14.2 Crime and Fidelity Coverage
Key Takeaways
- ISO Commercial Crime forms (CR 00 20 discovery / CR 00 21 loss-sustained) cover employee theft, forgery, theft of money and securities, computer and funds-transfer fraud.
- Fidelity bonds (employee dishonesty) protect the employer against losses caused by its own employees; surety bonds protect a third-party obligee.
- The discovery form covers losses discovered during the policy period; the loss-sustained form covers losses occurring during the period and discovered within a tail.
- Money and securities theft is split into inside-the-premises and outside-the-premises (messenger) coverages, each with its own limit.
- Employee theft is excluded once a specific dishonest act of that employee is known, and there is no coverage for inventory-shortage-only proof of loss.
Crime forms, triggers, and insuring agreements
Commercial crime exposures are written on the ISO Commercial Crime program. The two principal forms are the Commercial Crime Coverage Form - Discovery (CR 00 20) and the Loss Sustained (CR 00 21) form, plus parallel policy versions. The discovery trigger covers losses discovered during the policy period regardless of when they occurred. The loss-sustained trigger covers losses that actually occur during the policy period and are discovered during the period or within a stated discovery tail (commonly one year).
Crime coverage is organized into separate insuring agreements, each with its own limit and deductible:
| Agreement | Covers |
|---|---|
| Employee Theft | Theft of money, securities, or property by employees (fidelity) |
| Forgery or Alteration | Forged checks, drafts, promissory notes |
| Inside the Premises - Money & Securities | Theft, disappearance, destruction on premises |
| Inside the Premises - Robbery/Safe Burglary of other property | Robbery of a custodian; safe burglary |
| Outside the Premises | Money/securities/property in care of a messenger |
| Computer Fraud | Fraudulent transfer caused by computer manipulation |
| Funds Transfer Fraud | Fraudulent instructions to a financial institution |
| Money Orders & Counterfeit Money | Loss from accepting these in good faith |
Fidelity vs. surety - a tested distinction
A fidelity bond (employee dishonesty / Employee Theft agreement) is two-party in effect: the insurer reimburses the employer (insured) for losses caused by the dishonest acts of its own employees. A surety bond is three-party: the surety guarantees to an obligee that the principal will perform an obligation; if the principal fails, the surety pays and seeks reimbursement from the principal.
Key contrasts examiners test:
- Fidelity protects the insured against insiders; surety protects a third party against the principal.
- Fidelity expects losses (it is true insurance with premiums priced for expected losses); surety expects no loss (the principal is pre-qualified and indemnifies the surety).
- A surety can recover from the principal; a fidelity insurer generally cannot recover from the employer it insured.
The Employee Theft agreement excludes any employee from coverage once the insured (or a manager) learns of a prior dishonest act by that specific employee. Coverage also excludes losses proven only by inventory shortage or profit-and-loss computation - there must be other evidence of theft.
Inside vs. outside, and a worked numeric
Money and securities are split by location. Inside the Premises - Money and Securities covers theft, disappearance, or destruction while on the insured's premises or in a financial institution. Outside the Premises covers the same property while in the care and custody of a messenger away from the premises. Each has its own limit; selecting the wrong one on the exam is a classic trap.
Worked example: A jewelry store carries Inside Money & Securities $15,000 and Outside (messenger) $5,000, with a $500 deductible per occurrence. A messenger carrying a $9,000 bank deposit is robbed two blocks away.
| Step | Amount |
|---|---|
| Applicable agreement | Outside the Premises |
| Loss | $9,000 |
| Limit for that agreement | $5,000 |
| Less deductible | -$500 |
| Paid | $4,500 |
The loss is capped at the outside limit of $5,000, not the larger inside limit, then reduced by the deductible to $4,500. Recognizing which agreement applies is the whole question.
Definitions, exclusions, and the employee-theft fine print
Crime forms turn on precise definitions. Money means currency, coins, bank notes, and traveler's checks. Securities means negotiable and non-negotiable instruments representing money or property (stocks, bonds, tokens, stamps). Other property is tangible property other than money and securities. Employee includes most workers the insured directs and controls, but the form excludes agents, brokers, independent contractors, and (unless endorsed) directors who are not also employees.
Key exclusions and conditions every exam revisits:
| Provision | Effect |
|---|---|
| Inventory-shortage exclusion | Loss provable only by inventory or profit/loss computation is not covered |
| Prior-dishonesty cancellation | Coverage ends for an employee once a prior dishonest act is known |
| Acts of the insured/owners | Theft by the named insured, partners, or owners is excluded |
| Indirect loss | Lost income or expenses from a covered theft are not covered |
| Legal-expense limitation | Defense costs to establish a loss are limited |
| Territory | Coverage generally limited to U.S., its territories, and Canada |
The loss-sustained form pairs with a superseded suretyship / loss-sustained-during-prior-insurance provision: if a prior crime policy would have paid but its discovery period expired, the new policy can bridge the gap up to the smaller of the two limits. The discovery form, by contrast, simply asks whether the loss was discovered during the current period - the date of the theft is irrelevant. When a fact pattern stresses when the theft happened versus when it was found, match it to the correct trigger before doing anything else.
Finally, distinguish the crime forms from the closely related financial-institution bonds and the ERISA fidelity requirement. A standard commercial crime policy is not a Financial Institution Bond (used by banks and the like), and any plan handling ERISA assets needs a separate fidelity bond equal to at least 10 percent of plan funds, subject to a statutory minimum and maximum. Producers should also note that crime limits are stated per occurrence, and that multiple acts by the same employee over time are usually treated as a single occurrence, capping recovery at one limit rather than stacking limits across years.
A bonded messenger carrying $9,000 is robbed off-premises. The policy has Inside Money & Securities of $15,000, Outside of $5,000, and a $500 deductible. How much is paid?
Which statement correctly distinguishes a fidelity bond from a surety bond?