Hands in the cookie jar
Consider nonemployees when discussing crime insurance
By Donald S. Malecki, CPCU
The focus of employee dishonesty insurance naturally is on employees. It is not unusual, however, for employers to sustain loss of money, securities or other tangible property at the hands of persons other than employees who have business relationships with employers. Because of this, insureds should be advised to consider adding appropriate endorsements that would add applicable service contractors to the list of employees.
Among those who fall within this “nonemployee” category are agents, brokers, factors, commission merchants, consignees, and other independent contractors, or representatives; also, any manager (meaning a person serving in a directorial capacity for a limited liability company), director or trustee, except while performing acts coming within the scope of the usual duties of an “employee.”
While the definitions section of crime insurance forms has grown over the years, none of the preceding excluded persons or organizations, as defined therein, or anywhere else are in the provisions of commercial crime coverage forms.
Most of these persons or organizations itemized as not being considered as employees are service contractors of one type or another and any one of whom could be the source of financial loss to the entity that retains its services. Black’s Law Dictionary, 5th Edition, defines each of the above nonemployees as follows:
Agents. A business representative, whose function is to bring about, modify, affect, accept performance of, or terminate contractual obligations between principal and third persons.
Brokers. A person whose business is to bring buyer and seller together. Such a person could be in the business of buying or selling stocks, bonds, commodities, insurance or real estate.
Commission merchants. Is a term that is synonymous with “factor,” as listed below. It means one who receives goods, chattels, or merchandise for sale, exchange, or other disposition, and who is to receive a compensation for his services, to be paid by the owner, or derived from the sale, etc., of the goods.
Factors. See “commission merchants” above. A “factor” differs from a “broker” in that the factor is entrusted with possession, management, and control of the goods, while a broker acts as a mere intermediary without control or possession of the property.
Consignees. One to whom a consignment is made. A person to whom goods are shipped for sale, or one to whom a carrier may lawfully make delivery in accordance with his contract of carriage.
Independent contractors. Generally, one who, in exercise of independent employment, contracts to a piece of work according to his methods and is subject to his employer’s control only as to the end product or result of his work.
Generally speaking, all of the preceding persons or entities who are not considered to be employees could be categorized as independent contractors. Presumably, they are specifically singled out and mentioned for purposes of clarification in part because it is not always easy to determine if a person is acting as an independent contractor. If that is an issue, the answer will likely hinge in a large part on who had control of the means and methods of the work at the time of the event giving rise to the loss.
Adding any one or more of these excluded categories to employee dishonesty coverage decreases the chances that an employer’s loss will go uncompensated. The big question is whether or not an underwriter is willing to add one or more and, if so, at what price? Based on some research of court cases, it does not appear that these persons or entities have created much of a problem when added to someone’s commercial crime coverage form.
A variety of other persons or entities also fall outside the definition of “employee” under commercial crime coverage forms. The longer the number of limitations added to the defined term “employee,” the more difficult it is to determine who precisely is not considered to be an employee. Looking at the Commercial Crime Discovery and Loss Sustained Coverage Forms, the definition of “employee,” for example, does not include:
• A temporary employee while having care and custody of property outside of the “premises,” as defined in the forms
• Any administrator or manager who is an independent contractor of any “employee benefit plan(s)” insured under this insurance
• A guest student or intern pursuing studies or duties while having care and custody of property outside of the “premises”
It is worth emphasizing here that even though a temporary employee, guest student or intern is considered to be an employee, no coverage will apply for loss while property is in his or her possession away from the “premises,” as defined in the form.
So when these persons are asked to run errands involving money, securities or other tangible property, the employer needs to keep in mind that any loss to such property that was in the care and custody of those persons would not be covered. This is an exposure that is sometimes overlooked.
A number of endorsements are available for use with the various commercial crime forms or policies. It is unfortunate that there is not a better way to offer coverage than the current method where, if some person(s) or organization(s) needs to be covered, a separate endorsement has to be issued.
What would be a better way, and a way that would reduce the chances of an omission or oversight would be an endorsement checklist. All of the available endorsements, in other words, would be listed, with the appropriate one checked off. There is nothing novel about this approach. Some insurers use this approach for a variety of coverages. The checklist would also serve as a reminder of who should be added to the policy.
