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June 24, 2014 Articles

Insurance 101: Employers Required to Establish Employee Theft for Coverage under Crime Policies

Because first-party property policies typically do not cover crime-related losses, companies are purchasing commercial crime policies, also called fidelity insurance, to fill this gap and protect their assets

by Gabrielle T. Kelly

Although no business wants to deal with the issue, companies increasingly are being forced to deal with losses from theft, fraud and embezzlement in the workplace. The losses in these situations can be enormous. Since first-party property policies typically do not cover crime-related losses, companies are purchasing commercial crime policies, also called fidelity insurance, to fill this gap and protect their assets. Commercial crime policies provide employers with protection from losses that arise from employee dishonesty, forgery, and counterfeiting. While the language in crime policies varies by insurer, two examples of typical coverage grants are as follows:

We will pay you for your direct loss of, or your direct loss from damage to, Money, Securities and Other Property directly caused by Theft or Forgery committed by an Employee, whether identified or not, acting alone or in collusion with other persons.

Rhode Island Resource Recovery Corp. v. Travelers Cas. & Sur. Co. of Am., 2011 U.S. Dist. LEXIS 58007, at *3 n.1 (D.R.I. May 25, 2011).

The Company shall pay the Insured for] direct loss of Money, Securities, or Property sustained by an Insured resulting from Theft or Forgery committed by an Employee acting alone or in collusion with others.

Coleman Cable, Inc. v. Travelers Indem. Co., 790 F. Supp. 2d 742, 744 (N.D. Ill. 2011).

Under both coverage grants, there are several consistent and important elements that are required, including 1) loss of money, securities, or property, and 2) theft or forgery by an employee, acting alone or in collusion with others. Policyholders must satisfy each of these requirements to obtain coverage. Therefore, even when the policyholder has experienced a loss, it may have difficulty obtaining coverage where it cannot definitively attribute the loss to employee theft.

Courts consistently have held that inventory calculations and assumptions about the cause of loss are insufficient to establish coverage under a crime policy. Performance Autoplex II. Ltd. v. Mid-Continent Cas. Co., 322 F.3d 847 (5th Cir. 2003) (__ law); Ernie Von Schledorn Ltd. v. United Fire & Cas. Co., 635 N.W.2d 27 (Wisc. 2001); United States Smelting Ref. & Mining Co. v. Aetna Cas. & Sur. Co., 372 F. Supp. 489 (S.D.N.Y. 1974). It is not enough for the policyholder to have inventory shortages or evidence that an employee was near the missing items prior to their disappearance. Commercial crime policies require the policyholder to possess sufficient evidence that the only reasonable conclusion that can be drawn is that an employee committed the theft. Accordingly, the policyholder must have evidence that creates more than a mere suspicion or supposition that an employee is responsible for the loss.

The policyholder does not need to be able to identify the employee that committed the crime, and it is not necessary that the policyholder know all the facts surrounding a loss. But, the policyholder must have considered other potential causes for the loss and eliminated them as possibilities. When courts have analyzed whether a policyholder established that employee theft was responsible for its loss, they have focused on various factors, including: whether the policyholder accurately identified the amount or number of items that was stolen; whether the policyholder identified a probable date and time of the theft;  whether the policyholder’s employees were the only persons with access to the items; the policyholder’s manner of recordkeeping; and the policyholder’s procedure for investigating the potential loss. Policyholders most successful in obtaining coverage for their losses specifically detailed their basis for believing than an employee caused the loss. Thus, if a policyholder wants to obtain coverage under its crime policy when it cannot definitively attribute the loss to an employee, the policyholder must have as much information as possible to provide to the insurance company.

In conclusion, employers are encouraged not only to obtain a crime policy, but also to read the policy carefully to understand what claims are covered. The policy may provide coverage that is quite different from the employer’s general expectations, or the policy may require the policyholder to provide specific information that it was unaware that it needed to have. Further, if a loss occurs, policyholders should determine the facts surrounding the theft, determine when they discovered the crime, and carefully document all information obtained. By following these procedures, employers can ensure that they have insurance coverage in the unfortunate event that they are victims of employee theft.


Keywords: insurance, coverage, litigation, loss, commercial crime policy, fidelity, employee, theft

Gabrielle T. Kelly is with Brouse McDowell LPA, Cleveland.

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