The insuring agreements now state that coverage is provided when a limit shown on the declarations applies to a loss that has occurred as a result of a defined “occurrence”, which was “discovered” by the insured during the policy period or the extended period to cover loss. This restricts the policy so that the nature of the loss and how it is discovered are defined and must fit those definitions before the policy limit can apply.

New under the employee theft agreement is that the insuring agreement of theft also includes forgery. However this is not the policy defined term of “forgery”, it is undefined. This is important as a desk dictionary would be used for interpretation should a question regarding forgery under this agreement arise.

The forgery or alteration agreement is the same as in the prior policies except for the addition of language stating that a substitute check as defined in the Check Clearing for the 21st Century Act shall be treated the same as the original it replaces. Check Clearing 21 is a federal law designed to allow banks to handle checks electronically, thus making processing faster and more efficient. A substitute check is a paper copy of the front and back of the original check; it is slightly larger so that a picture of the original check can be presented. Very specific standards dictate how the substitute check is printed so that it can be used the same way as the original check. With a substitute check, banks can transmit the information electronically instead of physically moving a paper check. This is different than converting checks to electronic payments; different regulations govern electronic funds and paper checks.

Limit of Insurance

B.Limit Of Insurance

The most we will pay for all loss resulting directly from an “occurrence” is the applicable Limit of Insurance shown in the Declarations.

If any loss is covered under more than one Insuring Agreement or Coverage, the most we will pay for such loss shall not exceed the largest Limit of Insurance available under any one of those Insuring Agreements or Coverages.

Analysis

The limit of insurance now states that if any loss is covered under more than one agreement, payment will be made under the agreement with the highest limit; limits may not be stacked. For example, a loss of $600,000 occurs. The loss is covered under two different agreements. The limit of one agreement is $500,000 and the limit on the other agreement is $200,000. The most that is paid is $500,000, the higher of the two limits. The limits are not combined in order to cover the full amount of the loss.

Exclusions

b. Acts Of Employees Learned Of By You Prior To The Policy Period

Loss caused by an “employee” if the “employee” had also committed “theft” or any other dishonest act prior to the effective date of this policy and you or any of your partners, “members”, “managers”, officers, directors or trustees, not in collusion with the “employee”, learned of that “theft” or dishonest act prior to the Policy Period shown in the Declarations.

c. Confidential Information

Loss resulting from:

(1)The unauthorized disclosure of your confidential information including, but not limited to, patents, trade secrets, processing methods or customer lists; or

(2)The unauthorized use or disclosure of confidential information of another person or entity which is held by you including, but not limited to, financial information, personal information, credit card information or similar non-public information.

Analysis

Two new exclusions appear in the 2006 policy. One for acts of employees learned of by the insured prior to the policy period. For example, an employee was caught in May 2006 falsifying documents. The policy in question becomes effective August 2006. In November, the same employee is caught stealing. Since the insured knew of the employee's dishonest act prior to the policy period, any loss is excluded from coverage.

Loss resulting from the disclosure or use of confidential information is also excluded. With the concerns regarding identity theft, and recent situations where company's computers with large amounts of confidential information have been lost or stolen, unauthorized disclosure of such information is excluded.

The exclusion for an employee cancelled under prior insurance no longer applies to insuring agreement A.1.

Conditions

E.Conditions

1.Conditions Applicable To All Insuring Agreements

a.Additional Employees

If, while this policy is in force, you hire additional “employees”, other than through consolidation or merger with, or purchase or acquisition of assets or liabilities of, another entity, such “employees” shall automatically be covered under this policy. Notice to us of an increase in the number of “employees” need not be given and no additional premium need be paid for the remainder of the Policy Period shown in the Declarations.

Analysis

This condition is new to the 2006 form, and provides automatic coverage for newly hired employees or employees acquired as part of a consolidation, merger, or acquisition. The carrier does not require notification of these additional employees and no additional premiums are required for the remaining policy

term.

Removed from the conditions that apply to all insuring agreements is the condition related to cancellation as to any employee; this condition now applies only to insuring agreement one. The language of the condition remains the same.

e.Consolidation – Merger Or Acquisition

If you consolidate or merge with, or purchase or acquire the assets or liabilities of, another entity:

(1)You must give us written notice as soon as possible and obtain our written consent to extend the coverage provided by this policy to such consolidated or merged entity or such purchased or acquired assets or liabilities. We may condition our consent by requiring payment of an additional premium; but

(2)For the first 90 days after the effective date of such consolidation, merger or purchase or acquisition of assets or liabilities, the coverage provided by this policy shall apply to such consolidated or merged entity or such purchased or acquired assets or liabilities, provided that all “occurrences” causing or contributing to a loss involving such consolidation, merger or purchase or acquisition of assets or liabilities, must take place after the effective date of such consolidation, merger or purchase or acquisition of assets or liabilities.