While all of the endorsements adding others as employees to commercial crime coverage forms are important, some may be more important than others, simply because of the fact that they are sometimes overlooked and they protect important exposures.
Include Partners As Employee (CR 25 03). This endorsement redefines the term “employee” to include the partners identified in the schedule of this endorsement. It also amends the “acts committed by you, your partners or your members” exclusion of the crime general provisions.
When this endorsement is issued, the insurer will not pay for loss caused by any partner included as an “employee” by this endorsement, unless the amount of the loss exceeds the sum of the following:1
a. Any amounts you owe that partner.
b. The value of that partner’s partnership interest in a partnership insured under this insurance as determined by the closing of that partnership’s books on the date of discovery of the loss by that partnership or any of its partners not in collusion with the partner causing the loss, and
c. Any applicable deductible.
We will then pay the amount of loss excess of that sum, up to the Limit of Insurance applicable to the Employee Dishonesty Coverage Form.
When this endorsement becomes applicable, it forces the partner who is dishonest to suffer the loss he or she caused, while allowing the insurer to pay for that part of the loss to the extent it exceeds the share of the partner who caused the loss. This approach departs from what usually is the situation involving partners—that is, joint and several liability.
Include Members of a Limited Liability Company As Employees (CR 25 04). This endorsement is similar in its approach to the one applying to partners of a partnership. It requires a schedule for listing the members who are to be considered as employees. It also modifies the “acts committed by you, your partners or your members” exclusion so as to make an exception insofar as those members who are listed and viewed as employees. This endorsement also includes the same quoted provision that applies to partners.
Include Volunteer Workers As Employees (CR 25 09). This endorsement redefines “employee” to include any noncompensated natural person, other than one who is a fund solicitor, while performing services for the employer that are usual to the duties of an employee, or while acting as a fund solicitor during fundraising campaigns. Considering how common volunteer services are today, it is advisable to have this endorsement issued whether or not any volunteers exist at policy inception.
Include the Spouse and Children of Building Manager or Superintendent or Janitor As Employees (CR 25 11). When this so-called real estate or property management endorsement is issued, the term “employee” also includes the spouse and children (over 18 years of age) who reside with any employee who is a building manager, superintendent, or janitor. Each family, however, is considered to be, collectively, one employee for purposes of this endorsement, except that the cancellation provisions apply separately to the spouse and children.
Include Leased Workers As Employees (CR 25 05). If an entity leases employees, even sporadically, it might be advisable to have this endorsement issued as well. When attached, it does not, however, cover an employer’s loss of money, securities or other tangible property caused by a person furnished to substitute for a permanent employee while on leave, or to meet seasonal or short-term workloads.
Other endorsements available to include persons or organizations as employees are: Include Joint Venture or Partnerships As Insureds (CR 20 18); Include Designated Agents As Employees (CR 25 02); Include Chairperson and Members of Specified Committees As Employees (CR 25 06); Include Specified Directors or Trustees On Committees As Employees (CR 25 07); Include Specified Non-Compensated Officers As Employees (CR 25 08); Include Volunteer Workers Other Than Fund Solicitors As Employees (CR 25 10); Include Treasurers or Tax Collectors As Employees (CR 25 12); Include Students As Employees (CR 25 13); Include Officers and Employees of Federal Reserve Bank Acting As EFTS Agents As Employees (CR 25 14); Amend Definition of Employee To Comply With Labor-Management Reporting and Disclosure Act of 1959 (CR 25 15); and Include Designated Persons or Classes of Persons As Employees (CR 25 41).
The fact that endorsements are available to expand (and sometimes to reduce) the meaning of “employee” under the commercial crime coverage forms does not necessarily mean that the insurer will issue them. Much will depend on underwriter discretion.
Considering the number of endorsements available to modify the definition of “employee,” it may be advisable (1) to maintain a checklist of the endorsements available and (2) request issuance of those endorsements not only where an exposure exists at policy inception but also where an exposure is likely to arise during the policy period.
1 Copyright, ISO Properties, Inc. 2006.
Donald S. Malecki, CPCU, has spent 49 years in the insurance and risk management consulting business. During his career he was a supervising casualty underwriter for a large Eastern insurer, as well as a broker. He currently is a principal of Malecki Deimling Nielander & Associates L.L.C., an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.