft, forgery, robbery, burglary, and electronic fraud.
- Two coverage triggers govern when a loss is paid: the Discovery form responds to losses discovered during the period regardless of when they occurred; the Loss Sustained form responds only to losses occurring during the period.
- Robbery requires a person present and confronted by force or threat; burglary requires visible marks of forced entry; theft is the broad umbrella covering both.
- Non-cumulation of limits treats a multi-year dishonest scheme as one occurrence subject to one limit, and the inventory-shortage exclusion bars losses provable only by inventory computation.
- Fidelity bonds guarantee employee honesty and overlap with Coverage A employee theft; financial-institution and public-official bonds are specialized variants.
What Crime Insurance Covers
Commercial crime insurance pays for financial loss from dishonest and criminal acts - employee theft, forgery, robbery, burglary, and electronic fraud. Where property insurance handles accidental and natural perils, crime insurance targets intentional human wrongdoing. A requirement runs through every insuring agreement: the loss must be a direct loss of covered money, securities, or other property - never a consequential loss such as lost profit or reputational harm. The standard ISO program is the Commercial Crime Coverage Form.
Quick Answer: Crime policies pay direct loss of money, securities, and other property caused by theft, forgery, and fraud, whether the wrongdoer is an employee or an outsider.
Coverage Triggers: Discovery vs. Loss Sustained
The single most-tested crime concept is when a loss is covered.
| Discovery Form | Loss Sustained Form | |
|---|---|---|
| Trigger | Loss discovered during the period | Loss occurs during the period |
| When loss happened | Irrelevant - may be years earlier | Must fall within the period |
| Extended window | Often a discovery extension after expiry | Typically a 1-year discovery window |
| Best for | Broader for the insured | More predictable for the insurer |
Worked scenario: A bookkeeper embezzles for three years and is caught today. A Discovery form in force now pays even though most thefts predate it. A Loss Sustained form pays only the portion occurring while it was in force (plus losses discovered in its post-expiration window). Read the stem for discovered vs. occurred.
The Core Insuring Agreements
| Agreement | What it covers |
|---|---|
| A - Employee Theft | Theft, embezzlement, forgery by employees (direct loss only) |
| B - Forgery or Alteration | Forged/altered checks and drafts on the insured's accounts |
| C - Inside the Premises: Money & Securities | Theft, robbery, safe burglary of money/securities on premises |
| D - Inside the Premises: Other Property | Robbery or safe burglary of property other than money |
| E - Outside the Premises | Money/securities in a messenger's or armored-car care off-site |
| F - Computer Fraud | Theft of money/securities via fraudulent computer use |
| G - Funds Transfer Fraud | Fraudulent instructions to a bank to transfer the insured's funds |
Robbery vs. Burglary vs. Theft - Precise Definitions
These words carry technical policy meanings that differ from everyday speech, and the exam tests them relentlessly.
| Term | Policy definition | Key element |
|---|---|---|
| Robbery | Unlawful taking by violence or threat of violence | A person is present and confronted |
| Burglary | Unlawful entry/exit shown by visible marks of forced entry, intending to steal | Forcible entry; usually no one present |
| Theft | The broad act of stealing | Umbrella term covering robbery and burglary |
Example: A masked person threatens a clerk and empties the register - robbery. A thief pries open a locked door overnight and removes cash, leaving pry marks - burglary. Broad money-and-securities forms cover all three; a narrow form may require visible signs of burglary.
Key Definitions and Exclusions
- Money = currency, coins, bank notes, and certain registered checks and money orders.
- Securities = negotiable and non-negotiable instruments representing money or property (stocks, bonds, tokens).
- Other property = tangible property other than money/securities (inventory, equipment, merchandise).
- Direct loss only - no consequential or business-income loss.
- Inventory-shortage exclusion - a loss provable only by inventory computation or a profit-and-loss comparison is excluded; you must show actual theft.
- Prior-knowledge cancellation - coverage for an employee ends once the insured learns of that employee's earlier dishonest act.
- Acts of owners/partners are typically excluded.
Non-Cumulation of Limits (Worked Example)
Crime forms use a per-occurrence limit and usually a per-occurrence deductible. A heavily tested rule is non-cumulation: a single scheme spanning several policy years is one occurrence subject to one limit, not stacked year over year.
Suppose an employee embezzles $400,000 over four consecutive annual policies each carrying a $100,000 limit. Non-cumulation means recovery is capped at a single $100,000, not $400,000 - a classic trap.
Fidelity Bonds vs. Crime Coverage
Fidelity bonds guarantee employee honesty and overlap heavily with Coverage A employee theft; they may be written as bonds or as crime insuring agreements. Specialized variants include the Financial Institution Bond (Form 24) for banks and public-official bonds that protect a governmental body against a dishonest officeholder.
Common Exam Traps
- Discovery vs. loss sustained - match the stem's word, discovered or occurred.
- Robbery needs a person present; burglary needs visible marks of forced entry.
- Inventory shortage alone is not proof of a covered theft.
- Non-cumulation caps a multi-year scheme at one limit, never stacked.
ISO Crime Coverages, Definitions, and Worked Traps
ISO Commercial Crime (form CR 00 21) offers a menu of insuring agreements, each bought separately. The exam expects you to match a loss to the correct agreement: Employee Theft (A), Forgery or Alteration (B), Inside the Premises – Money & Securities (C), Inside the Premises – Robbery/Safe Burglary of Other Property (D), Outside the Premises (E), Computer/Funds Transfer Fraud (F/G), and Money Orders & Counterfeit Money (H).
| Insuring Agreement | Covers |
|---|---|
| A – Employee Theft | Dishonesty/theft by employees |
| B – Forgery or Alteration | Forged checks/drafts the insured issues |
| C – Money & Securities (inside) | Theft, disappearance, destruction on premises |
| F – Computer Fraud | Fraudulent transfer via computer manipulation |
| G – Funds Transfer Fraud | Fraudulent transfer instructions to a bank |
Critical definitions drive coverage: "money" is currency, coins, and bank notes; "securities" are negotiable/non-negotiable instruments; "other property" is tangible property other than money/securities. Crime can be written loss-sustained (covers losses discovered during the period, even if they occurred earlier under a prior policy) or discovery form.
Worked scenario: A bookkeeper diverts $80,000 over two years through fake vendor invoices, discovered only this year. On a loss-sustained form with continuous coverage, the current insurer pays (subject to the limit), coordinating with any prior policy. Trap: Social-engineering losses — where an employee is tricked into voluntarily wiring funds — are often not covered by base Computer/Funds Transfer Fraud agreements and need a specific social engineering endorsement, a fast-growing exam topic.
Overnight, a thief pries open a locked back door, leaving visible tool marks, and removes cash from an empty office. In crime-insurance terms this loss is best classified as:
An employee embezzles $300,000 over three consecutive one-year crime policies, each with a $100,000 limit, and the scheme is discovered as a single continuing dishonest act. Under non-cumulation of limits, the maximum recovery is: