Businesses and professional associations have always been threatened by losses due to criminal acts by employees and by those outside of the business. Thefts by employees adds millions of dollars to the cost of goods to consumers because of these illegal and unlawful activities. Small businesses, in particular, are susceptible to criminal activities such as burglary and holdups. Employee theft is usually covered through Fidelity Bonds and in some form of Crime policies.
Crime Coverage Forms are attached to Common Policy conditions and Declarations, and will include a General Provisions Form.
The Commercial Crime Coverage Part was developed by the ISO and the Surety Association of America, and consists of six parts. If only one coverage part is used as the policy, it is considered a monoline policy. If two or more parts are used, it is considered as a Commercial Package policy,
The six parts that create a Crime Coverage Part are:
The Common Policy Declarations and Common Policy Conditions follow very closely the provisions of the Commercial Property Policy.
Typical policy provisions include:
As with all Commercial policies, certain specific General Exclusions apply. Other exclusions are peculiar to the particular Crime Coverage form.
Loss Committed By The Insured or Partners - The policy does not cover criminal or dishonest actions committed by the Insured or his partners, either acting alone or in collaboration with others.
War and Similar Actions - No coverage for loss due to war, insurrection, rebellion, revolution, etc.
Nuclear Hazards - Any loss because of nuclear reaction or radiation or contamination is excluded.
Governmental Action - Any losses as the result of seizure or destruction of any property because of governmental authority will not be covered.
Indirect Loss - Any covered loss or damage to the property insured must be as the direct result of an occurrence.
Discovery Period - Due to the nature of crime, many criminal acts are not apparent immediately. The policy provides that the loss must occur while the policy is in force, and must be discovered within one year after the policy expires.
Loss Sustained During Prior Insurance - The policy has provisions to pay for losses that were sustained while a prior policy was in force, but which was not discovered during that policy’s term, provided there was no break in coverage and it can be shown that it was a loss that would have been covered under the present (new) policy had that policy been in force when the loss occurred. The amount paid is the lesser of the amount the previous policy would have paid for the loss if the loss had been discovered during the policy term, and the amount the present policy would have paid if it had been in force
ILLUSTRATION:
The insured firm was a family-owned business that had been in the family for many years. As the family grew, so did the business. It had always been the practice of the family to take from the company certain costs as they arose, regardless of the percentage of ownership. For instance, daughters of two of the family owners had to have braces at the same time, and the parents drew the Orthodontist fee from the cash register, simply notifying the bookkeeper that they were doing so. This business suffered a loss by burglary and many of the bookkeepers records were destroyed in the process.
When the claim was filed, the insurer required an accurate accounting of all income and disbursements. To reconstruct the company’s books was beyond the ability of the bookkeeper, and they had to bring in the outside accountant. Even though the insurer was the one that required the services of the accountant, the insured business had to pay the added cost of accounting services.
ILLUSTRATION:
Johnson Musical Instrument Company purchases a Crime policy from Brokers Insurance with an insured amount of $20,000 on January 1, 1994. The policy was kept in force for 3 years, expiring on December 31 1997. It was immediately replaced on January 1, 1998 by a Crime Policy from Security State Insurance with an insured amount of $40,000. Benefits and coverages under both policies were essentially the same.
In April 1998, while moving some of the merchandise to a second store location, it was discovered that many musical instruments were missing from their cases, with a worth of $35,000. The instruments had been locked in the store room in June 1, 1996, taken out and displayed in September of 1996, and then returned to the storeroom in January 1997 which was left unlocked until July 1997 when it was locked and all indications were that the room had not been entered since , thereby fixing the time of loss as the period between January 1997 and July 1997.
Since the loss was discovered too late to be covered by the first company, the second (replacing) company assumes the loss as there was no break in coverage. However, the maximum payment by Security State would be $20,000, the maximum allowed under the first policy.
Ownership of Property; Interests Covered - The type of property may differ from form to form, however they all apply only to property owned or held by the Insured, or property for which he is legally liable.
The amount of the Crime coverage part governs the amount of insurance, unless specific extensions are included.
Loss Sustained By Several Insureds - Policy will not pay more than it would if there were only one insured, regardless of the number of insured persons suffering losses.
Loss Covered Under Several Coverages - If more than one coverage applies to a loss, the policy will pay up to the maximum for each coverage, but not more than the amount of the loss under all coverages combined.
Non - Accumulation of Liability - Although several dishonest acts can create loss, all of the separate losses committed over a period of time, are considered as one loss and liability is limited to the policy limits and cannot accumulate even though the policy may have been in force for a substantial period of time.
ILLUSTRATION:
Fabric’s Unlimited has a large warehouse storing various materials offered in its stores, including some very expensive silks. During certain times during the year, Fabric’s opens their warehouse to designers, retailers, and to those who simply want to purchase larger than usual amounts of fabrics. They employ part time help during this time.
