COMMERCIAL CRIME COVERAGE ANALYSIS

(August 2009)

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INTRODUCTION

This analysis is based on the Insurance Services Office (ISO) 05 06 edition. Changes from the previous edition are in bold print.

Commercial crime coverage can be written on either a discovery form or a loss sustained form. It may be written as a monoline policy or as a coverage part in a commercial package policy. The forms are:

CR 00 20–Commercial Crime Coverage Form (Discovery Form)
CR 00 21–Commercial Crime Coverage Form (Loss Sustained Form)
CR 00 22–Commercial Crime Policy (Discovery Form)
CR 00 23–Commercial Crime Policy (Loss Sustained Form)

This analysis evaluates Form CR 00 21, Commercial Crime Coverage Form (Loss Sustained Form).

Like all ISO forms, defined words are offset by quotation marks in the policy or coverage form but are not in this analysis. The words you and your mean the named insured listed on the declarations. As discussed in the Common Policy conditions, the first named insured is the entity that receives premium statements, cancellations and similar notices. The words we and us refer to the insurance company providing the coverage.

A. INSURING AGREEMENTS

Eight separate insuring agreements are available in each of the commercial crime coverage forms. If any insuring agreement has NOT COVERED indicated next to it on the declarations, the policy does not cover or provide protection for that insuring agreement. Therefore, it is possible to issue a policy where only a single crime insuring agreement applies.

Coverage applies to losses sustained by the named insured under the following circumstances:

The loss must be the result of an occurrence.
The occurrence must take place DURING the policy period shown on the declarations.
The loss must be discovered by the named insured DURING the policy period or the extended discovery period.

All of the above are subject to:

Condition E.1.g: Extended Period To Discover Loss;
Condition E.1.k: Loss Sustained During Prior Insurance Issued By Us Or Any Affiliate;
Condition E.1.l: Loss Sustained During Prior Insurance Not Issued By Us Or Any Affiliate; and
Definitions of the terms discovered and occurrence in Section F of the coverage form.

The 05 06 change eliminated the Loss Sustained Condition and moved it into the insuring agreement. It also added a reference to important conditions that affect the losses covered. One final change was the addition of a definition for the term “discovered.”

1. Employee Theft

Employee theft covers losses to money, securities and other property. It covers the unlawful taking of covered insured property by employees. Coverage applies regardless of the number of employees involved in the loss. This is an important point, since the limit of insurance applies to each act and not to each employee. In this insuring agreement, theft includes forgery (05 06 addition).

Example: Ten employees at Easy Pickings, Inc. devise a scheme to siphon cash from the accounts receivable. The total loss is $500,000. The policy limit of insurance for employee theft is $200,000. Easy Pickings, Inc. argues that each employee should be covered for $200,000 with a total possible loss payout of $2,000,000. The company argues in vain. The policy coverage pays the limit per occurrence, not per employee. Because the employees are all part of the same scheme, the policy limit of $200,000 applies.

Example: An employee at Easy Pickings steals merchandise from the warehouse and sells it to friends. This employee’s actions were completely separate from the ten-person scheme so the $200,000 limit of insurance on the policy applies separately to this claim.

2. Forgery and Alteration

This insuring agreement applies to the actions of outsiders. Coverage does not apply to forgery or alteration of checks done by the named insured or any employee, manager, director, trustee or representative. Coverage applies only to checks drawn on the named insured’s accounts or the accounts of any party while acting as an insured’s agent. Checks include drafts, promissory notes, and orders or directions to pay money. It also includes substitute checks as defined by the Check Clearing for the 21^st Century Act (05 06 addition). A check can allegedly have been drawn, meaning there may be some doubt whether the check was actually drawn, against:

An insured’s account;
Another party’s account; or
An account that no longer exists.

Example: A thief breaks into Plumber’s Palace and steals checks from the bottom of a stack he finds in the comptroller’s office. During the next few weeks, the thief writes checks against the insured’s account until the cashing of unauthorized checks is reported to the comptroller.

One of the unusual features of this coverage is that it provides defense coverage if the named insured is sued for refusing to pay on a check or an instrument believed to be forged or fraudulent. The insurance company must first give its written consent to the named insured to defend itself against such a suit. It then pays the reasonable legal expenses relating to defense of the suit. The defense coverage is unlimited and is in addition to the policy limit for forgery and alteration coverage.

3. Inside the Premises–Theft of Money and Securities

This insuring agreement contains three basic coverages:

It pays for the loss of money and securities from the insured premises or banking premises caused by:

Theft committed by a person actually present inside (05 06 change) the premises or a banking premises; or
Disappearance or destruction of money or securities.

This insuring agreement does not cover merchandise or stock. Premises are considered to be the interior of the building occupied by the named insured and from which business is conducted. Banking premises is also defined.

It covers damage to the interior of the premises and to the exterior of the building during an attempted or actual theft. In order for coverage to apply to damage to the exterior of the building, the named insured must either own the building or be legally liable for damage to its exterior.

It covers damage incurred during an attempted or actual theft to locked safes, vaults, cash registers, cash boxes and cash drawers inside the premises.

4. Inside the Premises–Robbery or Safe Burglary of Other Property

Other property means property other than money and securities having intrinsic value and not otherwise excluded. Intrinsic is defined by the American Heritage College Dictionary as “of or relating to the essential nature of a thing; inherent.” A chair has intrinsic value. An idea, in and of itself, has no intrinsic value unless it is applied and made into something.

Under this insuring agreement, coverage applies only to robbery of a custodian or to safe burglary. The act must take place within premises located in a described building. Robbery is a subset of theft that involves actual bodily harm or the threat of bodily harm, violence or intimidation or the unlawful taking of property witnessed by another person. A custodian may be the named insured, members, partners or employees but NOT watchpersons or janitors.


NOT A CUSTODIAN	A CUSTODIAN

Losses from robberies either during normal business hours or after hours that do not involve watchpersons or janitors are covered. A person working late and turning on the alarm before leaving is not a watchperson, unless hired specifically to have custody of the property (with no other duties). A watchperson is the security guard hired to watch the premises during normal business hours.

Example: Eric is working late. He is asked to lock up when he leaves, meaning he has custody of the premises. However, he is not a watchperson or a janitor. He sees the cleaning staff opening desk drawers to dust inside. The next day, several people are missing valuable tools, software and other items. Eric believes they were stolen by the cleaning staff. Since he was not threatened and did not actually witness an obvious act of stealing, there is no coverage under this insuring agreement.

Under this insuring agreement, damage to the premises from an attempted or actual act of robbery or safe burglary is covered as well as damage to a LOCKED safe or vault. If an open safe or vault is damaged during a robbery, it is not covered. However, a loss to property inside the safe or vault is covered.

5. Outside the Premises

Money and securities are covered for theft, disappearance and destruction while outside the premises and in the custody of a messenger or armored car company. Coverage includes theft, robbery or other instances of accidental loss.

Example: A suitcase full of cash bounces out of the back of a pickup truck, tumbles across a bridge, falls 120 feet into a river and is never recovered. This situation would be eligible for coverage.

Other property is covered outside the premises when it is in the custody of a messenger or an armored car company but only for robbery. Robbery must include at least the threat of bodily harm, violence or intimidation or the messenger must actually observe the commission of an unlawful act.

Example: A crate of rare vases that bounces out of a truck and falls to the river below never to be seen again is not covered but coverage applies if that same vehicle is car-jacked and the robber throws the crate into the river.

In either case, a messenger must be the named insured or a partner or employee of the named insured. Employees do not include independent contractors (other than an armored car company), leased employees or any agent or broker. Coverage for leased employees may be added by using Form CR 25 05–Include Leased Workers As Employees.

Example: Pink Elephant Phine Liquors arranges to have its truck fleet operated by truck drivers leased from Perki Personnel, a professional employment organization. When delivering a load of liquor to a Pink Elephant warehouse, the driver is robbed at gunpoint. There is no coverage for this claim because the leased driver was not a messenger as defined in the policy.

6. Computer Fraud

This insuring agreement covers money, securities and other property fraudulently transferred by computer from the insured premises or banking premises to a location other than the insured premises or the banking premises. It does not include transfer to a messenger. Coverage is worldwide. A fraudulent transfer of funds from an insured’s Swiss bank account to someone in the United States is covered in the same way as a person breaking an office and uses an insured's computer to transfer funds from the insured’s account to his or her Swiss bank account. Coverage also applies if someone remotely hacks into an insured’s computer and sends money to the thief’s personal bank account. Coverage applies to locations and premises outside the United States.

Example: Josie Proust, the top salesperson for Cyberfroot Distributors, was staying in a hotel in Beijing. She regularly conducted business from her room. While at a meeting with a local group of lychee and pomegranate farmers, someone broke into her room, stole some of her valuables and hacked into her laptop to transfer funds from her account. This insuring agreement covers this computer fraud loss.

7. Funds Transfer Fraud

This insuring agreement provides coverage for the loss of funds resulting directly from a fraudulent instruction directing a financial institution to transfer, pay or deliver funds from the insured’s transfer account.

8. Money Orders and Counterfeit Money (05 06 change)

This insuring agreement covers counterfeit money accepted in good faith in exchange for purchases. It also covers money orders accepted by the named insured in good faith but not accepted when presented by the named insured for payment. The coverage territory is limited to the United States, its territories, its possessions and Canada. There is no coverage for fake euros when traveling in Europe.

Note: Cashier’s checks and other negotiable instruments are NOT covered.

The 05 06 edition replaces the phrase counterfeit paper currency with the defined term counterfeit money. This is a significant increase in coverage because the defined term includes traveler’s checks, register checks and money orders in addition to currency, bank notes and coins.

B. LIMIT OF INSURANCE

The limit shown on the declarations is the most paid for all loss that results from an occurrence (05 06 change). If a loss is covered under more than one insuring agreement, the company pays ONLY the largest limit of insurance available and not the sum of each available limit (05 06 change). In some cases, this could create a significant reduction in coverage.

Example: Acme Company sustains a loss that involves both employees and non-employees. It is found to be a single occurrence and coverage is available under Insuring Agreements 1, 3 and 7. The coverage limit is $300,000 under Insuring Agreement 1, $100,000 under Insuring Agreement 3 and $250,000 under Insuring Agreement 7. The total loss is $500,000. In the previous edition, Acme could have recovered under each of the insuring agreements and have been fully compensated. Under the current edition, the maximum recovery is $300,000, the highest limit available.

A situation like this could have claimants and claimant attorneys searching for ways to utilize the differing definitions of occurrence within the insuring agreements so a loss situation may qualify as a multiple occurrence.

C. DEDUCTIBLE

Each of the eight insuring agreements can have a different deductible. In most cases, smaller accounts do not require deductibles for most coverages. The insurance company does not pay any loss until the deductible amount stated on the declarations is satisfied.

In previous editions, the policy indicated that if different deductibles exist for a given loss, only the highest deductible was applied. In the 05 06 edition, this provision is removed. When the deductible provision is now read in conjunction with the limit of insurance, it can be implied that the applicable deductible is the one shown on the declarations and associated with the highest limit of insurance. However, it is not stated this way. With the removal of the deductible limitation language, confusion may arise about which or how many deductibles apply to a given loss. Due to this ambiguity, an insured could argue that the lowest (or even that NO) deductible, should be used. In such disputes, any ambiguity could be construed in favor of an insured’s interpretation.

Example: Continuing the Acme example above, the deductible for Insuring Agreement 1 is $10,000, the deductible for Insuring Agreement 3 is $1,000 and Insuring Agreement 7 has no deductible. The insured argues that no deductible should apply but the insurance company argues that the deductible that should apply is $10,000.

D. EXCLUSIONS

1. These exclusions apply to each of the eight insuring agreements, unless otherwise stated.

a. Acts Committed by You, Your Partners or Members

Any theft or dishonest act of the named insured, whether committed alone or with another individual or an employee, is excluded. The named insured cannot claim coverage for the dishonest act of an employee if the named insured is involved in the same misdeed. For the purposes of this exclusion, a member is an owner of a Limited Liability Corporation (LLC).

b. Acts of Employees Learned of by You Prior to the Policy Period

This exclusion applies to losses committed by employees with a history of committing a dishonest act. If the named insured, partners, members, managers, officers, directors or trustees hire an individual that one or more of them knows has committed theft or engaged in dishonest acts prior to the policy period, coverage does not apply to any loss caused by that employee.

