A business that we insure paid a new employee erroneously. Instead of paying the employee $680, the business paid him $11,000 for 680 hours of work. When the error was discovered, the employer asked for the money back. However, the employee refused to return it, saying he thought it was a signing bonus and had spent it.

Even though this started out as a mistake, the employee seems to have ultimately acted dishonestly in order to gain financial benefit and cause the employer financial loss. However, the insurance company is raising questions about coverage because the payment was in the form of wages. Do you think there is coverage for this loss under the employee dishonesty form?

Kansas Subscriber

The wording you quote in your question comes from the employee dishonesty form. That form likely will not provide coverage for this type of loss because of the definition of “employee dishonesty”, which specifies that an employee must act dishonestly with a manifest intent to cause the employer to sustain loss and to obtain financial benefit other than employee benefits earned in the normal course of employment, including: salaries, commissions, fees, bonuses, promotions, awards, profit sharing or pensions (emphasis added).

Various courts have addressed the question of whether wages or commissions that are fraudulently obtained qualify for coverage. 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.”

Other courts that have taken the same stance are Auburn Ford Lincoln Mercury, Inc. v. Universal Underwriters Ins. Co., 967 F. Supp. 475 (M.D. Ala. 1997), Benchmark Crafters, Inc. v. Northwestern National Ins. Co. of Milwaukee, 363 N.W.2d 89 (Minn. Ct. App. 1985), and Berger v. Fireman's American Loss Control Co., (Slip Op., Md. Ct. Spec. App. 1982).

Because the $11,000 was received as salary, the loss is not covered by the employee dishonesty form even though it may meet the other requirements for coverage.

The ISO commercial crime coverage form's employee theft insuring agreement (CR 00 20 07 02) has dropped the exclusionary language for wages and other employee benefits, but that does not change the coverage that is available on the employee dishonesty form.

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