20-1

Financing Crime Exposures

Historical development led to the development of two distinct classes of dishonesty coverages:

1. Fidelity Bonds, which cover theft or dishonesty on the part of employees of the insured.

2. Nonemployee Crime Coverages, which are designed to cover dishonest acts of persons who are not employees of the insured.

20-2

Employee - Nonemployee Crime

• Each of these classes provides incomplete protection against the peril of dishonesty.

• To provide more complete protection, they must be combined, so it is appropriate to discuss them together.

• With the advent of package policies, both types of criminal losses are frequently insured in the same contract.

20-3

Coverage Under Property Policies

• Increasingly, the exposures of burglary, robbery, and theft of merchandise and equipment are insured under fire policies.

• Virtually all property forms, however, exclude losses due to employee dishonesty. In addition, fire policies (and now the Portfolio property forms) exclude money and securities.

20-4

Need for Separate Crime Insurance

• The need to cover losses from employee dishonesty, and the need for coverage on money and securities still require separate contracts, generally classified as crime insurance.

• In addition, other crime forms exist to cover the traditional crime perils of burglary, robbery, and theft, even though these perils are often covered under open-peril property policies.

20-5

The Portfolio Crime Coverage Forms

There are seventeen crime coverage forms; (actually eighteen, since Coverage Form A, which covers employee dishonesty has two versions: one that provides blanket coverage and one that provides schedule coverage).

20-6

Coverage Form A Employee DishonestyCoverage Form B Forgery or AlterationCoverage Form C Theft, Disappearance, and Destruction Coverage Form D Robbery and Safe Burglary Coverage Form E Premises Burglary Coverage Form F Computer Fraud Coverage Form G Extortion Coverage Form H Premises Theft and Robbery Outside the Premises Coverage Form I Lessees of Safe Deposit Boxes Coverage Form J Securities Deposited with Others FormCoverage Form K Liability for Guests' Property-Safe Deposit Box Coverage Form L Liability for Guests' Property-Premises Coverage Form M Safe Depository Liability Coverage Form N Safe Depository Direct LossCoverage Form O Public Employee Dishonesty Per LossCoverage Form P Public Employee Dishonesty Per EmployeeCoverage Form Q Robbery and Safe Burglary - Money and Securities

20-7

Crime Coverage General Provisions Form

• Crime General Provisions Form (CR 10 00) contains General Exclusions, General Conditions, and General Definitions that apply to most Crime Coverage Forms.

• Crime General Provisions Form contains 6 General Exclusions and 18 General Conditions.

20-8

General Exclusions

1. Loss resulting from dishonesty or criminal acts by the insured or any partner while acting alone or in collusion with others.

2. Loss resulting from seizure or destruction of property by order of government authority.

3. Indirect or consequential loss resulting from a covered event, such as the cost of audits to establish the amount of loss or loss of income that would have been earned except for the loss.

20-9

General Exclusions

4. Expenses related to any legal action.

5. Loss resulting from nuclear reaction, radiation, or radioactive contamination.

6. Loss resulting from war, whether or not declared, warlike action, insurrection, rebellion, or revolution.

20-10

General Conditions

• The General Conditions deal with loss settlement provisions, the application of policy limits, subrogation, and similar provisions.

• The following of these General Conditions are especially noteworthy.

20-11

Discovery Period for Loss

• The insurer is liable only for losses discovered within one year of the end of the policy period.

20-12

Loss Sustained During Prior Insurance

• Currently, most bonds are written for a specified term, such as one year.

• To provide continuity of coverage, the Loss Sustained During Prior Insurance provision states that coverage applies to losses that occurred during a prior bond, but which are not covered by the prior bond because the discovery period of the prior policy has expired.

20-13

Loss Sustained During Prior Insurance

• The Loss Sustained During Prior Insurance provision applies only if there has been absolutely no gap in coverage between the termination of the prior bond and the inception of the existing bond.

• Continuity of coverage is maintained even if the bond in force has replaced a bond of another insurer. This assumption of coverage by a subsequent insurer provides continuity of coverage when the insured changes insurers.