Analysis

The consolidation condition has had some important wording revisions. Instead of coverage applying to new employees during the first ninety days of the merger, coverage is also afforded to the consolidated entity, including assets and liabilities. The condition also stipulates that such loss must occur after the consolidation or merger occurs in order for coverage to apply. Now the insured is to give the carrier written notice as soon as possible of the merger and obtain the carriers written permission to extend coverage to such entities.

g.Duties In The Event Of Loss

After you “discover” a loss or a situation that may result in loss of or damage to “money”, “securities” or “other property” you must:

(1)Notify us as soon as possible.

(2)Submit to examination under oath at our request and give us a signed statement of your answers.

(3)Produce for our examination all pertinent records.

(4)Give us a detailed, sworn proof of loss within 120 days.

(5)Cooperate with us in the investigation and settlement of any claim.

Analysis

A new duty is required of the insured in event of a loss. The insured is required to produce for the insurer's review any records pertinent to the loss. If an insured is claiming a loss of inventory, the carrier has the right to review the insured's inventory records to substantiate the amount of the loss.

l.Joint Insured

(1)If more than one Insured is named in the Declarations, the first Named Insured will act for itself and for every other Insured for all purposes of this policy. If the first Named Insured ceases to be covered, then the next Named Insured will become the first Named Insured.

(2)If any Insured, or partner, “member” or officer of that Insured has knowledge of any information relevant to this policy, that knowledge is considered knowledge of every Insured.

(3)An “employee” of any Insured is considered to be an “employee” of every Insured.

(4)If this policy or any of its coverages is cancelled as to any Insured, loss sustained by that Insured is covered only if it is “discovered” by you:

(a)No later than 60 days from the date of that cancellation. However, this extended period to “discover” loss terminates immediately upon the effective date of any other insurance obtained by that Insured, whether from us or another insurer, replacing in whole or in part the coverage afforded under this policy, whether or not such other insurance provides coverage for loss sustained prior to its effective date.

(b)No later than 1 year from the date of that cancellation with regard to any “employee benefit plans”.

(5)We will not pay more for loss sustained by more than one Insured than the amount we would pay if all such loss had been sustained by one Insured.

(6)Payment by us to the first Named Insured for loss sustained by any Insured, other than an “employee benefit plan”, shall fully release us on account of such loss.

Analysis

The joint insured wording has been modified. Instead of referring the reader to E.1.j. for the length of time allowed for an extended period to discover loss, the policy now states directly that loss must be discovered within sixty days from the date of cancellation. For employee benefit plans, the loss must be discovered within one year from the cancellation date of the policy.

Excepting employee benefit plans, payment to the first named insured fully releases the carrier on account of the loss.

o.Other Insurance

If other valid and collectible insurance is available to you for loss covered under this policy, our obligations are limited as follows:

(1)Primary Insurance

When this policy is written as primary insurance, and:

(a)You have other insurance subject to the same terms and conditions as this policy, we will pay our share of the covered loss. Our share is the proportion that the applicable Limit of Insurance shown in the Declarations bears to the total limit of all insurance covering the same loss.

(b)You have other insurance covering the same loss other than that described in Paragraph (1)(a), we will only pay for the amount of loss that exceeds:

(i)The Limit of Insurance and Deductible Amount of that other insurance, whether you can collect on it or not; or

(ii)The Deductible Amount shown in the Declarations;

whichever is greater. Our payment for loss is subject to the terms and conditions of this policy.

(2)Excess Insurance

(a)When this policy is written excess over other insurance, we will only pay for the amount of loss that exceeds the Limit of Insurance and Deductible Amount of that other insurance, whether you can collect on it or not. Our payment for loss is subject to the terms and conditions of this policy.

(b)However, if loss covered under this policy is subject to a Deductible, we will reduce the Deductible Amount shown in the Declarations by the sum total of all such other insurance plus any Deductible Amount applicable to that other insurance.

Analysis

The loss covered under more than one coverage of this policy and the non-cumulation of limit of insurance clauses have been removed from the 2006 policy. The ability to stack limits has been removed under the limits of insurance.

The other insurance clause has been separated, and now primary insurance and excess insurance are explained separately. If this policy is primary and other coverage exists with the same terms and conditions, this policy will pay proportionally based on the proportion of the limit of insurance to all available limits. For example, a loss of $1.2 million occurs. This policy has limits of $500,000 and the other policy has limits of $1,000,000. The total limits available are 1.5 million. The proportion of this policy to the entire available limits is 500,000/1,500,000 = 333. Therefore, this policy pays $333,000 and the other policy pays the remainder. If the other coverage does not have the same terms and conditions, then this policy pays the amount that exceeds the deductible and the limits of the other insurance.

The excess clause is similar; this policy will pay over the limit of other insurance and its deductible. Any deductible amount in this policy is reduced by the total of all other insurance and its deductible.

q.Policy Bridge – Discovery Replacing Loss Sustained

(1)If this policy replaces insurance that provided you with an extended period of time after cancellation in which to discover loss and which did not terminate at the time this policy became effective:

(a)We will not pay for any loss that occurred during the Policy Period of that prior insurance which is “discovered” by you during the extended period to “discover” loss, unless the amount of loss exceeds the Limit of Insurance and Deductible Amount of that prior insurance. In that case, we will pay for the excess loss subject to the terms and conditions of this policy.