However, coverage does apply if the member, partner, manager, officer, director or trustee aware of the dishonest acts is in collusion with the employee to commit the theft or dishonest act.

Example: Trent has a troubled background. Rick, the vice president of operations, hires Trent to help him with inventory. Rick uses Trent and his shady contacts to help him fence items they steal from their company’s warehouse. When the loss is discovered, the insurance company cannot deny coverage. This is because Rick is the only one at the company aware of Trent’s dishonest past.

c. Acts of Employees, Managers, Directors, Trustees or Representatives

This exclusion applies to all insuring agreements EXCEPT Insuring Agreement A.1, Employee Theft. In addition to excluding acts committed by an insured, other dishonest acts, such as forgery, committed by employees and outside persons working together are also excluded.

d. Confidential Information (05 06 addition)

This new exclusion explains that the crime policy is not designed to cover losses due to identify theft. Any loss caused by or resulting from any disclosure or use of the named insured’s confidential information is not covered. This includes, but is not limited to, patents, trade secrets, processing methods or customer lists.

In addition, any loss caused by or resulting from any disclosure of confidential information of others, such as financial or personal information is not covered.

This is considered to be a clarifying exclusion, because the policy was never intended to cover such losses.

Example: Marguerite works in Acme College’s Record’s Department. Her boyfriend, Phillip, asks for some information about his roommate, Paul, and uses it to steal Paul's identity. Paul discovers the identity theft when he attempts to secure a student loan. The police track the release of information to Phillip and Marguerite, both of whom have left town. Paul demands that the school system compensate him for the monetary loss due to Marguerite’s actions but the insurance company denies coverage under the crime insuring agreements.

e. Government Action

Loss resulting from government seizure, forfeiture, and other taking or destruction of property is not covered.

Example: The owner of Shot Docks Bass Boat Rentals files a claim for the loss of a boat. The boat is valued at $37,000 and the owner states that “some official persons” took it from her premises. The claims adjuster questions her and denies the claim. He learns that the boat was confiscated under a federal controlled substances law.

f. Indirect Loss

Indirect losses that are ineligible for coverage include:

Loss of income as a result of not being able to use money, securities or other property. This means that coverage does not apply to loss of interest income on money that could have been invested. There is no coverage for loss of income on stock holdings that could have appreciated during an upturn in the market. Finally, loss of profit due to the loss of a chance to sell product stolen from an insured is not covered. Business income coverage available in commercial property forms pays for the loss of income on property other than money or securities.

· Legal liability claims. Coverage for property of others is available only by endorsement. However, some direct damage coverage is provided in specific insuring agreements.

The cost of establishing the amount of a loss. Such costs can be substantial.

Examples:

- The expense of hiring auditors to examine books “cooked” by an employee

- The cost of independent investigators hired to ferret out the scope of a financial loss and who caused it.

- The cost of hiring forensic or other specialists to determine what missing inventory was stolen and what was simply part of an inventory shortage.

Coverage for these costs and expenses is available by attaching Form CR 25 40–Include Expenses Incurred To Establish Amount Of Covered Loss.

g. Legal Fees, Costs and Expenses

Costs, fees or legal expenses incurred by the insured for any reason, including those for a covered loss, are not covered EXCEPT under Insuring Agreement A.2, Forgery and Alteration.

h. Nuclear Hazard

Losses caused by or related to nuclear energy in any manner are not covered.

i. Pollution (05 06 change)

There is no coverage for any loss or damage resulting from pollution and pollution is defined within the exclusion. The definition is identical to the one used in ISO property coverage forms. While there are no court cases to justify this addition, it is added as a precaution against attempts to obtain pollution coverage through policies not having pollution exclusions.

j. War and Military Action

Losses caused by or related to war or warlike action, including rebellion, insurrection, revolution and government power used to defend against such actions, are not covered (05 06 change).

This wording is similar to what is found in other ISO property coverage forms.

2. These exclusions apply to Insuring Agreement A.1: Employee Theft Coverage.

a. The Employee Cancelled Under Prior Insurance exclusion has been rewritten, broadened and is now Exclusion 1.b: Acts of Employees Learned by You Prior to the Policy Period (05 06 change).

a. Inventory Shortages

There is no coverage for shortages of money, securities or other property if the only proof of loss is discovery of a shortage via an inventory. This also includes profit or loss calculations, such as mistakes on the books or in ledgers. However, for eligible losses, an insured’s books, ledgers and inventory records may be used to substantiate the amount of the loss.

b. Trading

Losses resulting from trading are excluded. Trading activities include stock-trading losses, commodity-trading losses, and merchandise-trading losses (where batches of product are exchanged). Certain trading losses to a genuine, not a fictional, account are covered by CR 25 16–Add Trading Coverage.

c. Warehouse Receipts

Warehouse receipts document storage and transfers of products between, usually, separate entities. A fraudulent transfer can occur when property is delivered to someone not authorized to receive it. A forged instrument is frequently used by an individual having a seemingly legitimate claim to the property, but does not. Coverage does not apply to these situations or to errors in issuing, signing, canceling or failing to cancel any warehouse receipt. CR 25 17–Add Warehouse Receipts Coverage can be attached to insure fraudulent transfer of warehouse receipts.

Warehouse Operators Legal Liability Coverage, an inland marine coverage, can also be purchased to cover fraudulent or other improper or negligent transfer of goods, other than by employee theft.

3. The following exclusions apply to Insuring Agreements A.3: Inside the Premises–Theft of Money and Securities, A.4: Inside the Premises–Robbery or Safe Burglary of Other Property, and A.5: Outside the Premises.

a. Accounting or Arithmetical Errors or Omissions

Loss that is caused merely by mathematical errors is excluded. There is no standard endorsement available to "buy back" this exclusion or to purchase this coverage.

b. Exchanges or Purchases

There is no coverage for loss in any exchange or purchase of any property. There is no standard endorsement available to "buy back" this exclusion or to purchase this coverage.

Example: A customer pays the marked price of $2,000 for a piece of furniture. It is determined later that the price should have been $20,000. Further investigation shows that the mistaken marking was an act of intentional fraud and the customer provided information that was also fraudulent. Even though this appears to be criminal activity, coverage does not apply because this loss was the result of a purchase.

c. Fire

There is no coverage for damage (05/06 addition) or loss caused by fire except:

(1) Coverage applies for loss or damage to money and securities. This is very important because no other commercial property coverage forms protect against fire damage to money and securities.

