14.2 Crime and Fidelity Coverage

What Crime Insurance Covers

Commercial crime insurance pays for financial loss from dishonest and criminal acts - employee theft, forgery, robbery, burglary, and computer/funds-transfer fraud. Where property insurance handles natural and accidental perils, crime insurance targets intentional human wrongdoing. The leading ISO forms are CR 00 20 (Commercial Crime - Discovery Form) and CR 00 21 (Commercial Crime - Loss Sustained Form).

Every insuring agreement shares one requirement: the loss must be a direct loss of covered money, securities, or other property - not a consequential loss such as lost profit, interest, or reputation.

Quick Answer: Crime policies pay for direct loss of money, securities, and property from theft, forgery, and fraud by employees or outsiders.

Discovery vs. Loss Sustained Trigger

The single most-tested crime concept is when a loss is covered.

Trap: On a Discovery form, a theft committed two years before the policy began is still covered if it is first discovered during the current policy period - so long as no prior policy applied.

The Core Insuring Agreements

ISO crime forms are built from numbered insuring agreements; the insured selects which to buy and sets a limit for each.

1. Employee Theft (the fidelity coverage) - dishonest acts by employees; can be written per-loss or per-employee.
2. Forgery or Alteration - of checks, drafts, and similar instruments drawn by the insured.
3. Inside the Premises - Theft of Money & Securities - robbery/safe burglary inside.
4. Inside the Premises - Robbery/Safe Burglary of Other Property.
5. Outside the Premises - loss in the custody of a messenger.
6. Computer Fraud - fraudulent transfer of property by computer.
7. Funds Transfer Fraud - fraudulent wire/EFT instructions.
8. Money Orders and Counterfeit Money.

Fidelity bonds are the employee-dishonesty cousin: a financial institution bond or an ERISA fidelity bond (which protects employee-benefit-plan assets and must be at least 10% of plan assets, $1,000 minimum and $500,000 maximum, or $1,000,000 if the plan holds employer securities).

Definitions That Drive Exam Questions

• Robbery - taking property from a person by force, threat, or violence (there is a victim present).
• Burglary - taking property by unlawful entry/exit, with visible signs of forced entry into the premises.
• Theft - the broadest term: any act of stealing, including robbery and burglary plus mysterious disappearance where covered.
• Employee - generally excludes the loss caused by any person after the insured learns of a prior dishonest act by that person.

Worked Coinsurance-Style Example (Recovery/Salvage Sharing)

Employee Theft limit is $100,000 with a $5,000 deductible. An employee embezzles $130,000. The insurer pays $130,000 - $5,000 = $125,000, capped at the $100,000 limit, so it pays $100,000. If $20,000 is later recovered, ISO crime forms apply recovery first to the insured's uncovered loss ($30,000 above the limit), so the full $20,000 recovery goes to the insured, not the insurer, until the insured is made whole.

Synthesis: Matching the Crime Loss to the Right Agreement

On the exam, first decide the trigger (discovery vs. loss-sustained) because it controls whether a long-running theft is covered at all, then match the loss to the correct insuring agreement (employee theft, forgery/alteration, computer/funds-transfer fraud, money/securities inside or outside). A loss caused by an owner of the business, or indirect losses such as lost income, fall outside the standard agreements - a reliable distractor in crime questions.

Who Is an "Employee" and Key Exclusions

The definition of employee decides whether a dishonesty loss falls under the fidelity insuring agreement. ISO crime forms generally include leased and temporary workers under the insured's direction but exclude independent contractors and agents. Critically, coverage on any person ends the moment the insured learns of a prior dishonest act by that person - continuing to employ a known thief voids coverage for later acts.

Common crime exclusions you must recognize:

• Acts of the insured (owners/partners) - the named insured's own dishonesty is not covered; owner theft is uninsurable.
• Inventory shortage as the sole proof of employee theft - the insured needs independent evidence.
• Indirect/consequential loss - lost income, fines, and damages flowing from a covered theft.
• War, governmental seizure, and trading losses from a clerk's bad trades.

Quick Answer: Crime covers loss caused by employees, but never the dishonesty of the named insured/owners themselves.

Per-Loss vs. Per-Employee Limits

Employee Theft can be written per-loss (one limit applies to the whole loss regardless of how many employees colluded) or per-employee (the limit applies separately to each dishonest employee). On the exam, a colluding-employees scenario tests this distinction.

Worked example: A $50,000 Employee Theft limit, no deductible, three employees collude to steal $130,000 together.

• Per-loss basis: one $50,000 limit applies to the single loss event, paying $50,000.
• Per-employee basis: the $50,000 limit applies to each of the three thieves, allowing up to $150,000, so the full $130,000 is paid.

The per-employee approach is broader and costs more premium; selecting the wrong basis is a frequent claim-time surprise.