November 30, 2008 by
For commercial risks, the Dishonesty, Disappearance, and Destruction policy (3-D policy) is often used to cover employee dishonesty, crime exposures and physical damage to money and similar property.
Dealing with dishonesty
It used to be quite common for employers to have fidelity bonds written on their employees: guarantees that the employee named in the bond would perform his or her obligations honestly as described in the bond. If an employee stole money from an employer, the employee would be in default of the bond. When provided by a commercial insurer, a fidelity bond is considered to be an insurance contract.
These days, another approach is to add a 3-D policy as a rider to property and liability coverage in a package. The rider covers employee dishonesty as well as other crimes (see sidebar). The dishonesty portion of the coverage can have either a per-loss aggregate limit or a per-employee limit.
If employee dishonesty coverage has an aggregate per-loss limit, then no matter how many employees are involved in the loss, the specified aggregate limit prevails.
If the dishonesty coverage has a limit per employee per loss, then the insurer’s total exposure in a loss situation is the number of employees involved multiplied by the bond limit. Deductibles are usually applied on a per-employee basis. If the insured employer cannot identify the particular employees involved, then the loss may be limited to the face value of the policy. If the employer cannot identify more than one employee in an instance of employee dishonesty, then only the single limit of coverage will be available.
Policies cover the property of the insured and any other property (belonging to third parties) that the insured is holding in a legal capacity or for which the insured is legally liable. The policy is only for the benefit of the insured, so if the insured does not elect to claim for property of others, then no loss is payable by the insurer. A person who is not a party to the contract is not in a legal position to enforce it.
Dishonesty coverage excludes
• any loss caused by an insured or a partner (insureds should not be compensated for fraudulent actions they committed themselves); • the consequential loss of any potential income, including interest and dividends that were not realized because a loss occurred;
• costs incurred by the insured to prove the existence or the amount of loss.
Exclusions are often changed or modified to accommodate specific risks, so it’s always best to review the specific policy.
Coverage for employee dishonesty is limited to losses sustained during the policy period (with some exceptions). However, the discovery period -the time in which the claim can be reported -is extended for up to two years after the policy expires, depending on the coverage purchased. Under certain circumstances, a current policy may cover losses that occurred during the term of prior policies but were discovered after the reporting window under the prior policy was over. Coverage generally applies only to losses that would have been covered under the prior policy but for the expiry of the discovery period.
Intent, involvement, evidence
The term “manifest intent” has been used in some policy forms to emphasize that mismanagement and ordinary business risks are excluded from coverage. The employee’s intent to commit fraud must be clearly and plainly evident. Interpreting manifest intent and how it affects the validity of a claim has been the subject of contention and therefore should be a primary focus of the adjuster. An insured may be unable to attribute fraud or dishonesty to a particular employee. In this case, it will be enough for the insured to show that the loss could not have happened without employee involvement, even though the guilty employees cannot be determined.
Standard crime coverage excludes losses where the existence of the loss is determined by an inventory computation or a profit-and-loss calculation. The insured must establish the theft or employee dishonesty through evidence wholly separate from such computations or calculations. Mere shortages of inventory, without explanation, are not covered under the policy unless the insured can prove the loss through other means.
A loss is “discovered” when an insured has reasonable knowledge, based on relevant facts, that a loss under the policy has taken place. The suspicion a loss has occurred does not constitute “discovery” under the policy. Crimes of employee dishonesty are typically concealed by wrongdoers, so it’s not unusual for management to be unaware of such crimes for an extended period. If management suspects an employee is being dishonest and begins an investigation, it can later be difficult to determine at what point the reasonable suspicion of dishonesty ended and the loss was discovered.
In a large organization, ordinary employees might know something about an employee’s dishonesty, but this may not qualify as knowledge of the loss by the insured. For example, if a clerk discovers a loss but fails to notify superiors, this might not be deemed discovery of the loss for purposes of coverage. Adjusters need to determine the identity and position of all persons within the insured’s employ who knew of the loss before it was reported to the insurers.
First steps in a claim
Most dishonesty policies require that the insurer be notified immediately upon the discovery of a covered loss. Alternatively, a limit can be set for notification, such as 30 days after discovery. Late notification can expose the insurer to additional loss and affect the adjuster’s ability to properly investigate the claim. If evidence required to pursue recovery from the defaulter is no longer available or the defaulter disappears, the insurer has been prejudiced by the event and coverage could be in question. Once the discovery date has been determined, other steps are set in motion, such as notice to the underwriter, submission of proof of loss, and instituting legal action. Policy coverage for the dishonest employee is terminated. Any additional theft suffered by the insured after the formal discovery is not recoverable under the policy. Determining the exact discovery date is therefore a critical investigative point.
An overview of the rest of the claims process in cases of employee dishonesty will appear in the next Education Forum.
This article is based on excerpts from the study material in the Claims Professional Series of applied courses -a core of the CIP Program that helps adjusters learn the functional knowledge and skills required of their profession.
The 3-D Rider
The Dishonesty, Disappearance, and Destruction rider provides five standard insuring agreements:
• dishonesty coverage with either a per-loss aggregate or a per-employee limit;
• loss of money or securities the inside insured premises for destruction, disappearance or wrongful abstraction;
• loss of money or securities outside the insured premises for destruction, disappearance or wrongful abstraction;
• loss caused by accepting money orders and counterfeit paper currency;
• loss caused by cheques issued by the insured by depositor’s forgery.