(2) Damage to a safe or a vault. This is duplicate coverage with the property coverage forms and could be considered primary to the property form since it is specific in nature.

d. Money Operated Devices

Theft of money from vending machines or other money or coin-operated devices is not covered unless the money is continuously counted and recorded by the machine itself. There is no standard endorsement available to "buy back" this exclusion or to purchase broader coverage.

e. Motor Vehicles or Equipment and Accessories

Damage to any motor vehicle, its accessories or trailer is excluded. Coverage for theft of motor vehicles is available under commercial automobile comprehensive coverage, garage dealer coverage and garagekeepers’ liability coverage. It is also available for vehicle manufacturers through commercial property coverage forms. The term “motor vehicle” is not defined in this coverage form as it is in other ISO forms.

f. Transfer or Surrender of Property

Loss or damage to property given to someone outside the premises or banking premises because of unauthorized instructions is not covered. Coverage does not apply to property given up because of the threat of either bodily harm or property damage. There is also no coverage for property relinquished due to computer-generated threats to harm the named insured’s products or to release confidential information (05 06 addition). However, since this type of activity is considered to be a form of extortion, coverage is available by purchasing Optional Insuring Agreement CR 04 03–Extortion–Commercial Entities or by purchasing a Kidnap/Ransom and Extortion Policy.

This exclusion does not apply to Insuring Agreement A.5, Outside the Premises, if the property was in the custody of a messenger who had no knowledge of the threat at the time the trip began, or who knew about the threat but was the victim of an entirely different threat.

g. Vandalism

Vandalism losses to the building, premises, safes or cash drawers are not covered. Vandalism is properly insured under commercial property coverage forms. In certain situations, vandalism and theft are concurrent causes of loss. These are different losses that occur at the same time.

Example: During a riot, vandals break a business’s showroom windows and steal merchandise. Some time later, other persons climb through the debris to steal fixtures and other building materials. Vandalism is the proximate cause of the theft loss and the building losses should be covered by the property policy. Theft of merchandise by the burglars who climb through the broken windows is covered under Crime Insuring Agreement A.4, Inside the Premises–Robbery or Safe Burglary of Other Property.

h. Voluntary Parting with Title to or Possession of Property

There is no coverage if an insured voluntarily parts with title to or possession of any covered property because of a trick or scheme concocted by another party. There is no standard endorsement available to "buy back" this exclusion or to purchase this coverage.

4. The following exclusions apply to Insuring Agreement A. 6: Computer Fraud.

a. The Exchanges or Purchases exclusion is eliminated and replaced by the Credit Card Transactions exclusion (05 06 change).

a. Credit Card Transactions

Coverage does not apply if the loss is the result of use of any type of credit, debit, charge or other similar card.

b. Funds Transfer Fraud

There is no coverage if the loss is a result of a fraudulent instruction directing a financial institution to transfer, pay or deliver funds from the transfer account to an unauthorized party. Coverage for this exposure is available under Insuring Agreement A.7, Funds Transfer Fraud.

c. Inventory Shortages

Losses where the only evidence of loss is an incorrect inventory count or a profit and loss statement computation error are not covered.

d. The Voluntary Parting with Title to or Possession of Property exclusion is eliminated. However, since credit cards are often used in such transactions, coverage is still probably not available because of the Credit Card Transactions exclusion (05 06 change).

5. The following exclusion applies to Insuring Agreement A. 7: Funds Transfer Fraud.

Loss due to using a computer to fraudulently transfer money, securities or other property is not covered. Coverage for this exposure is available under Insuring Agreement A.6, Computer Fraud.

E. CONDITIONS

1. Conditions Applicable to All Insuring Agreements

a. The Cancellation as to Any Employee exclusion is eliminated from this section and moved to Conditions that apply to Insurance Agreement A.1 only (05 06 change).

a. Additional Premises or Employees (05 06 addition)

When a named insured adds employees and/or premises, coverage automatically applies without an additional premium charge during that policy term. The only exception is when the new premises or employees are the result of a consolidation, merger or acquisition. Refer to the consolidation, merger or acquisition condition below for information on the exception.

b. Concealment, Misrepresentation or Fraud

Any fraudulent act committed by the insured voids coverage. Intentional concealment or misrepresentation of a material fact about the property covered, the insured's interest in the covered property or in any claim also voids coverage. Voiding coverage includes existing claims as well as future claims.

c. Consolidation–Merger or Acquisition (05 06 change)

Coverage applies for 90 days for newly acquired entities, premises, assets or liabilities of another entity and its employees. The coverage is automatic but the insurance company must receive written notice of the acquisition. There is no coverage after 90 days unless the insurance company adds it to the policy. Additional premium may be required. The only losses covered are those that occur AFTER the date of consolidation, merger or acquisition.

d. Cooperation (05 06 addition)

The named insured must be cooperative and work with the insurance company with respect to all insurance policy terms and conditions.

e. Duties in the Event of Loss

· If illegal activity is involved or suspected, let the insurance company and the police know about the loss as soon as possible. The police do not need to be notified if the loss involves employee theft or alteration or forgery.

Submit to an examination under oath and sign a statement. This is required when requested by the insurance company.
Provide any records considered pertinent to the loss to the insurance company so it can examine them as needed (05 06 addition).
Provide a detailed, sworn proof of loss within 120 days after the date of loss. This is longer than in most policies, because of the extraordinarily long amount of time that may be needed to work through a complicated employee theft scheme or other fraud, and where trails of money or computer fraud are involved.
Cooperate with the insurance company in the investigation and claim settlement.

f. Employee Benefit Plans

Insuring Agreement A.1, Employee Theft coverage applies to the employee benefit plans listed on the declarations. This is not employment practices legal liability coverage that covers such things as forgetting to enroll an employee during the open enrollment period. Employee benefit plans coverage applies to fraudulent or dishonest acts, such as theft of retirement funds by an employee.

Only the plans listed on the declarations are covered under Insuring Agreement A.1, Employee Theft.

Example: The Jones Company Retirement Plan is listed on the declarations as covered. If the plan administrator changes but the plan name does not, coverage continues.

Example: The Jones Company Retirement Plan through ABC Funding is listed on the declarations as covered. If the insured transfers the plan's assets to DEF Funding, replacing ABC Funding, coverage does not apply to the new plan unless the policy is endorsed to recognize the change.