20-14

Loss Sustained During Prior Insurance

• In the absence of such a provision, an insured would be penalized by changing insurers, since he or she would forfeit coverage for any losses that had occurred, but which had not yet been discovered.

• The Loss Under Prior Bond provision guarantees the insured against a break in coverage when changing bonding companies.

20-15

Noncumulation of Limit of Insurance

• The limit of insurance is not cumulative from year to year.

• This is an important limitation, since employee infidelity can take place over an extended period of time, and all thefts by a given employee are considered a single loss.

20-16

Recoveries

• If the loss exceeds coverage under the bond, the insured is entitled to any recoveries from the embezzler in excess of the limit of insurance and amount of the deductible.

• Recoveries in excess of this amount go to the insurer, until the insurer is fully reimbursed.

• Finally, recoveries in excess of the insurer's reimbursement go to the insured, up to the amount of the deductible.

20-17

Transfer of the Insured's Rights of Recovery

• This is the standard subrogation clause, and requires the insured to transfer to the insurer all rights of recovery against others to the extent that the insurer has made payment.

• The insured must do everything necessary to secure right of recovery against others and shall do nothing after a loss to impair that right.

20-18

Valuation

• Money is valued at more than its face value.

• Foreign money is valued at either its face value or its value in U.S. dollars at the rate of exchange for the day the loss is discovered.

• Securities are valued at not more than their worth at the close of the day the loss is discovered.

• Property other than money and securities is valued, at the option of the insurer, at its actual cash value or the cost of repairing or replacing the property.

20-19

Discovery Bonds

• A special class of bonds--usually written for financial institutions--may provide coverage on a discovery basis.

• A bond written on a "discovery" basis covers losses which occurred prior to inception if they are discovered during the coverage period of the bond.

20-20

Mode of Coverage

• Coverage under a fidelity bond may apply to specifically designated individuals, to persons occupying specified positions, or to all employees.

• The mode of coverage depends on whether the bond is written on a name-schedule basis, a position basis, or a blanket basis.

20-21

Form A: Employee Dishonesty

• Coverage Form A, Employee Dishonesty, provides fidelity bond coverage to protect against loss resulting from employees' dishonesty, up to the face amount of the bond, called the penalty.

• Covers loss of money, securities, or other property resulting from acts (fraud, forgery, embezzlement, theft).

• Coverage may be written on a blanket or scheduled basis.

20-22

Employee Dishonesty Blanket Coverage

• Coverage Form A Blanket basis (CR 00 01) is the most attractive form of fidelity coverage.

• Coverage applies to all employees, regardless of position, with new employees covered automatically.

• Coverage applies to dishonest acts of employees, whether or not the employee is identified.

• The coverage is subject to a one year discovery period.

20-23

Definition of Employee

The term employee is defined to include:

a. Any natural person(1) while in your service (and for 30 days after

termination of service);(2) whom you compensate directly by salary,

wages, or commissions; and(3) whom you have the right to direct and

control while performing services for you.

20-24

Definition of Employee

b. Any natural person employed by an employment contractor while that person is subject to your direction and control and performing services for you excluding, however, any such person while having care and custody of property outside the "premises."

20-25

Definition of Employee

But Employee does not mean any:

(1) Agent, broker, factor, commission merchant, consignee, independent contractor or representation of the same general contractor; or

(2) Director or trustee except while performing acts coming within the scope of the usual duties of an employee.

20-26

Definition of Employee

There are significant omissions: • manufacturers representatives are not

considered employees. • directors and trustees of the insured are not

"employees" of the insured unless they are compensated by the insured, and then only while there are performing acts that are the normal duties of an employee.

Standard endorsements are available to add these persons to the definition of "employee."

20-27

Definition of Employee

• The Employee Retirement Income Security Act (ERISA) requires that persons handling funds for pension and welfare plans be bonded.

• A standard endorsement is available to broaden the definition of "employee" to include persons handling welfare or pension funds.

20-28

Application of Penalty

• The "penalty" (or limit of coverage) under the Blanket Employee Dishonesty Coverage form applies on a "per loss" basis rather than "per employee."

• This means that if several employees are involved in a collusive loss, the maximum payable for that loss is the limit specified.