(b)However, any payment we make for the excess loss will not be greater than the difference between the Limit of Insurance and Deductible Amount of that prior insurance and the Limit of Insurance shown in the Declarations. We will not apply the Deductible Amount shown in the Declarations to this excess loss.

(2)The Other Insurance Condition E.1.o. does not apply to this Condition.

Analysis

Another new section in the 2006 policy is that of policy bridge – discovery replacing loss sustained. This section explains how the discovery policy interacts with a prior policy that was loss sustained. This policy will pay only the excess above what the prior policy covers when a loss occurs during the prior policy's extended discovery period.

t.Recoveries

(1)Any recoveries, whether effected before or after any payment under this policy, whether made by us or you, shall be applied net of the expense of such recovery:

(a)First, to you in satisfaction of your covered loss in excess of the amount paid under this policy;

(b)Second, to us in satisfaction of amounts paid in settlement of your claim;

(c)Third, to you in satisfaction of any Deductible Amount; and

(d)Fourth, to you in satisfaction of any loss not covered under this policy.

(2)Recoveries do not include any recovery:

(a)From insurance, suretyship, reinsurance, security or indemnity taken for our benefit; or

(b)Of original “securities” after duplicates of them have been issued.

u.Territory

This policy covers loss that you sustain resulting directly from an “occurrence” taking place within the United States of America (including its territories and possessions), Puerto Rico and Canada.

x.Valuation – Settlement

(1)The value of any loss for purposes of coverage under this policy shall be determined as follows:

(a)Loss of “money” but only up to and including its face value. We will, at your option, pay for loss of “money” issued by any country other than the United States of America:

(i)At face value in the “money” issued by that country; or

(ii)In the United States of America dollar equivalent determined by the rate of exchange published in The Wall Street Journal on the day the loss was “discovered”.

Analysis

Minor modifications have been made in the recoveries, territory, and valuation sections. The recovery section now includes a fourth recovery, which is that any funds recovered, once the other recoveries have been disbursed, will be given to the insured for payment of any loss not covered under this policy.

The territory section now states that loss the insured sustains that results from an occurrence is covered. The prior policy stated that acts committed within the Unites States, territories/possession, Puerto Rico and Canada were covered. The new wording clarifies that a loss must result from a defined “occurrence” of the policy.

In the valuation section, money issued by another country will be paid at face value in the money of that country or at the exchange rate as published in the Wall Street Journal on the date the loss was discovered. The prior policy did not specify what source was to be used to establish the exchange rate.

Definitions

1.”Discover” or “discovered” means the time when you first become aware of facts which would cause a reasonable person to assume that a loss of a type covered by this policy has been or will be incurred, regardless of when the act or acts causing or contributing to such loss occurred, even though the exact amount or details of loss may not then be known.

“Discover” or “discovered” also means the time when you first receive notice of an actual or potential claim in which it is alleged that you are liable to a third party under circumstances which, if true, would constitute a loss under this policy.

2.”Employee”:

a.”Employee” means:

(1)Any natural person:

(a)While in your service and for the first 30 days immediately after termination of service, unless such termination is due to “theft” or any other dishonest act committed by the “employee”;

(2)Any natural person who is furnished temporarily to you:

(a)To substitute for a permanent “employee” as defined in Paragraph a.(1), who is on leave; or

(b)To meet seasonal or short-term work load conditions;

while that person is subject to your di-rection and control and performing ser-vices for you, excluding, however, any such person while having care and cus-tody of property outside the “premises”;

(3)Any natural person who is leased to you under a written agreement between you and a labor leasing firm, to perform duties related to the conduct of your business, but does not mean a temporary employee as defined in Paragraph a.(2);

(4)Any natural person who is:

(a)A trustee, officer, employee, administrator or manager, except an administrator or manager who is an independent contractor, of any “employee benefit plan”; and

(b) A director or trustee of yours while that person is engaged in handling “funds” or “other property” of any “employee benefit plan”;

(5)Any natural person who is a former “employee”, partner, “member”, “manager”, director or trustee retained as a consultant while performing services for you;

(6)Any natural person who is a guest student or intern pursuing studies or duties, excluding, however, any such person while having care and custody of property outside the “premises”;

(7)Any “employee” of an entity merged or consolidated with you prior to the effective date of this policy; or

(8)Any of your “managers”, directors or trustees while:

(a)Performing acts within the scope of the usual duties of an “employee”; or

(b)Acting as a member of any committee duly elected or appointed by resolution of your board of directors or board of trustees to perform specific, as distinguished from general, directorial acts on your behalf.

Analysis

One definition has been removed from the 2006 form that appeared in the 2000 form, and that is client. The definition of employee has been expanded and now includes persons leased to the insured from a labor leasing firm, former employees, partners, managers, directors acting as a consultant and performing services, guest students or interns, employees of a entity merged with the insured, and managers, directors or trustees while performing acts within the scope of an employee or while serving on a committee appointed by the board of directors.