At year-end inventory, they discovered that there was a large amount of the more expensive fabric that could not be accounted for. They hired a firm of Private Investigators and were able to catch two of their part-time employees stealing from them. The employees would personally take rolls of silk and put it in the trunks of their own cars, they would sell rolls of cloth and other material and when they could, they would pocket the money. In addition, one of the employees had an arrangement with the driver for a clothing manufacturer wherein he would ostensibly purchase material, sign all the forms, and then take the material to his own home where he would later sell it to other stores. The employee would destroy the paperwork.
Fabric’s had policy limits of $250,000 per loss. Their accountants were able to determine that they lost over $350,000 from these two employees.
Even though there were several instances of theft over a period of time, the insurer was liable for only $250,000, the total limit per loss.
However, if Fabric’s also suffered a holdup during this period of time, and the two employees were not involved, this would be treated as a separate event.
Excess Insurance Over Other Insurance - Coverage will apply only to any amount that is not recoverable from other policies.
Loss Covered Under Present and Prior Policies In Same Company - If a loss is covered by a present policy, however the previous carrier was the same company, the insurer will pay only the larger amount recoverable under either the present or the prior policy.
ILLUSTRATION:
Assume that during the period of loss by theft suffered under Fabric’s, Fabric’s changed the policy to add additional benefits and to increase the policy limits. The previous policy was in force when the thefts by employees first started, and the policy limit to cover the theft losses was $250,000. The policy limits was raised to $350,000 with the new policy. Also assume that the total loss was $500,000.
The insurer would pay $350,000, the larger of the policy limits since both policies were with the same company. However, they would not combine the two policy amounts ($600,000 total) but would only pay the larger of the two policy amounts.
Recovery (Salvage) - Any salvage after claim settlement is shared between the insured and the insurer, taking into consideration settlement costs which will be shared accordingly.
Coverage Outside of the Policy Territory - Coverage for up to 90 days is afforded for losses committed while an employee is temporarily outside the policy territory.
Schedule Coverage - The form may be written on either a Name Schedule or Position Schedule basis. (The descriptions above pertain to the Blanket Form, the Schedule Form covers only losses by persons [employee] named in the Schedule form or person occupying a particular position listed in the Position Schedule).
Employee Prior Dishonest Act - If any employee is discovered by the Insured to have committed a dishonest act during present or prior employment, coverage on that employee is immediately terminated. However this can be at the discretion of the insurer.
ILLUSTRATION:
Alter Manufacturing Co. manufacturers plumbing supplies and carries a crime policy. They received a large contract from a hotel chain and hired additional personnel. Because of the influx of employees, their Human Resources Department performed only cursory background checks on employees.
Bill had formerly worked for Ceramic Manufacturing and had experience needed by Alter. He had an impeccable record for his 10 years with Ceramic, and left them only because of higher income and more opportunity with Alter. However, when quite young, he was convicted of stealing a hunting knife from a hardware
(Continued from previous page) store where he worked while going to school. He made full restitution and he was put on probation.
When this was discovered during an investigation of robbery at Alter, the insurer immediately terminated coverage on Bill. The executives at Alter were irate and the insurer then reversed their decision and Bill remained covered.
Inventory Losses - Any loss discovered by inventory is not covered if there is no evidence of employee dishonesty.
B |
This Form covers any loss due to forgery or alteration of a check or draft, promissory or similar written promise. It also covers any legal expense if the insured is sued for refusing to pay any covered instrument that was forged or altered.
C |
This Form provides coverage for any losses of money or securities because of theft, disappearance or destruction, and adapts the General Provisions Form to the specific needs of the Insured.
The policy is divided into two Sections, as follows:
Loss Inside Premises
Loss Outside Premises
EXCLUSIONS:
Acts of Employees, Directors, Etc. - Losses caused by any dishonest act of an employee, officer, director, trustee or representative, either alone or acting with others, are not covered.
Exchanges or Purchases - Any loss arising from the gift of covered property, whether exchanged or sold, is not covered.
Accounting Errors - Losses resulting from accounting or mathematics errors are not covered under the policy.
Money Operated Devices - Any money-operated device is not covered unless there is a continuous recording instrument in the device.
Transfer or Surrender of Property - Any losses arising from the surrender of property to a person outside of the premises because of unauthorized instructions, or as a result of threat to do bodily harm, is not covered. However, if property is in the custody of a messenger and the insured was not aware of any threat at the time the property was given to the messenger, or if the threat was not specifically related to the property involved, the loss would be covered.
Voluntary Parting With Property - Losses resulting from the insured (or anyone acting on his authority) being persuaded to voluntarily part with the property by a dishonest act.
