Employee Dishonesty Coverage and Discovery Period

Q

Our insured business owner received a phone call from a customer stating he had been double-billed. The call was received two days before the end of the one-year discovery period on the employee dishonesty policy that we wrote for the insured. The business owner investigated and determined that the bookkeeper had been double-billing customers and pocketing the money. However, this was not determined until one month after the initial phone call, which was after the extended discovery period had ended.

The current employee dishonesty carrier on this account provides $50,000 in coverage, but the loss is $80,000. The insured is trying to get us to pay the additional $30,000. He contends that the phone call qualifies as discovery, but we are not sure that a mere phone call questioning one bill constitutes discovery.

Many employee dishonesty policies include wording that any extended discovery period is terminated as soon as all or part of the coverage is replaced by other insurance. Our form, however, does not include this wording.

What do you think?

Texas Subscriber

A

We do not believe you are responsible for the extra $30,000 of loss.

Discovery requires information that points to a fraudulent act or loss, not just a mistake. A mere phone call asking about a bill does not meet this requirement. The call did come during the extended discovery period, but at the time the customer only notified the insured of a mistake. There was no allegation or hint of employee dishonesty.

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