For plans that are jointly insured with any other insured plan, the insured is responsible for making sure the limit of insurance is enough to cover the plans as if they were insured separately. This language is included because federal laws require some employee retirement and other benefit plans to carry a specific limit of fidelity coverage. This provision places the responsibility for selecting that limit on the insured and not on the insurance company.
This coverage pays only for loss of funds and other plan property. It does not apply to loss to desks or other property associated with the administration of the plan.
If the first named insured is not the same name as the covered employee benefit plan, any loss payment must be held by the insured for the benefit of the plan. In other words, the insured is not permitted to commingle loss payment or claim funds with general business funds.
If the policy covers two or more employee benefit plans, losses arising out of one occurrence are shared by the funds in the same proportion as the required limit in each plan bears to the total limit required for all plans which share the loss. Any payment due is made directly to the plan or plans sustaining the loss (05 06 addition).

Example: A loss of $100,000 is suffered by three plans that share coverage under the same crime policy. Covered Plan A requires a limit of $500,000, Covered Plan B requires a limit of $200,000 and Covered Plan C requires a limit of $50,000. The policy limit is $1,000,000. The policy reimburses Plan A 500/750 of the loss, Plan B 200/750 of the loss and Plan C 50/750 of the loss.

No deductible applies to employee benefit plan coverage

g. Extended Period to Discover Loss

Losses must occur prior to the cancellation date of coverage but may be discovered:

Within one year from the date of cancellation. However, if another policy covering the same loss was purchased to replace the insurance under this policy, the extended period of discovery ends immediately.

Example: Peggy had no idea that employees were skimming money from the cash registers. Her crime policy expired on January 1, 2007 and was not renewed. She discovered the loss on June 10, 2007. The loss is covered if the employees began stealing the money from the cash registers before January 1, 2007 and during the previous policy period, January 1, 2006 through December 31, 2006.

Within one year from the date of cancellation if the coverage applies to employee benefits plan. There is no exception.

h. Joint Insured

The first named insured acts for all other insureds, unless excluded, deleted or, for some reason, is ineligible for coverage. In that case, the next named insured listed becomes the first named insured. The first named insured is responsible for premium payments and receives all notices issued by the insurance company, such as cancellation notices.

Example: The named insured reads John Wilson, Wilson, Inc., Wilson, LLC and Wilson, Johnson and Miles. As the first named insured, John Wilson is responsible for paying the premium. He does not pay and, because he is the first named insured, he receives the cancellation notice. He does not notify any of the other entities that the coverage is cancelled. Afterwards, when a loss occurs, the other named insureds have no recourse against the insurance company because the first named insured had been notified.

Knowledge by one insured of anything affecting the insurance coverage is considered to be knowledge held by all insureds. This is an important point because not all insureds on the policy may be wholly owned by the first named insured. They may be partnerships or corporations involving significant outside ownership.

Example: Prior to the policy cancellation, John Wilson lets Wilson, Johnson and Miles hire Millie, one of his employees. John forgets to tell Wilson, Johnson and Miles that Millie has a criminal record. Since all named insureds are considered to know what each of the others knows, any employee theft losses involving Millie are excluded.

An employee of one insured is an employee of all insureds.
The extended period to discover loss condition applies separately to each insured.

Example: John Wilson does not purchase any replacement coverage so he has a one-year extended period to discover loss. Once the other named insureds realized the policy had been canceled they bought additional coverage. Their extended period to discover loss ends on the effective date of the new coverage.

The limit of insurance applies to all insureds. A separate limit does not apply to each insured.

Example: All three named insureds shared a single bookkeeper. When she didn’t return from her vacation, it was discovered that all accounts had been emptied. John Wilson sustains a $100,000 loss, Wilson, Johnson and Miles has a $75,000 loss and Wilson LLC has a $50,000 loss from this single occurrence. The insurance company will pay only a total of $100,000 (its stated policy limit).

When the insurance company pays the first named insured for a loss, the claim is satisfied for all named insureds. The one exception is employee benefit plans, which must receive a separate settlement (05 06 addition).

Example: The insurance company pays John Wilson the $100,000 loss. He takes the payment and leaves town. The other two named insureds are left with no payment and no recourse except against John Wilson’s assets.

i. Legal Action Against Us

As with most policies, no insured can pursue legal action until that insured has complied with all the policy terms. An insured must wait up to 90 days after filing a proof of loss and any lawsuit must be filed within two years of the date the insured discovered the loss, not the date the loss was filed. If a state law or local statute requires different time periods, the policy is amended or conformed to comply with those requirements.

j. Liberalization

If the insurance company broadens coverage without making an additional premium charge during the policy period or within 45 days before the start of the policy period, the broadened coverage applies.

k. Loss Sustained During Prior Insurance Issued by Us or Any Affiliate

Note: The Loss Covered Under This Insurance and Prior Insurance Issued by Us or Any Affiliate condition is removed and replaced by wording in Section B, Limit of Insurance (05 06 change).

A person or persons may perform numerous dishonest acts over a period of years before being caught, but all such acts are considered one occurrence. If the insured maintains continuous coverage with the same insurer or group of insurance companies, coverage applies back to the inception date of the continuous coverage. However, the policy limits do not accumulate because of the multiple years. Instead, the highest limit available during the total period is available to settle the total loss over the years in which they occurred. Because of some confusion and court cases, such as Auto Lenders Acc Ace. Corp.v Gentilini Ford, Inc., 181 N.J. 245, 854 A.2d 378 2004, the condition now has three parts and includes three examples.

If a loss is sustained in part during the current insurance and in part during prior policies and there was no break in coverage, the loss in the current policy period is settled first and the losses in the prior periods are then settled.
If a loss is sustained entirely during a previous policy period, there was no break in coverage between the date of loss and the current policy, and the current policy covers the loss, the insurance company settles the loss under the most recent previous insurance first and then settles the remaining amounts during previous insurance.
Any settlement is made as follows:

The highest single limit of insurance available during any policy period when the loss occurred is available for the loss.
No settlement is paid until the deductible that applies under the current policy is satisfied. That deductible is the only one applied to the entire loss settlement, regardless of the number of policy periods involved.

Note: While the language in this condition is lengthier than what existed in t previous form editions, the intent is unchanged.

