14.2 Crime and Fidelity Coverage
Key Takeaways
- ISO Commercial Crime is written on a loss-sustained or discovery basis; the discovery form pays for losses found during the policy period regardless of when they occurred.
- Employee theft (fidelity) covers dishonest acts by employees, while the remaining insuring agreements cover third-party crime such as robbery, burglary, theft, forgery, and computer/funds-transfer fraud.
- Money and securities are covered separately for inside-the-premises and outside-the-premises exposures, and 'theft' is the broadest crime peril.
- Fidelity bonds guarantee employee honesty for a third party (the obligee), distinguishing a three-party bond from a two-party insurance contract.
- Key conditions include the non-cumulation of limits across policy periods and the loss-sustained discovery extension that protects against losses discovered after cancellation.
The two coverage triggers: loss-sustained vs. discovery
ISO Commercial Crime is issued as either a Coverage Form (policy) or a Coverage Part within a CPP, on one of two triggers:
- Loss Sustained Form - covers loss that is sustained during the policy period and discovered during the policy period or within an extended discovery window (commonly 1 year after the policy ends).
- Discovery Form - covers loss discovered during the policy period regardless of when the loss actually occurred (subject to a retroactive limitation).
This trigger distinction is the crime equivalent of occurrence vs. claims-made on the liability side. A common exam stem describes an embezzlement that ran for three years but was found this year; the discovery form responds because discovery - not the act date - controls.
Insuring agreements: fidelity vs. third-party crime
The Commercial Crime form is a menu of separately scheduled insuring agreements, each with its own limit:
| Insuring agreement | What it covers |
|---|---|
| Employee Theft (Fidelity) | Dishonest acts by the insured's own employees |
| Forgery or Alteration | Forged/altered checks, drafts, promissory notes |
| Inside the Premises - Money & Securities | Theft, disappearance, destruction on premises |
| Inside the Premises - Robbery/Safe Burglary (Other Property) | Robbery of a custodian; safe burglary of other property |
| Outside the Premises | Money, securities, other property in a messenger's care |
| Computer & Funds Transfer Fraud | Fraudulent electronic transfer of money/securities |
| Money Orders & Counterfeit Money | Acceptance of bad money orders / counterfeit currency |
Fidelity = protection against your own employees. The rest are third-party crime committed by outsiders.
Precise peril definitions (high-frequency exam content)
The crime perils are defined narrowly, and the exam loves to swap the definitions:
- Theft - the broadest peril: any act of stealing. (Money & securities coverage uses 'theft.')
- Robbery - taking property from a person by force, threat of force, or an obvious act of violence. There must be a person who is confronted.
- Burglary - taking property by forcible, unlawful entry into a premises, with visible signs of forced entry (marks of forced entry). No person needs to be present.
- Safe burglary - forced entry into a locked safe/vault, or removal of the safe from the premises.
Memory hook: Robbery involves a person; Burglary involves a place with visible damage; Theft is everything. A shoplifter who simply pockets goods is committing theft, not robbery or burglary, because there was no force against a person and no forced entry.
Loss-Sustained vs. Discovery Trigger Recap
The two crime-policy triggers are a guaranteed exam item. A discovery form covers losses discovered during the policy period (or a short discovery extension after expiration), regardless of when the act occurred — ideal when the insured cannot pinpoint when an embezzlement began. A loss-sustained form covers losses that occurred and were discovered during the policy period or during prior policies with the same insurer in an unbroken chain. The non-cumulation condition prevents stacking limits across multiple years for one ongoing scheme.
Distinguish employee dishonesty/fidelity (first-party loss from the insured's own employees) from third-party crime perils — robbery, burglary, theft, forgery, and computer/funds-transfer fraud — each with its own precise definition the exam tests by fact pattern.
A masked individual breaks the rear door lock of a closed jewelry store at night, leaving pry marks, and takes merchandise. No employee is present. Which crime peril most precisely describes this loss?
Money and securities: inside vs. outside
The form separates the money-and-securities exposure by location:
- Inside the Premises - Money & Securities covers theft, disappearance, or destruction of money and securities while on the insured's premises or inside a banking premises.
- Outside the Premises covers the same property while in the care of a messenger away from the premises - for example, an employee carrying the daily deposit to the bank.
'Disappearance' is broader than theft - it pays even when the cause of loss cannot be proven (e.g., cash that simply vanishes), which is why the money-and-securities agreements are valuable beyond pure theft scenarios. Securities include negotiable and non-negotiable instruments and contracts; money is currency, coins, and bank notes.
Fidelity bonds: a three-party relationship
A fidelity bond guarantees the honesty of employees and protects the employer (the obligee) against employee dishonesty. Although often discussed alongside crime insurance, a bond is structurally a three-party instrument:
- Principal - the employee whose honesty is guaranteed
- Obligee - the employer protected by the bond
- Surety/insurer - the company providing the guarantee
This contrasts with an ordinary two-party insurance contract (insurer and insured). Common bond forms:
- Name schedule bond - lists each covered employee by name
- Position schedule bond - covers employees by job position
- Blanket bond - covers all employees automatically (commercial blanket or blanket position)
A blanket bond removes the gap created when a new hire is not yet added to a name schedule - a frequent exam point.
Key conditions: non-cumulation and discovery extension
Two crime conditions are heavily tested:
- Non-cumulation of limits - the limit of insurance does not stack across consecutive policy periods. If a dishonest scheme spans three annual periods, the insured recovers only one limit, not three times the limit. This prevents an insured from multiplying recovery for a single continuing loss.
- Extended period to discover loss - under the loss-sustained form, losses sustained during the policy period but discovered after expiration are still covered if found within the discovery window (commonly 1 year), provided no replacing coverage exists.
Numeric example: a $50,000 employee-theft limit and a continuous embezzlement of $120,000 across two policy years pays a maximum of $50,000 (one limit) under non-cumulation - not $100,000.
An employee embezzled a total of $120,000 over two consecutive annual crime policy periods, each carrying a $50,000 Employee Theft limit. Under the non-cumulation of limits condition, the maximum the insurer pays is: