14.2 Crime and Fidelity Coverage
Key Takeaways
- ISO commercial crime is written on two coverage triggers: the Discovery form (CR 00 22) pays for loss discovered during the policy period regardless of when it occurred, while the Loss Sustained form (CR 00 23) pays only for loss occurring during the period, with a limited extended discovery window of up to one year
- Employee Theft (Insuring Agreement 1) is the most-purchased agreement and covers theft, forgery, and embezzlement by employees, paying direct loss only - never consequential loss such as lost profits
- Robbery requires a person present and a taking by force or threat; burglary requires visible marks of forcible entry with intent to steal; theft is the broad umbrella that includes both
- A non-cumulation of limits clause treats a single dishonest scheme spanning multiple policy years as one occurrence subject to one limit, so multi-year embezzlement does not stack year over year
- Fidelity bonds guarantee employee honesty and overlap with Employee Theft coverage; the inventory-shortage exclusion bars any loss provable only by inventory computation or profit-and-loss comparison
What Crime and Fidelity Coverage Insures
Commercial crime insurance pays for financial loss from intentional, dishonest, and criminal acts - employee theft, forgery, robbery, burglary, and electronic fraud. While property insurance handles accidental and natural perils, crime coverage targets human wrongdoing. A requirement runs through every insuring agreement: the loss must be a direct loss of covered money, securities, or other property - never a consequential loss such as lost profit, lost interest, or reputational damage.
Quick Answer: Crime coverage pays direct loss of money, securities, and property from theft, forgery, and fraud committed by employees or outsiders.
Fidelity is the historical name for the employee-honesty piece of the line. A fidelity bond guarantees an employer against loss from the dishonesty of named or scheduled employees and overlaps heavily with the modern Employee Theft insuring agreement. Crime can be written as bonds or as ISO crime insuring agreements; the exam treats fidelity/employee-theft as the heart of the line.
Coverage Triggers and the Core Insuring Agreements
The most-tested crime concept is when a loss is covered. ISO offers two triggers.
| Discovery Form (CR 00 22) | Loss Sustained Form (CR 00 23) | |
|---|---|---|
| Trigger | Loss is discovered during the period | Loss occurs during the period |
| When loss happened | Irrelevant - may predate the policy | Must fall within the period |
| Extended window | Discovery extension after expiration | Up to a 1-year discovery window |
| View | Broader for the insured | More predictable for the insurer |
Worked scenario: A bookkeeper embezzles for three years and is caught today. A Discovery form now in force pays even though most thefts predate it; a Loss Sustained form pays only the portion that occurred while in force, plus losses discovered within its post-expiration window. Read the stem for "discovered" vs. "occurred."
The core insuring agreements
| Insuring Agreement | What It Covers |
|---|---|
| 1 - Employee Theft | Theft, embezzlement, forgery by employees (direct loss only) |
| 2 - Forgery or Alteration | Forged/altered checks and drafts on the insured's accounts |
| 3 - Inside the Premises: Money & Securities | Theft, robbery, safe burglary of money/securities on premises |
| 4 - Inside the Premises: Robbery/Safe Burglary of Other Property | Robbery or safe burglary of property other than money |
| 5 - Outside the Premises | Money/securities in a messenger's or armored-car's care off-site |
| 6 - Computer and Funds Transfer Fraud | Electronic theft of money/securities; fraudulent transfer instructions |
| 7 - Money Orders and Counterfeit Money | Loss from accepting bad money orders or counterfeit currency |
Robbery vs. Burglary vs. Theft, Limits, and Traps
These terms carry technical policy meanings that differ from everyday speech, and the exam tests the difference relentlessly.
| Term | Policy Definition | Key Element |
|---|---|---|
| Robbery | Unlawful taking by force or threat of force | A person is present and confronted |
| Burglary | Unlawful entry/exit shown by visible marks of forced entry, with intent to steal | Forcible entry; usually no one present |
| Theft | The broad act of stealing | Umbrella term including robbery and burglary |
Example: A masked person threatens a clerk and empties the register - robbery. A thief pries a locked door overnight and removes cash, leaving pry marks - burglary. A broad money-and-securities form may cover all three; a narrow form may demand visible signs of forced entry.
Non-cumulation of limits (heavily tested)
Crime coverage carries a per-occurrence limit, a deductible per occurrence, and a non-cumulation rule: a single dishonest scheme spanning several policy years is treated as one occurrence subject to one limit, not stacked.
Worked numeric: An employee embezzles $400,000 over four consecutive annual policies, each with a $100,000 Employee Theft limit and a $5,000 deductible. Non-cumulation caps recovery at one $100,000 limit for the single scheme; after the $5,000 deductible the insured nets $95,000 - not $400,000 and not $380,000.
Key exclusions and traps
- Direct loss only - no consequential, lost-profit, or business-income loss.
- Inventory-shortage exclusion - loss provable only by an inventory computation or profit-and-loss comparison is excluded; actual theft must be shown.
- Prior-knowledge cancellation - Employee Theft excludes loss by an employee after the insured learns of that employee's earlier dishonest act.
- Acts of owners/partners are excluded - a sole proprietor cannot "steal" from himself for coverage purposes.
- "Robbery and burglary are the same." They are not - robbery needs a person present; burglary needs visible marks of forced entry.
Specialized fidelity bonds
Beyond the standard crime form, specialized fidelity bonds cover unique exposures. The Financial Institution Bond (Form 24) protects banks against employee dishonesty, on-premises and in-transit losses, forgery, and counterfeit securities. Public-official bonds guarantee the faithful performance and honesty of government officeholders. ERISA fidelity bonds are mandated by federal law for persons who handle employee-benefit-plan funds, generally requiring a bond of at least 10% of the funds handled (commonly capped at $500,000, or $1,000,000 for plans holding employer securities). Matching the bond type to the obligee is a recurring exam task.
An employee diverts company funds to a personal account over four years totaling $400,000. Each of the four consecutive annual crime policies carried a $100,000 Employee Theft limit and a $5,000 deductible. Applying the non-cumulation of limits clause, what is the maximum the insured can recover?
A retailer's only proof of a claimed inventory loss is a year-end count showing merchandise unaccounted for, with no evidence of who took it or how. Under a commercial crime policy, how is the claim most likely treated?