20-29

Employee Dishonesty Schedule Coverage

• The second approach to fidelity coverage is provided under Coverage Form A Schedule (CR 00 02), which may be written on either a name schedule basis or a position schedule basis.

• When fidelity coverage is written on an individual

name basis, the person to be bonded is specifically named.

• When several persons are listed in a single bond, it is known as a Name Schedule Bond.

20-30

Position Schedule Basis Coverage

• Positions to be covered are listed rather than the individuals. If a person leaves the firm or moves to another position, his or her successor is covered in the scheduled position.

• When more individuals occupy a scheduled position than the number originally specified, all are covered, but on a decreased basis.

• For coverage to exist under the scheduled form of coverage, the dishonest act must have been committed by an identified employee.

20-31

Exclusions

1. There is no coverage for loss caused by an employee for whom coverage has been canceled under the policy or a similar policy and not reinstated.

• The policy states that coverage is canceled on any employee upon discovery by the insured or a partner, officer or director not in collusion with the employee, of any dishonest act committed by the employee before or after becoming an employee of the insured.

20-32

Exclusions

2. There is no coverage for any loss or part of a loss, the existence of which can be proved only by a profit and loss computation or an inventory.

20-33

Determining Fidelity Limits

• The fact that all thefts by an individual are considered to be a single loss, regardless of the period of time over which the loss occurs, combined with the fact that the penalty under a fidelity bond is noncumulative from year to year, makes it difficult to select a fidelity limit that will protect against the worst possible loss.

• The minimum amount of fidelity coverage that should be purchased is determined by using one of the "Dishonesty Exposure Indexes."

20-34

Dishonesty Exposure Indexes

• There are three separate indexes, one for manufacturers and retailers, one for commercial banks, and one for public bodies.

• Using selected variables from the organization’s financial statement, an index is calculated which, through reference to a table, indicates the minimum level of fidelity coverage that should be purchased.

20-35

Mercantile and Manufacturing Firms

5% of the value of goods on hand:$_______

20% of current assets other than goods on hand:

$_______

10% of annual gross sales:$_______

Dishonesty Exposure Index:$_______

20-36

Dishonesty Exposure Index

Exposure Index Bracket Minimum Fidelity Limit

Less than $25,000 1 $15,000 to $25,000$25,000 to $125,000 2 25,000 to 50,000125,000 to 250,000 3 50,000 to 75,000250,000 to 500,000 4 75,000 to 100,000500,000 to 750,000 5 100,000 to 125,000750,000 to 1,000,000 6 125,000 to 150,000

1,000,000 to 1,575,000 7 150,000 to 175,000500,000,000 to 750,000,000 28 3,000,000 to 3,500,000750,000,000 to 1,000,000,000 29 3,500,000 to 4,000,000

1,000,000,000 to 1,250,000,000 30 4,000,000 to 4,500,0001,250,000,000 to 1,500,000,000 31 4,500,000 to 5,000,000

20-37

Nonemployee Crime Coverages

• Nonemployee crime coverages protect against burglary, robbery, theft, and a variety of specified crime perils.

• All nonemployee crime coverages contain a specific exclusion of theft by employees.

20-38

Form B: Forgery or Alteration Coverage

• Forgery or Alteration coverage promises to pay for loss sustained by the insured resulting from forgery or alteration "of, on, or in any covered instrument."

• A "covered instrument" is “a check, draft, promissory note, or similar written promise or an order or direction to pay a certain sum in money that is drawn by or upon the insured or a person acting as the insured's agent, or that is supposed to have been so made or drawn.

20-39

Form C: Theft Disappearance and Destruction Form

• The Theft, Dishonesty and Destruction Form covers money and securities for loss by theft, but goes further and also provides coverage against loss by "disappearance and destruction."

• Employee infidelity is excluded.

• Coverage is available under two separate agreements applying to losses on premises and losses off premises.

20-40

Form C: Theft Disappearance and Destruction Form

• Section 1 covers money and securities inside the insured's premises (or inside banking premises) against theft, disappearance, or destruction. The term "theft" includes both robbery and burglary.

• Section 2 covers money and securities outside the premises while in the care and custody of a "messenger."

