14.2 Crime and Fidelity Coverage
Key Takeaways
- ISO commercial crime coverage is written on either a loss-sustained form or a discovery form; the trigger - when the act occurred versus when the loss was discovered - is the most-tested crime distinction.
- Employee theft (fidelity) coverage protects the insured against dishonest acts of its own employees and is the core insuring agreement; it excludes loss caused by an employee after the insured learned of a prior dishonest act.
- Crime forms separate money and securities from other property, and they distinguish inside-the-premises losses (robbery, safe burglary) from outside losses (theft from a messenger) and from computer/funds-transfer fraud.
- Key definitions - robbery (taking by force or threat), burglary (forcible entry with visible signs), and theft (any act of stealing) - drive which insuring agreement responds, and the wrong definition is the classic trap answer.
Crime Insurance and the Trigger Question
Commercial crime insurance covers loss of money, securities, and other property caused by criminal acts - employee dishonesty, robbery, burglary, theft, forgery, and computer or funds-transfer fraud. ISO publishes it as the Commercial Crime Coverage Form (CR 00 20 discovery / CR 00 21 loss-sustained) and a parallel Commercial Crime Policy (CR 00 22 / CR 00 23).
The single most-tested crime topic is the trigger, which depends on which form was issued:
- Discovery form - covers loss that is discovered during the policy period (or the extended discovery period), regardless of when the act actually occurred.
- Loss-sustained form - covers loss that is sustained during the policy period and discovered during the policy period or within one year after it ends.
A classic exam fact: an embezzlement that started three years ago but is first discovered today is covered by a discovery form, while a loss-sustained form covers only the portion that occurred during its period (and any prior-coverage tail under the superseded-coverage condition).
The practical lesson is that crime losses are often hidden for years - an employee skims slowly to avoid detection. A discovery form protects against that latency, which is why many accountants recommend it despite a higher premium. Loss-sustained pricing is cheaper because the carrier's exposure is tied to acts during its own term.
When a loss-sustained policy replaces a prior one, the superseded coverage condition lets the insured recover under the current policy for a loss that occurred under the old one, provided the old policy would have paid had it stayed in force - but recovery is capped at the lower of the two limits. This bridge prevents a coverage gap at renewal and is a subtle but testable point.
Core Insuring Agreements
The ISO crime form is built from numbered insuring agreements. The insured chooses which to activate and sets a limit for each:
| # | Insuring Agreement | What it covers |
|---|---|---|
| 1 | Employee Theft (fidelity) | Dishonest acts of the insured's own employees |
| 2 | Forgery or Alteration | Forged checks, drafts, promissory notes |
| 3 | Inside the Premises - Money & Securities | Theft, disappearance, destruction inside |
| 4 | Inside the Premises - Robbery/Safe Burglary of Other Property | Non-money property taken by robbery/safe burglary |
| 5 | Outside the Premises | Loss of money/securities/property outside (e.g., messenger) |
| 6 | Computer Fraud | Fraudulent transfer caused by computer manipulation |
| 7 | Funds Transfer Fraud | Fraudulent electronic instructions to a financial institution |
| 8 | Money Orders & Counterfeit Money | Loss from accepting bad money orders/counterfeit currency |
Employee theft (Agreement 1) is the heart of fidelity coverage. It pays for the insured's loss from dishonest employee acts but terminates as to any employee the moment the insured (or a controlling owner/officer) learns of a prior dishonest act by that employee. So an employer who keeps a known thief on the payroll forfeits coverage for that person.
Definitions That Decide Coverage
The wrong definition is the most common crime trap. Memorize these precisely:
- Robbery - the unlawful taking of property from a person by force or the threat of force/violence. There must be a person who is threatened or harmed. Example: a thief points a weapon at a cashier and demands the register.
- Burglary - the unlawful taking of property from inside the premises by a person who enters or leaves by forcible entry with visible signs (broken lock, pried door). No person need be present.
- Safe burglary - forcible entry into a locked safe or vault, or the taking of the entire safe from the premises.
- Theft - the broadest term: any act of stealing, including robbery, burglary, larceny, and mysterious disappearance where the form allows.
Worked example - which agreement responds? A messenger carrying $8,000 in deposits is assaulted on the street and the cash is taken by force. That is robbery outside the premises - it triggers Insuring Agreement 5 (Outside the Premises), not the inside-premises agreement. If the limit on Agreement 5 is $5,000, the recovery is $5,000, not the full $8,000, because each agreement carries its own limit.
Exclusions, Conditions, and ERISA Bonds
Common crime exclusions: acts committed by the named insured or its partners/owners (the policy never rewards the owner's own dishonesty), loss the insured cannot prove except through inventory shortage alone, governmental seizure, war, and indirect/consequential loss (lost income from a theft).
Two conditions deserve attention:
- Loss only during the bond/policy period - reinforced by the discovery vs. loss-sustained trigger above.
- Territory - the standard form is generally limited to specified territories unless extended.
Separately, fidelity bonds for employee benefit plans are mandated by ERISA: a plan official handling plan funds must be bonded for at least 10% of the funds handled, with a $1,000 minimum and a $500,000 maximum ($1,000,000 if the plan holds employer securities). This ERISA bond requirement is a frequently tested numeric.
Note the difference between a fidelity bond and a surety bond: a fidelity bond is a two-party arrangement protecting the employer against its own employees' dishonesty, while a surety bond is a three-party guarantee (principal, obligee, surety) of performance. Crime/fidelity coverage is loss insurance; surety is a guarantee on which the surety expects to be reimbursed by the principal. Mixing the two up is a common wrong answer.
An employer discovers that a bookkeeper embezzled funds steadily over the past four years. The company carries a Commercial Crime Coverage Form written on a DISCOVERY basis, in force for the last two years. How does the discovery form respond?
A masked individual breaks the rear lock of a closed warehouse at night, leaving visible pry marks, and removes inventory. No employee is present. Which crime term and insuring agreement most precisely apply?