Examples:

- An employee has been siphoning funds from Below Ground Enterprises for three years. The insured discovers the loss this year and calculates the amount at $100,000. The limit of insurance on the current policy is $100,000 but was only $25,000 three years ago. The loss payment is $100,000.

- Referring to the previous example above, the limit was reduced two years ago from $100,000 to $25,000. The insured is still eligible for the $100,000 loss payment because the limit of insurance at the time of the occurrence was $100,000.

Example: Alice stole $50,000 two years ago, $20,000 last year and $30,000 this year, for a total loss from this one occurrence of $100,000. Alice’s employer maintained a $50,000 coverage limit in each of these three years. These limits cannot be added together even though the dishonest acts were perpetrated during each of these years. The maximum limit available for this one occurrence is $50,000.

l. Loss Sustained During Prior Insurance Not Issued by Us or Any Affiliate

This condition applies only if there was no lapse in coverage between the current coverage and the previous coverage. Even a one-day lapse in coverage nullifies this important benefit. If a loss sustained in a previous policy term is discovered after the end of that policy's discovery period, coverage applies under the current policy if both the old and new policy have the same coverage and one immediately replaces the other. The limit of insurance available is the lesser of the two policy limits.

Example: Number One, Inc. moved its coverage from STU Accident and Casualty Insurance Company to the ABC Indemnity Company. It had been with STU for five years. Number One discovered a loss that occurred during the STU policy but after the discovery period expired. ABC Indemnity covers the loss for either the limit of insurance under the STU policy or the limit under their policy, whichever is less.

The coverage available under this condition cannot be combined with the coverage available under Condition k. to increase the insurance limits. The limits under Condition k. are taken into consideration with the limits of the previous company and the lesser is the one chosen.

The important distinction is that if coverage stays with one company or group, the highest limit is used to settle claims. If coverage moves between companies, the lowest limit is used to settle claims. This creates a significant coverage gap if an insured changes insurance companies.

m. Other Insurance

This condition is totally rewritten with the 05 06 edition but is not really changed. It is much clearer than in the previous edition.

Primary Insurance

If other insurance is written under the same terms and conditions as this insurance, the policies will share any loss proportionally. If the other insurance is not written under the same terms and conditions, this coverage is excess. It pays only after the loss exceeds the limit of insurance under the other policy or the deductible under this insurance, whichever is higher. The ability of the insured to collect the other coverage does not enter into consideration.

Example: Hershel changes insurance carriers. Because of the terms of the cancellation and non-renewal conditions, the two package policies overlap by two days. A holdup occurs at his business on one of those overlapping days.

Scenario one: the two crime coverages are identical, each contributes equally.

Scenario two: one of the package policies has an automatic property extension endorsement that provides holdup coverage with a $2,500 limit. The policy with the extension is primary and the crime coverages are excess.

Excess insurance

If this insurance is excess over other coverage, this coverage only pays after the limit and deductible of the other coverage is exhausted, whether it is collectible or not. If a deductible applies to this coverage, the deductible amount is reduced by the amount of the underlying coverage and the underlying deductible. This means the insured does not have to jump the hurdle of both the deductible and the underlying limits.

Example: Continuing the example above, each of the two crime coverages had a $2,500 deductible. Since the property extension had a $2,500 limit, the deductible was satisfied and the crime coverages paid the remaining loss, subject to the limit of insurance condition.

n. Ownership of Property; Interests Covered

Property covered includes owned property, leased property and property held for others.

Note: This is an important change! The prior edition’s exception that no coverage applies to property inside the client’s premises and the requirement that the insured be legally liable for the property of others to be eligible for coverage were removed (05 06 change).

o. Records

The insured must have records available that substantiate any loss reported.

p. Recoveries

Recoveries made by the insurance company, minus recovery expenses, are returned to the insured until the amount of its loss above the deductible amount is paid. Any remaining recovery amount is paid to the insurance company until it is completely reimbursed for the loss settlement it made. Any additional recovery amounts available go to the insured to reimburse its deductible. If any money remains after the first three items are paid, the insured is paid for losses sustained not covered by this insurance.
Recoveries do not include reinsurance recoveries by the insurance company or the cost of original securities if duplicates have been issued.

q. Territory

The United States, its territories and possessions, Puerto Rico and Canada constitute the covered territory. Exceptions apply for Insuring Agreements A.1, A.2 and A.6 as outlined below.

r. Transfer of Your Rights of Recovery Against Others to Us

The insured cannot waive subrogation rights for any reason. In most property insurance policies, the insured can waive rights of subrogation in writing before the loss, but this option is not available in the crime policy.

s. Valuation–Settlement

(1) The terms of the limit of insurance section apply first after which the following applies:

(a) Money is valued at its face value. If the money is foreign currency, it can be replaced for the face value of that country’s currency or the equivalent in U.S. dollars at the exchange rate or value published in the Wall Street Journal on the day the loss was discovered.

(b) Securities are valued at their price at the close of business on the day the loss was discovered. Securities are either replaced or cash is paid, at the insurance company's option. If replaced, the insured must sign over all rights to the lost securities to the insurance company. The insurance company then pays for the cost of a lost securities bond, if the cost of the bond is less than the value of the security or securities at the close of business on the date the loss was discovered, or the limit of insurance, whichever is less.

(c) Replacement cost is paid for damage to the premises or other property, subject to the limit of insurance. The damage must be repaired or replaced promptly. If it is not, the insurance company pays only the actual cash value of the covered property.

(2) Property other than money can be paid for in either the currency of the country where the loss occurred or the equivalent in United States dollars, at the exchange rate published in the Wall Street Journal on the date the loss occurred.

(3) Any property the insurance company replaces or pays for becomes the property of the insurance company.

2. Conditions Applicable to Insuring Agreement A.1: Employee Theft

a. Termination as to Any Employee (moved here from Conditions Applying to All Insuring Agreements) (05 06 addition).

This insuring agreement can cease to apply to any employee. The time and the manner in which this is done depend on the circumstances.

As soon as the named insured, partners, members, managers, officers, directors or trustees learn that an employee has committed a dishonest act, all coverage for that employee ends. It does not matter if the dishonest act happened before or after the employee joined the named insured’s business. The only exception is if one of the named groups of company representatives was in collusion with the employee and concealed the dishonest act of the employee in order to further his or her own dishonest plans.