20-41

Protective Devices or Services Provision

• Failure to maintain protective devices for which the insured has received a credit in the premium will affect the coverage.

• If, for reasons within the control of the insured, the protective devices or services claimed in the policy are not maintained, the insurance ceases for any period of nonmaintenance, but only for the premises or messengers affected.

20-42

Protective Devices or Services Provision

If, for reasons beyond the insured's control

• an alarm system for which the insured received credit is inoperative, but the insured provides at least one additional "watchperson," the coverage continues uninterrupted.

• any device other than an alarm system or protective service is not maintained, the limit of insurance is reduced to the amount that the premium paid would have purchased without credit for the device or service.

20-43

Form D: Robbery and Safe Burglary Coverage Form

• The Robbery and Safe Burglary Policy covers property other than money and securities and may be written to cover

on premises robbery off premises robberysafe burglary.

• The policy covers property other than money and securities inside or outside the premises (or both) against actual or attempted robbery.

20-44

Robbery Coverage

• The robbery coverage is written in two separate sections, each independent of the other.

• The two sections are robbery within the premises and robbery outside the premises.

• The insured may select either or both of these, and separate amounts of insurance are purchased for each.

20-45

Safe Burglary Coverage

• Covers loss of insured property from safe and damage to property owned by the insured that is damaged by safe burglary or attempted safe burglary.

• Forcible entry into the premises does not constitute safe burglary unless there is also forcible entry (or attempt) into the safe.

• There is no requirement that the premises be entered forcibly.

20-46

Form E: Premises Burglary Coverage

• The Premises Burglary Coverage covers loss of merchandise, furniture, fixtures, and equipment as a result of burglary.

• Requires visible evidence of forcible entry or forcible exit, and the policy covers damage caused by burglars.

• The policy is extended to cover loss by robbery or attempted robbery of a watchperson employed exclusively by the insured within the premises.

20-47

Form F: Computer Fraud Coverage

• "Computer Fraud" means theft of property following and directly related to the use of any computer to fraudulently cause a transfer of that property from inside the "premises" or "banking premises" to a person (other than a "messenger") outside those premises or to a place outside those premises.

• Losses in which a person outside the firm uses a computer to instruct the insured's computer to transfer funds to a fictitious payee.

20-48

Form G: Extortion Coverage Form

• The term "extortion," as used in the form, has a specialized meaning in Coverage G, which is somewhat narrower than the extortion excluded in the other forms.

• "Extortion" means the surrender of property away from the "premises" as a result of a threat communicated to (the named insured) to do bodily harm to (the named insured) or a relative or invitee of either, who is, or allegedly is, being held captive.

20-49

Form H: Premises Theft and Robbery Outside Premises

• The Premises Theft and Robbery Outside Coverage Form offers those insureds who desire it broader coverage than that available under Forms D and E.

• It covers property other than money and securities inside or outside the premises (or both) against actual or attempted theft inside the premises.

20-50

Other Crime Forms

Form I: Lessee of Safe Deposit Boxes Form

Form J: Securities Deposited With Others Form

Form K: Liability for Guests' Property - Safe Deposit Form

Form L: Liability for Guests' Property - Premises Form

Forms M and N: Safe Depository Liability and Direct Loss

20-51

Package Crime Policies

• Package crime policies combine employee and nonemployee crime in a single contract.

• There are nine package “plans” that differ primarily in the consumer for which they are intended, some of which are highly specialized.

• The most important of the crime package policies is Plan 1, designated the Combination Crime -- Separate Limits Form.

20-52

Package Crime Policies

Plan One: Combination Crime - Separate Limits

• Excellent example of the package approach to crime coverages, including both fidelity and nonemployee crime coverages in a single contract.

• The insured may select any combination of coverage forms A through J, and none of the coverages is mandatory.

20-53

Retention of Crime Exposures

• Employee crime represents an exposure of catastrophic proportions and is therefore rarely an appropriate subject for retention.

• For many nonemployee crime exposures, retention, combined with loss control, is the most appropriate approach to dealing with risk.

• Many, but not all, nonemployee crime exposures

represent high frequency, low severity exposures.