Crime and Professional Liability

Commercial crime insurance pays a business for loss of money, securities and other property caused by theft, robbery, forgery and similar crimes, including theft by its own employees. It is written on a commercial crime coverage form, as a coverage part of a commercial package policy or as a policy of its own.

Commercial crime

Why a business needs crime insurance

Commercial property insurance leaves important crime losses uninsured:

• Money and securities are not covered property. The building and personal property coverage form lists currency, money, notes and securities as property not covered.
• The basic and broad cause of loss forms do not cover theft. Their vandalism peril pays for the damage burglars do to the building in breaking in or out, but not for what they take.
• The special form excludes dishonesty. It excludes theft by the insured’s partners, officers and employees and their other dishonest or criminal acts (an employee’s act of destruction is still covered), and property given up because of a trick.

The insuring agreements

The form contains seven insuring agreements. An agreement applies only if a limit of insurance is shown for it in the declarations.

Insuring agreement	What it pays for	Example
1. Employee Theft	Loss of or damage to money, securities and other property from theft by an employee, identified or not, acting alone or with others. Theft here includes forgery.	A bookkeeper diverts customer payments into a personal account.
2. Forgery or Alteration	Loss from forgery or alteration of checks, drafts and promissory notes made or drawn by or upon the insured.	A thief forges the owner’s signature on a stolen company check.
3. Inside the Premises – Theft of Money and Securities	Loss of money and securities inside the premises from theft by a person present there, or from disappearance or destruction.	A burglar pries open the cash drawer overnight.
4. Inside the Premises – Robbery or Safe Burglary of Other Property	Loss of or damage to other property inside the premises from robbery of a custodian or from safe burglary.	An armed robber forces a clerk to hand over watches from a showcase.
5. Outside the Premises	Money and securities (theft, disappearance or destruction) and other property (robbery) while in the care of a messenger or an armored motor vehicle company.	An employee is robbed while carrying the deposit to the bank.
6. Computer and Funds Transfer Fraud	Loss from a fraudulent entry or change of data in the insured’s computer system that causes money or property to be transferred, or from a fraudulent instruction to a financial institution to pay from the insured’s account.	A hacker issues payments from the accounting system.
7. Money Orders and Counterfeit Money	Loss from accepting in good faith, for merchandise, money or services, a money order that is not paid or counterfeit money.	A retailer accepts counterfeit bills.

Agreements 3 and 4 also pay for damage from an actual or attempted theft of money and securities (agreement 3) or robbery or safe burglary of other property (agreement 4): damage to the premises or its exterior, if the insured owns the premises or is liable for the damage, and damage to a locked safe or vault inside the premises. Agreement 3 also covers a locked cash register, cash box or cash drawer, and damage from unlawful entry into those containers.

Sidenote

Know this...

Under the inside and outside the premises agreements, money and securities are covered for theft, disappearance or destruction, but other property, such as merchandise, is covered only for robbery and, inside the premises, safe burglary. Employee theft covers all three kinds of property.

Definitions

• Employee: a natural person in the insured’s service, paid directly by salary, wages or commissions, whom the insured has the right to direct and control. Temporary and leased workers are included, and a person remains an employee for the first 30 days after leaving, unless terminated for theft or dishonesty. An agent, broker or independent contractor is not an employee.
• Money: currency, coins and bank notes in current use, and traveler’s checks and money orders held for sale to the public.
• Securities: negotiable and nonnegotiable instruments or contracts representing money or property. Securities do not include money.
• Other property: tangible property other than money and securities that has intrinsic value. It does not include computer programs or electronic data.
• Theft: the unlawful taking of property to the deprivation of the insured.
• Robbery: the unlawful taking of property from the care and custody of a person by someone who has caused or threatened bodily harm to that person, or committed an obviously unlawful act the person witnessed.
• Safe burglary: the unlawful taking of property from a locked safe or vault by a person who enters it unlawfully, as shown by marks of forcible entry on its exterior, or the taking of the safe or vault itself from inside the premises.
• Forgery: signing the name of another person or organization with intent to deceive. Signing one’s own name is not forgery.
• Custodian: the insured, a partner or an employee who has care and custody of property inside the premises. A watchperson or janitor is not a custodian.
• Messenger: the insured, a relative, a partner or an employee who has care and custody of property outside the premises.
• Occurrence: for employee theft, an individual act, the combined total of all separate acts, or a series of acts by an employee, related or not, during the policy period. The limit of insurance is the most paid for one occurrence, so one limit applies to everything a dishonest employee takes during the policy period.
• Discover: the time the insured first becomes aware of facts that would cause a reasonable person to assume a covered loss has occurred or will occur.