Damage By Fire - Losses to the premises by fire are not covered.
Vandalism - Damage by vandalism is excluded.
Duties In Event of Loss - In addition to the requirements in case of loss spelled out in the General Provisions the insured has an obligation to notify the policy if he/she has reason to believe that a loss to property covered under the policy, actually involves a violation of the law.
D |
other than money and Securities.
Money and securities are excluded if coverage is on other forms, or if the insured has no need to cover such property, subject to endorsement to include money and securities.
COVERAGE
Inside Premises
EXCLUSIONS
The policy does not cover motor vehicles or semi-trailers or their equipment or accessories.
Robbery—Outside Premises
The property covered and the causes of loss are the same as under the Inside Premises coverage.
EXCLUSIONS
Transfer or Surrender of Property - The same provisions as under Coverage C above applies.
Acts of Employees, Fire, and Vandalism Exclusions.
H |
Different risks are covered on the insured’s premises than those off premises and each group is considered separately.
Premises Theft Coverages - Under this section of the policy, all property is covered against loss by theft, and covers any act of stealing, including burglary, theft, robbery, pilferage, etc. Losses by employee theft or computer fraud are excluded.
There are separate limits of liability, for on - premises and off - premises coverages. The exclusion regarding loses occurring at the premises during a fire, can be deleted by endorsement.
E |
This Coverage Form E is offered to nearly all business enterprises, including manufacturers, wholesalers, retailers, etc., and offers coverage:
COVERAGES
Burglary - Burglary requires unlawfully entering or leaving the premises, and there must be a visible mark or forcible entry or exit. There is no coverage without the visible mark, even if desks or cabinets were broken into and there were marks on those items.
Robbery of A Watchperson - The policy covers taking property by threat or by witnessing an unlawful act. Robbery coverage under Premises Burglary does not apply to any loss from robbery of a watchperson.
EXCLUSIONS
In addition to the hazards excluded in the Crime General Provisions Form (discussed earlier), this Crime coverage part is subject to the following additional exclusions:
Vehicles - Specifically excluded are motor vehicles, trailers, and semi - trailers or equipment and accessories attached.
Acts of Employees, Directors, Trustees, etc. - Losses resulting from any dishonest or criminal act by any employee, director, trustee, etc., as outlined above, will not be covered.
Fire - The policy. does not cover loss resulting from fire however caused, except loss from damage to a safe or vault or loss occurring during a fire.
Vandalism - Vandalism or malicious mischief is not covered.
Change In Conditions - If there is any change in the condition of a risk because of conditions within control of the Insured increasing the chance of loss, the risk will not be covered.
The policy provides that after a loss occurs, any further coverage is suspended until the premises are restored to the same state of security it previous enjoyed, however if a watchperson(s) is maintained, the restriction will not apply.
F |
The policy covers money, securities and other property from computer fraud, defined as theft of property following and related to use of any computer to fraudulently cause a transfer of property from inside the premises, to one outside the premises.
It excludes acts of employees, directors, etc.
G |
Extortion - Extortion is defined as the surrender of property away from the premises as a result of a threat which is communicated to the Insured and which, if carried out, would do bodily harm to the Insured, an employee, relative, or others who are being held captive. The threat to do bodily injury must be communicated to the insured during the policy period.
The insured is required to make a reasonable effort to notify an associate, the FBI and/or local law enforcement.
The Extortion Coverage Form is written as either (1) loss participation by the Insured, whereby the Insured pays part of the loss, or (2) no loss participation by the Insured and the Company pays the full amount.
1) Loss participation by, the Insured.
2) No loss participation by, Insured.
A |
I |
J |
K |
L |
M |
N |
O |
P |
Q |
STUDY QUESTIONS
1. Which statement is true? The Commercial Crime Coverage Part
A. consists of six parts.
B. is available only for the large business.
C. excludes losses by theft.
D. allows the insured to only use one part and therefore it is a Monoline
policy.
2. The Common Policy Declarations and Common Policy Conditions of the Commercial Crime Coverage Part
A. are completely different than any other commercial policy.
B. closely follows the provisions of the Commercial Property Policy.
C. are insignificant as every coverage stands on its own.
D. are identical and are stated so for emphasis.
3. Local Pawn Shop is owned by Bill and Frank as partners and they have a crime coverage policy. Bill steals money and other items from the Pawn Shop. Which is true?
A. The policy does not cover this situation.
B. Frank would receive full reimbursement for the items taken.
C. Frank would receive payments only for the other items taken.
D. The policy would be null and void ab initio (from the beginning).
4. Assume that the Local Pawn Shop has a policy available from the Association of Pawn Brokers, that covers theft of pawnshop items up to $5,000. A burglar stole several items worth $10,000. Which is true?
