14.2 Crime and Fidelity Coverage

The ISO Commercial Crime Architecture

Commercial crime insurance protects a business against loss of money, securities, and other property caused by theft, fraud, and employee dishonesty. ISO offers a Commercial Crime Coverage Form (for businesses) and a Government Crime Coverage Form (for public entities), each in two flavors based on how a claim is triggered:

• Loss Sustained Form (CR 00 21): the loss must be sustained (occur) during the policy period and be discovered no later than one year after the policy ends (or is canceled). This is the most common commercial version.
• Discovery Form (CR 00 20): the loss must be discovered during the policy period (or within 60 days after expiration), regardless of when it occurred. Discovery forms can reach back to acts committed before inception, subject to prior-insurance conditions.

Knowing which trigger answers a fact pattern — “when did it happen” versus “when was it found” — is the most-tested crime concept.

The Insuring Agreements

A crime policy is a menu. The insured selects insuring agreements and a limit for each. The standard ISO agreements:

Employee Theft (Agreement 1) is the descendant of the fidelity bond. It can be written on a per-loss basis (one limit per occurrence regardless of how many employees) or a per-employee basis (limit applies separately to each dishonest employee). Coverage ends for an employee as soon as the insured learns of a prior dishonest act — a key conditional trap.

Exclusions and the Fidelity vs. Surety Distinction

Two Heavily Tested Exclusions

• Inventory shortages: loss proven only by an inventory computation or profit-and-loss computation is excluded. The insured needs independent evidence of employee theft — a missing-inventory number alone does not trigger coverage.
• Indirect/consequential loss: the policy pays the direct loss of covered property, not lost income, fines, or business-interruption-type damages flowing from the crime.

Also excluded: acts of the named insured/owners, war, and (for most agreements) loss of trade secrets/intellectual property.

Fidelity Bonds vs. Surety Bonds

This comparison appears on nearly every P&C exam:

A fidelity bond is functionally first-party employee-dishonesty insurance. A surety bond is a guarantee — the surety can pursue the defaulting principal to recover what it pays the obligee.

Worked Example — Trigger and Limit

An accountant embezzles $60,000 over 18 months, beginning eight months before the current policy incepted. The current policy is a Loss Sustained Form (CR 00 21) with a $50,000 Employee Theft limit (per-loss basis), and there was a prior policy with the same insurer.

• The Loss Sustained Form pays losses sustained during its own period; pre-inception losses fall to the prior policy under the loss-sustained continuity rules, subject to the limit in force when each portion was sustained.
• If the entire $60,000 had been sustained during the current period, the per-loss limit caps recovery at $50,000 — the policy does not pay the full $60,000.
• Had the policy been a Discovery Form (CR 00 20) discovered now, the full 18-month loss could be presented to the current policy regardless of when committed, again capped at the $50,000 limit.

The number paid is governed by the limit; the form merely decides which policy period the loss attaches to.

Discovery vs. Loss-Sustained Forms and Bond Distinctions

Crime policies use one of two coverage triggers:

Fidelity bonds / employee dishonesty protect the employer against losses from dishonest employees (theft, embezzlement). They are two-party (insurer guarantees the employer). A surety bond is three-party (surety, principal, obligee) guaranteeing the principal will perform an obligation — fundamentally different from insurance.

Trap: employee dishonesty (fidelity) covers the employer's loss from its own employees; it does not cover theft by non-employees (that is robbery/burglary/theft insuring agreements) or the third-party performance guaranteed by a surety bond.