Exclusions

The form does not cover:

• Acts of the insured: theft or any other dishonest act by the named insured or its partners or members
• Acts of employees: theft or any other dishonest act by an employee, manager, director, trustee or authorized representative, except when it is covered under Employee Theft
• Employees known to be dishonest: loss caused by an employee whose earlier dishonest act the insured learned of before the policy period
• Indirect loss: lost income, damages owed to others (other than compensatory damages arising directly from a covered loss), and the cost of proving the loss
• Disclosure of confidential information, virtual currency, governmental seizure, nuclear hazard, pollution and war

Other exclusions apply only to particular agreements. Two groups matter most:

• Employee Theft does not cover a loss whose proof depends on an inventory computation or a profit and loss computation. The insured must show by other evidence that a theft took place, and may then use inventory records to support the amount.
• The inside and outside the premises agreements do not cover accounting or arithmetical errors, fire (the exclusion does not apply to money and securities, which are covered for destruction, or to a safe or vault, which is covered only for damage from an actual or attempted theft, unlawful entry, robbery or safe burglary), vandalism, motor vehicles, property transferred or surrendered to a person or place outside the premises on unauthorized instructions or because of a threat (a messenger robbed on a trip is still covered if the insured did not know of the threat when the trip began), or property the insured was tricked into giving up (voluntary parting).

Discovery form versus loss sustained form

Crime coverage is written on a loss sustained form or a discovery form. They differ in which policy pays when a hidden theft comes to light. Under both, the loss must be discovered during the policy period or the extended period to discover loss.

	Loss sustained form	Discovery form
The occurrence must take place	During the policy period	At any time
Extended period to discover loss after cancellation	One year	60 days in the standard discovery form

Suppose an employee steals for three years and the theft is discovered in the fourth. A discovery form in force that year covers the whole loss, up to its limit. A loss sustained form in force that year covers, on its own, only what was taken during its policy period.

Extended period to discover loss. After cancellation, the insured may still discover a loss sustained before the cancellation date: one year under the loss sustained form and, in the standard discovery form, 60 days. The period ends immediately when the insured obtains other insurance replacing the coverage. An employee benefit plan subject to ERISA has one year under either form, and under the loss sustained form replacement insurance does not end that year early.

Loss sustained during prior insurance. Under a loss sustained form, if the current insurance took effect when the prior insurance was cancelled, and the current insurance would have covered the loss, the current insurer pays for a loss discovered now that took place during the prior insurance. If another insurer issued the prior insurance, its own period to discover loss must also have expired. The limits of the two policies do not add together: the most paid is the highest single limit when the same insurer or an affiliate issued both, and the lesser of the two limits when another insurer issued the prior one. A gap between the policies defeats the condition.

Conditions

Duties in the event of loss. After discovering a loss, or a situation that may result in one, the insured must:

• Notify the insurer as soon as possible
• Notify law enforcement if the loss involves a violation of law (not required for employee theft or forgery)
• Give a detailed, sworn proof of loss within 120 days
• Cooperate, produce pertinent records, and submit to examination under oath if asked
• Secure its rights of recovery against those responsible

Valuation. Money is paid at face value. Securities are valued at the close of business on the day the loss was discovered. Other property is paid at replacement cost without deduction for depreciation once it is repaired or replaced, and at actual cash value if it is not.

Other insurance. When crime coverage is primary and other insurance applies on the same terms, each insurer pays in proportion to its limit. If it is on different terms, the crime coverage pays only the loss above the other insurance’s limit and deductible, whether or not the insured can collect on it, or above its own deductible if that is greater.

Termination as to any employee. Employee theft coverage ends for an employee as soon as the insured, or a partner, officer or director not in collusion with the employee, learns of any theft or other dishonest act the employee has committed, whether before or after being hired. The insurer may also end coverage for an employee by mailing notice at least 30 days in advance.

Professional Liability

Professional liability insurance is a specialized type of liability coverage for individuals such as physicians, attorneys, certified public accountants, insurance producers, or directors or officers of corporations.

Professional liability refers to liability arising from a failure to use care (negligence) at the level of skill expected from the professional.

Several forms of professional liability insurance are common.

Malpractice

Medical malpractice insurance is available to physicians, surgeons, dentists, and hospitals. It protects against legal action brought by an injured third party due to the insured’s negligence in performing professional duties.

Coverage applies to the insured’s responsibility for bodily injury or property damage to others. Many policies also cover personal injury, such as mental anguish suffered by the injured third party due to the insured’s negligence or non-performance.

Many malpractice policies include a “consent to settle” clause. This requires the insurer to obtain the insured’s permission before settling a claim, which helps protect the professional’s reputation.

Errors and Omissions

Many professions use errors and omissions (E&O) policies. Examples include accountants, insurance producers or adjusters, architects, attorneys, stockbrokers, real estate brokers, and engineers.

Coverage is tailored to the profession. It pays for liability arising out of the performance of professional duties when the insured is alleged to have been negligent.

For example, if an insurance agent makes an inadequate recommendation that causes a customer financial harm, a resulting lawsuit will likely be covered by the agent’s E&O policy.

Directors and Officers

Another type of professional liability contract provides legal liability protection to a corporate director or officer for errors and/or omissions. This type of policy protects corporate leadership from lawsuits by stockholders or others alleging mismanagement.

Other profession-specific policies are also available, including:

• Druggists Liability
• Fiduciary Liability
• Employee Benefit Plan Liability
• Professional Architects Liability

Specialty liability insurance

Three other specialty liability coverages address exposures that a commercial general liability (CGL) policy excludes or was never designed to cover.