A. The Crime Coverage policy would pay $10,000.
B. The Crime Coverage policy would not pay anything.
C. The Crime Coverage policy would pay $5,000, the excess over what
is covered by the Association coverage.
D. Each company would pay 50% of the claim.
5. Cecil is a diamond broker and attends a gem collectors convention in Los Vegas. A burglar steals diamonds insured under the Crime Coverage Policy of the business which is located in New Jersey. Which is true?
A. Crime Coverage Policy coverages are not transportable. No coverage.
B. The policy would pay as the Coverage Outside of the Policy Territory
would prevail.
C. The policy would not pay as Cecil has not been gone for more than 90
days as required by the policy provisions.
D. The policy will pay the excess over the New Jersey Crime insurance
plan.
6. A check was sent to a vendor, and it was stolen and the amount changed. Which Crime Coverage Form would apply?
A. Form C - Theft, Disappearance & Destruction Coverage.
B. Form H - Premises Theft and Outside Robbery Coverage.
C. Form B - Forgery or Alteration Form.
D. Form J – Fraud and Counterfeiting Form.
7. Bruce goes to work for Jewelers Wholesale. He becomes very proficient in designing jewelry so he makes an agreement with Jewelers Wholesale to contract with them in designing jewelry for their customers that want specially designed jewelry. A customer wanted a necklace designed and Jewelers gave Bruce $250,000 in diamonds and other jewels for this purpose. Bruce was not heard from again. Jewelers Wholesale has a Commercial Crime policy. Will it pay?
A. It will not pay as Bruce is working for the company and is considered as
an employee.
B. Bruce would have to carry his own Commercial Crime policy as he is an
independent contractor, and if he did not, Jewelers will not pay.
C. Since Bruce disappeared, he is not considered as a contractor any
longer so the policy will not pay until Bruce shows up again.
D. The policy will pay as Bruce is an independent contractor and is
performing work for the insured away from the premises, which is
covered.
8. Jewelers Wholesale exchanged their Commercial Crime policy for a newer version that had a better billing method and cost than their own policy and they increased the limits from $500,000 to $750,000 with the new policy. They cancelled their old policy on the effective date of the new policy, Jan. 1, 2000. In April, when they do their usual inventory, they discovered that someone had removed a jeweled pin worth $700,000 from a showcase and had replaced it with paste jewelry. They have no idea as to how long ago the theft took place, or who did it.
A. The insurer will pay the full $700,000.
B. The insurer will not pay any amount since the date of theft was not
known.
C. The insurer would only pay $500,000.
D. The insurer would split the difference, and pay $650,000.
9. Jewelers Wholesale had an expensive brooch on display over a weekend, that attracted a lot of attention. One very well dressed gentleman with a Rolex watch (who knows if it was real…) convinced a salesperson that the only way he could tell if the color of the sapphires matched his wife’s eyes was to take it out in the sunshine. Usually at a request as this, the salesperson accompanies the customer, but the salesperson was distracted by a lady customer fainting, and when he returned to watch the man with the brooch, both the man and the broach were gone. If Jewelers has Crime Coverage Form C, how much will the insurer pay?
A. None, Nada, Not a farthing. Voluntary parting with property by a
dishonest act is an Exclusion.
B. The entire Cash Value of the brooch according to the valuation provision
of the policy.
C. The policy states that for Voluntary Parting (being persuaded to
voluntarily part with the property) the act must be an honest mistake.
Therefore the policy will pay for the entire listed value.
D. Only for the scheduled value of the stones in the brooch.
10. Jewelry Wholesalers also has Form E – Premises Burglary Coverage. One morning they discovered that during the night someone had stolen several Rolex watches from a locked case. There were no marks around the doors or windows, so they believe that the thieves picked the lock. However, the case holding the Rolex watches was a steel box welded to the floor, but the thieves evidently hit it with a sledgehammer and broke the door to get inside. Now what?
A. There is full coverage on this situation as the case where watches were
visible marks of forced entry.
B. In any event, it was obvious a burglary, and since illegal tools were used
to gain entry (lock-picking tools) this would be adequate for the definition
of burglary.
C. Nothing again. There must be visible marks showing forcible entry and
even with the marks on the case, there still must be marks at the point of
entry (or exit).
D. Jewelry Wholesalers also pointed out that they had a valuable brooch
stored in the box with the Rolex watches, and since it was gone too, that
obviously was a burglary, so the insurance investigator took a deep
breath and reminded them that the brooch was taken by a man outside
the store. However, they will still pay, but just for the watches.
ANSWERS TO STUDY QUESTIONS
1A 2B 3A 4C 5B 6C 7D 8A 9A 10C