Although the intent of coverage appears to be the same, some critical differences make a world of difference.

The new form calls it “employee theft” instead of “employee dishonesty,” but both cover loss of or damage to money, securities, and other property caused by employees. The new commercial crime program specifies that the loss must result “directly from theft committed by an employee, whether identified or not, acting alone or in collusion with other persons.” Theft is defined as the “unlawful taking of money, securities, or other property to the deprivation of the insured.”

This definition is strikingly different from that of the former employee dishonesty insuring agreement. The older version states that the loss must be caused by “employee dishonesty,” which means dishonest acts committed by an employee with the manifest intent to both cause the insured to sustain loss and to obtain financial benefit for the employee or another person or organization.

In addition, financial benefit excludes employee benefits earned in the normal course of employment, such as salaries, commissions, fees, bonuses, etc.

As you can see, the new forms definition of theft leaves out the “manifest intent” wording. It also drops the exclusion of financial benefit that is in the form of employee benefits.

All of us who were schooled in the intricacies of the bankers blanket bond and other fidelity coverages know just how important those words “manifest intent” were. But now the only requirement is that the unlawful taking deprive the insured employer.

The previous exclusion of employee benefits also is omitted in the current form. Various courts held to this phrasing literally, essentially precluding coverage for even fraudulently obtained or unearned compensation.

For example, the court in Hartford Accident & Indemnity Ins. Co. v. Washington National Ins. Co., 638 F. Supp. 78 (N.D. Ill. 1986) quoted an earlier court that dealt with this definition by saying: “The comprehensive crime insurance policy clearly and unambiguously excludes from coverage the acts of an employee who fraudulently or dishonestly obtains salary or commission.”

This had a negative effect on coverage under CR 00 01 for situations in which employees fraudulently increased their own salaries, gave themselves or friends bonuses, or contributed unearned money to their own or others profit-sharing accounts. The exclusion is done away with in the new employee theft definition, which could lead to coverage for claims that previously were denied.

In contrast, some areas that caused consternation under the older form probably will continue to do so because the applicable wording remains unchanged. Examples are the definition of “other covered property,” which in both forms must be “tangible property other than money and securities that has intrinsic value” but is not specifically excluded.

The current proliferation of credit cards and cell phones often give rise to claims that may not be covered under either crime program because of this definition. For example, a Florida court ruled in 1997 that significant unauthorized phone charges that resulted from an employees theft of mobile telephone serial and identification numbers did not fall within the coverage parameters of the insureds employee dishonesty policy.

In Peoples Telephone Co., Inc., v. Hartford Fire Ins. Co., 36 F. Supp. 2d 1335 (S.D. Fla. 1997), the court ruled that the stolen phone identifiers were not tangible property with intrinsic value. Peoples claimed some $660,000 in unauthorized phone usage charges and deactivation and reactivation costs. The court reasoned that the stolen numbers were not tangible property with intrinsic value because, without their reference to the phones in question, they had no meaning or use.

In Benchemark Printing, Inc., v. American manufacturers Mutual Ins. Co., No. 00-CV-0865, 2001 U.S. Dist. LEXIS 619 (N.D.N.Y. Jan. 26, 2001), an employee directed work to a competitor and then received kickbacks when the competitor got the jobs.

In this case, the court agreed that the loss was caused by employee fraud. However, it noted that Benchemark lost business opportunities and not actual profits. The mere opportunity to realize a profit was not covered property.

These examples, and the seeming increase in subscriber calls about employee misuse of credit cards or theft of intangible property such as phone services, point out that some things just arent insurable as a matter of course. But they still represent the possibility of substantial loss to employers–a business risk that might best be addressed with vigilant risk management techniques.

Diana Reitz, CPCU, AAI, is associate editor of the FC&S Bulletins and Editor of the RF&S Bulletins, published by the National Underwriter Company in Erlanger, Ky. The editors welcome comment and questions and may be reached by fax at 859-692-2211 or via e-mail at [email protected].

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 14, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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