Example: Sherry is watching a rerun of a reality crime show and is shocked to see the on screen arrest of Jackie, who she had hired six months earlier and was considered trustworthy. Sherry decided not to share this information with her business partners. Two months later, Jackie disappears along with half of the company inventory. During examination it is discovered that Sherry had knowledge of Jackie’s past so coverage is denied.

The insurance company can terminate coverage for an employee by mailing notice to the named insured at least 30 days before the date that cancellation takes effect.

b. Territory

Losses caused by employees located temporarily outside the United States, its territories and possessions or Canada are covered for up to 90 consecutive days. This coverage does not apply to employees permanently relocating to another country.

3. Conditions Applicable to Insuring Agreement A.2: Forgery and Alteration

a. Deductible Amount

No deductible applies to legal expenses.

b. Electronic and Mechanical Signatures

Electronic, mechanical or other similar means of duplicating signatures are acceptable and considered the same as handwritten signatures. However, coverage does not apply for electronic signatures that do not produce a visible handwritten signature but that are used in electronic commerce to verify the sender and the sender’s intent.

c. Proof of Loss

The instrument involved with the loss, such as the check, must be attached to the proof of loss. If the instrument cannot be provided, an affidavit describing the cause and amount of loss must be provided in its place.

d. Territory

The territory condition does not apply to this insuring agreement since coverage applies anywhere in the world.

4. Conditions Applicable to Insuring Agreement A.4: Inside the Premises–Robbery or Safe Burglary of Other Property and Insuring Agreement A.5: Outside the Premises

a. Armored Motor Vehicle Companies

If a contract is in place that allows for recovery from the armored vehicle company directly or from its insurance company, this policy is excess over the recovery amount.

b. Special Limit of Insurance for Specified Property

The maximum amount available in any one occurrence for loss of precious metals, precious or semiprecious stones, pearls, furs or fur articles is $5,000. Fur includes expensive minks or inexpensive rabbit. This includes articles, whether complete or not, whose principal value is derived from the fur, precious metals or precious stones. This limit also applies to manuscripts, drawings or any kind of records, the cost of reconstructing them or reproducing any information in them.

Example: The Coat Company manufactures two nearly identical ladies’ jackets. The one trimmed with fur wholesales for $500. The one without fur trim wholesales for $350. Because the fur trim amounts to only $150 of the value of the $500 coat, it would not be subject to the limitation because the value of the fur is less than half of the total value of the coat.

5. Conditions Applicable to Insuring Agreement A.6: Computer Fraud

a. Special Limit of Insurance for Specified Property

Property consisting of manuscripts, drawings or records, including the cost of reconstruction or reproduction, is subject to a $5,000 limitation. There is no further limitation on electronic records.

b. Territory

The policy territory is worldwide.

F. DEFINITIONS

These definitions apply to all crime insuring agreements.

1. Banking premises refers to the interior of a bank or a similar safe depository. Does it include the vestibule or entrance hall at the bank where the ATM machine is located? At a main branch, does it extend to the entire premises, including the securities division and the insurance agency? Banking premises do not include a stock brokerage or other financial institution, except a banking institution or similar safe depository. In the current era of financial services reform, more combination financial institutions may develop. The premises may house a bank branch in one area and other functions, such as insurance, stocks and bonds sales and administration, in other areas of the building. In that situation, would the entire financial institution be classified as a bank? The policy language is not clear. The interior of a bank may be best defined by the federal or state laws that apply to the banking institution where the covered loss occurs.

The definition of Client is removed in the 05 06 edition.

2. Counterfeit money is a money imitation designed to deceive and be accepted as real money (05 06 change).

3. Custodian means the insured, including partners, members or employees having custody of property INSIDE the premises. It does not mean anyone acting as a watchperson or as a janitor. Watchperson is defined as someone hired to watch. An employee working late and responsible for locking up when leaving is not a watchperson. Janitor is not defined; therefore, a person hired to perform duties such as cleaning or light maintenance would be the common understanding of the term.

Example: Becky is a very conscientious administrative assistant. Once she came in on a Sunday night to clean up the company conference room so that it was ready for a Monday morning partners meeting. Even though she was performing janitorial type duties she was still considered a custodian because her job function is that of an administrative assistant.

4. Discover or discovered refers to when the named insured has enough information to reasonably think that a covered loss has occurred or will happen soon. There is no requirement concerning having knowledge of specific details, such as the time or location of a loss.

It also means the time when the named insured receives notice of an actual or potential claim which involves an insured being held liable to another party for a loss that may be eligible under this insurance policy.

This definition’s paragraphs may both cause confusion. The first concerns the reasonable man theory. When is there enough information to prompt a reasonable person to get an insurance company involved? The second paragraph refers to “notice” but does not define the word. The result is that interpreting the matter could lead to legal action and court decisions.

5. Employee:

a. Employees ARE:

Natural persons employed by the insured and for up to 30 days after termination of employment. This time period does not apply to any employee terminated due to his or her dishonest acts (05 06 addition). The person must be compensated directly by salary, wages or commissions and the insured must have the right to direct or control the activities of the person. The difference between employees and independent contractors can be vague and is somewhat fluid. Recent employment cases have scrutinized long-term independent contracts to determine whether individuals are truly independent or are de facto employees. Each situation is different and requires expert legal advice to determine whether these persons should be considered as employees or not.

Example: Kent fires employee Bob. On Bob’s last day at work, Kent collects his keys and other items as Bob removes his personal items. However, Bob made and kept a duplicate key. Two weeks after being fired, he uses this key to steal merchandise from Kent’s warehouse. Bob is an employee under the definition and Insuring Agreement A.1 Employee Theft provides coverage for his actions.

