Understanding Crime Insurance: Key Coverages, Enhancements, and Limitations

Crime insurance is a key component of your business’s risk management strategy. It provides coverage for losses resulting from acts such as theft, fraud, and embezzlement. This article will explore the coverages, enhancement endorsements, limitations, and important considerations.

Key Coverages

1. Employee Theft: Covers losses resulting from theft committed by employees.
2. Forgery or Alteration: Protects against losses from forged or altered checks, drafts, or promissory notes.
3. Inside the Premises – Theft of Money and Securities: Covers theft, disappearance, or destruction of money and securities within the insured’s premises.
4. Outside the Premises: Provides coverage for money and securities stolen, lost, or destroyed while outside the premises.
5. Computer Fraud: Protects against losses resulting from the use of a computer to fraudulently transfer money, securities, or property.
6. Funds Transfer Fraud: Covers losses from fraudulent instructions to transfer funds from the insured’s account.

Important Enhancement Endorsements

1. Social Engineering Fraud: Provides coverage for losses resulting from deceptive schemes that trick employees into transferring funds or divulging confidential information. Social Engineering may be included on the Crime policy or the Cyber policy.
2. Extortion Coverage: Protects against losses resulting from threats of violence, property damage, or reputational harm.
3. Third Party Employee Dishonesty: Extends coverage to include losses sustained by clients due to fraudulent acts committed by the insured’s employees.

Limitations and Exclusions

1. Exclusion for Officers and Owners: Crime insurance policies often exclude coverage for fraudulent acts committed by officers, owners, or partners of the insured organization. This limitation is in place because these individuals have significant control over the business and its assets.
2. Prior Dishonesty Exclusion: Excludes coverage for losses caused by employees who have a history of dishonest acts known to the insured.

Loss Sustained vs. Discovery Forms

It is important to understand the difference between the two primary forms for crime insurance which are defined below. Most policies are written on the Discovery form. This means that the limit of insurance that applies is the one on the policy on the date that you “discover” that someone has been stealing from you. If the fraud has been perpetrated for years, your limits will not “add up.” You will only have the limit on the policy in force.

1. Loss Sustained Form: Provides coverage for losses that occur during the policy period and are discovered within a specified time after the policy expires.
2. Discovery Form: Covers losses that are discovered during the policy period, regardless of when the loss occurred. This form is beneficial for businesses that may not immediately detect fraudulent activities.

You do not want to switch back and forth between loss sustained and discovery forms. Ideally, you would not move your coverage from carriers on a frequent basis. Make sure that there is never an interruption in your coverage.

Key Crime Insurance Terms

1. Employee: Any individual employed by the insured, including temporary and leased employees.
2. Forgery: The act of falsely making or altering a document with the intent to deceive.
3. Premises: The physical location owned or leased by the insured where business operations are conducted.
4. Securities: Negotiable and non-negotiable instruments representing money or property.

Policy Coordination

Often, businesses have their coverage for Crime with their package carrier and separate stand-alone cyber and executive liability policies. That may work well, but a thoughtful review is critical. You must avoid having duplicate coverage and/or gaps where it was assumed that coverage is on another policy. If there was a situation where you suffered a social engineering attack and transferred money to the wrong bank account, you would want to know which policy would respond, your crime or your cyber insurance policy. In addition, Senior Leadership may be exposed to allegations of mismanagement regarding training practices and efforts to protect the organization.           

Work closely with your insurance broker to ensure that you have the coverage properly coordinated. In addition, with emerging risks and threats, you need to evaluate this coverage at least annually.