Employment practices

Employment practices liability insurance (EPLI) protects an employer against claims by employees, former employees and job applicants alleging wrongful employment practices, such as:

• Wrongful termination or discharge
• Discrimination in hiring, promotion, pay or firing
• Sexual harassment and a hostile work environment
• Retaliation against an employee who complained or reported wrongdoing
• Wrongful failure to hire or promote, and employment-related defamation or invasion of privacy

The CGL excludes injury arising out of employment-related practices, which is why a separate EPLI policy is needed. EPLI pays defense costs and damages, and is usually written on a claims-made basis. It does not replace workers’ compensation, which covers an employee’s work injuries.

Employee benefits

Employee benefits liability coverage protects an employer against claims arising from negligent errors or omissions in administering its employee benefit programs, such as group health, life, disability and retirement plans. Typical claims arise from:

• Failing to enroll an eligible employee, or to process a change in coverage, so that a claim later goes unpaid
• Giving an employee incorrect advice about the plan’s benefits or eligibility

It is usually added to the CGL by endorsement, on a claims-made basis. It covers administrative mistakes, not a plan’s failure to pay the benefits it promised. It also does not cover breaches of the duties of a plan fiduciary, which are the subject of separate fiduciary liability insurance.

Cyber liability and network protection

Cyber liability insurance covers losses from data breaches, network security failures and cyberattacks. Traditional property and liability policies exclude or sharply limit these losses, so a separate cyber policy fills the gap. It usually combines two kinds of coverage:

• First-party coverage (the insured’s own costs): forensic investigation of a breach, notifying affected individuals and providing credit monitoring, restoring lost or corrupted data, lost income from a network outage (business interruption), and responding to cyber extortion such as ransomware
• Third-party coverage (liability to others): network security and privacy liability for claims by customers or others whose information was exposed or who were harmed by malicious code spread from the insured’s systems, defense of regulatory proceedings, and media liability for content the insured publishes online

Cyber policies are generally written on a claims-made basis.

Lesson Summary

• The building and personal property form does not cover money and securities, the basic and broad cause of loss forms do not cover theft, and the special form excludes theft by employees. Commercial crime insurance fills those gaps.
• The form has seven insuring agreements. Under the inside and outside the premises agreements, money and securities are covered for theft, disappearance or destruction. Other property is covered for robbery and, inside the premises only, safe burglary.
• Robbery is a taking from a person by force or threat. Safe burglary is a taking from a locked safe or vault shown by marks of forcible entry, or the taking of the safe or vault itself.
• The form excludes dishonest acts of the insured and its partners, and indirect loss.
• A loss sustained form covers occurrences during the policy period, with one year after cancellation to discover them. A discovery form covers losses discovered during the policy period whenever they occurred, with 60 days after cancellation in the standard discovery form.
• The insured must give notice as soon as possible and a sworn proof of loss within 120 days. Money is valued at face value and other property at replacement cost.
• Employee theft coverage ends for an employee as soon as the insured learns of any dishonest act by that employee.

Professional Liability Insurance includes forms for Malpractice, Errors and Omissions, and Directors and Officers coverage tailored to different professions.

• Malpractice - for physicians, surgeons, dentists, etc.
• Errors and Omissions - for various professions
• Directors and Officers - for legal liability protection

Specialty liability coverages fill gaps in the CGL:

• Employment practices liability - claims of wrongful termination, discrimination, harassment and retaliation
• Employee benefits liability - errors and omissions in administering employee benefit plans
• Cyber liability - first-party breach costs and third-party network security and privacy liability

Chapter Vocabulary

Definitions

Arson

The deliberate setting of a fire.

Burglary

An individual or an intruder who steals property from a premises and leaves evidence or signs of forced entry at the location.

Crime Insurance

Term referring to property coverages for the perils of burglary, theft and robbery, forgery or counterfeiting, fraud, kidnap and ransom, and off-premises exposure.

Embezzlement

A fraudulent act involving taking property or money from the one who has been entrusted with such property.

Employee Dishonesty Coverage

Covers direct losses and damage to businesses resulting from the dishonest acts of employees.

Errors and Omissions Liability

Liability coverage of a professional or quasi-professional insured to persons who have incurred bodily injury or property damage or who have sustained any loss from omissions arising from the performance of services for others, errors in judgment, breaches of duty, or negligent or wrongful acts in business conduct.

Kidnap/Ransom Insurance

Coverage for ransom or extortion costs and related expenses.

Larceny

A theft loss that occurs during a period of time when access was granted to the stolen property.

Malpractice

Alleged misconduct or negligence in a professional act resulting in loss or injury.

Medical Malpractice

Insurance coverage protecting a licensed health care provider or health care facility against legal liability resulting from the death or injury of any person due to the insured’s misconduct, negligence, or incompetence, in rendering or failure to render professional services.

Mysterious Disappearance

An article is known to have disappeared, but it is impossible to determine how such a disappearance occurred.

Premises

The particular location of the property or a portion of it as designated in an insurance policy.

Watchman

One who watches over an insured’s property.