Temporary employees are employees if they are hired to meet seasonal or short-term workloads or to substitute for permanent employees on leave. Insurance coverage does not apply when temporary employees have custody of property OUTSIDE the insured premises. They would not be covered as a messenger or even when operating the outside cash register during a sidewalk sale.
Leased employees are employees. There must be a written agreement between the insured and a labor-leasing firm for the leased employee to perform duties related to the insured’s business. A leased employee is not a temporary employee as described above.
Trustees and officers of the employee benefit plan, as well as the plan employees, are employees. Third-party administrators or other independent contractors hired to administer covered employee benefit plan(s) are not employees. Directors or trustees of the named insured plans are considered employees while handling funds and other property that belong to the plan. A plan director may have administrative duties relating only to the plan but have nothing else to do with the insured’s business.
A former employee, director, partner, member, manager, representative or trustee used as a consultant is an employee.
Guest students or interns pursuing studies or duties are employees, unless they have care and custody of the insured’s property outside the covered premises.
Employees of merged or consolidated entities are employees, provided the merger or consolidation occurred before the effective date of the current policy (05 06 addition).
Managers, directors or trustees are employees when performing duties usual to those of an employee or when serving on a committee at the request of the board of directors or board of trustees. A director is not an employee when sitting in board meetings or doing director tasks (05 06 change).

b. Employees ARE NOT agents, brokers, factors, commission merchants, consignees, independent contractors or other similar parties and others not specifically mentioned as employees (05 06 change).

6. Employee benefit plan means any welfare or pension plan subject to the Employee Retirement Income Security Act of 1974 (ERISA). Insurable plans include defined benefit pension, target benefit, profit sharing, 401(k), Keogh, Simplified Employee Pension (SEP) Plans, group health, life, disability, unemployment and cafeteria (Section 125) plans and prepaid legal services. Government plans such as Social Security are not included.

7. Forgery is the signing of someone else’s name with the intent to deceive. However, forgery does not apply when the insured or an employee signs something for which he or she has no signature authority.

8. Fraudulent instruction means any of three different things:

· An electronic, telegraphic, cable, teletype, telefacsimile or telephone instruction supposedly transmitted by the insured but actually transmitted by someone else without the insured’s knowledge.

· A written instruction issued by the insured forged or altered by someone without the insured’s knowledge or consent.

· An electronic, telegraphic, cable, teletype, fax, telephone or written instruction initially received by the insured, supposedly transmitted by an employee, but sent by someone else without the insured’s or the employee’s knowledge or consent.

9. Funds are money and securities and are usually associated with an employee benefit plan.

10. Manager is a person who is a director of a limited liability company. Manager is not the typical employee with supervisory responsibilities. That person would be considered an employee.

11. Member is an owner of a limited liability company. A member may also be a manager.

12. Messenger includes the insured, the insured’s relatives, partners, members or any employee having care and custody of the property outside the premises. If the named insured is either an individual or a partnership, a relative is considered a messenger when having custody of property outside the premises. If the business is a corporation, it does not have relatives. However, the president’s spouse as well as the spouse of a rank-and-file employee could be considered a messenger.

13. Money is currency, coin or bank notes in current use with a face value. Money also means traveler’s checks, register checks and money orders held for sale. Register checks are no longer used in the banking industry but the term remains. Cashier’s checks are NOT considered money.

14. Occurrence

This definition is significantly expanded in the 05 06 edition. The coverage intent is the same but wording has been added to clarify the intent due to ambiguities cited in Auto Lenders Acceptance Corporation v. Gentilini Ford, Inc. 181 N.J. 245, 854 A 2.d 378 2004. The major change is that the emphasis is on the individual committing the act instead of the act itself. The defined occurrence must take place during the policy period or in the period defined in Condition E.1.k or Condition E.1.l.

Under Insuring Agreement A.1, Employee Theft, an act or acts committed by an employee acting alone or with other persons is an occurrence. The act or acts can be by an individual, the combined total of several related or unrelated acts or a series of related or unrelated acts.

Examples:

Five employees work together to skim money at different times and by different means from their company’s accounts. This is treated as a single occurrence.

Five employees who do not know of each other’s plans or what they are doing skim money at different times and by different means from their company’s accounts. This is treated as five different occurrences.

Under Insuring Agreement A.2, Forgery or Alteration, forgery of one or more instruments committed by a person acting alone or with other persons is an occurrence. The act or acts can be by an individual, the combined total of several related or unrelated acts or a series of related or unrelated acts.

Under all other insuring agreements, an act or acts committed by a single person or with other persons is an occurrence. The act or acts can be by an individual, the combined total of several related or unrelated acts or a series of related or unrelated acts. This also includes an act or acts not committed by ANY person.

Example: A theft ring is never identified but evidence shows it has been at work in the insured’s plant for five months and has stolen hundreds of different products. This constitutes one occurrence.

15. Other property must have intrinsic or inherent value, cannot be money or securities and must not be property otherwise excluded. It does not include computer programs, electronic data or specifically excluded property (05 06 addition).

16. Premises are the interior PORTION of the building occupied by the insured and used to conduct its business. What portion of the building is occupied when the insured is a tenant in a mall with an interior corridor or the insured operates with a pushcart or kiosk in the mall? What about the storage locker located in a separate part of the mall? The lease would be the starting point to determine the meaning of premises in these situations.

17. Robbery is the unlawful taking of covered property from someone having custody of it and where actual bodily harm or threat of bodily harm is involved. It can also be an obviously unlawful act witnessed by the person having custody of the covered property.

Example: A customer in a store is observed shoplifting at the end of the aisle and security is called. Until and unless that customer threatens or harms an employee, a robbery has not taken place.

Example: An employee is taking a package of product from one store to another. When the employee is stopped at a stop sign, a pedestrian reaches into the vehicle and steals the package. This is a robbery because the employee witnessed it being removed.

18. Safe burglary requires evidence of forcible entry into or the removal of the entire safe or vault from the premises.

19. Securities include negotiable and nonnegotiable instruments that represent money or property. Some securities may represent commodities, such as grain or coal. Securities also include tokens, tickets, revenue and other stamps, including stamps in a postage meter. Securities can also be evidence of debt related to credit or charge cards but only if the evidence of debt is against a card not issued to the insured.

20. Theft is the unlawful taking of any covered property. The theft must be to the deprivation or loss of the insured. If the item stolen has no value, there is no theft according to this definition.

21. Transfer account is an account maintained by the insured at a financial institution from which funds may be transferred, paid or delivered by means of electronic, telegraphic, cable, teletype, telephone or fax instructions. This is done through an electronic funds transfer system or by written instructions that permit certain types of electronic transfers to be completed.

22. Watchperson is a person retained specifically to have care and custody of property INSIDE the premises and having no other duties. If the insured hires a watchperson who also patrols the grounds, this person does not meet the definitions of watchperson for the purposes of this insurance.