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The Rough Notes Company Inc.



March 26
13:28 2019

An employee of Black Silver removed property from each of the company’s five stores. The actions took place over a two-year time period and resulted in an employee theft loss of $65,000. Black Silver was insured by Sequoia Insurance under a Businessowners policy with a coverage extender Form SEQ 1525 attached. When presented with the claim, Sequoia initially offered $10,000 and then $20,000 but Black Silver demanded $65,000. The trial court agreed with Sequoia, but Black Silver appealed.

Read here to see how the appellate court ruled.

Black Silver is a retail operation and manages five boutiques in San Diego County. Between June 2006 and September 2008, Black suffered a loss in the amount of $65,000 because an employee removed property from all the locations. Sequoia Insurance Co. (Sequoia) provided Black Silver with two business owners policies. One was effective from February 1, 2007 to February 1, 2008 and the second from February 1, 2008 to February 1, 2009.

Black Silver alerted Sequoia of the loss and Sequoia reacted with a payment in the amount of $10,000. Black Silver sued Sequoia alleging that the loss was fully covered under the two policies, Sequoia responded with an additional payment of $10,000 as a result of the two consecutive policies. The payments were made under a coverage extender which was limited to $10,000 per policy and independent of the business personal property limits.

Following a bench trial, judgment was recorded as in favor of Sequoia with respects to Black Silver’s allegations for breach of contract and bad faith. Black Silver appealed, asserting that the coverage limitation was not conspicuous, plain, and clear. Black Silver appealed based upon policy wording. The coverage extender read as follows:

“As respects coverage under this endorsement, the following is added to the Businessowners Coverage Form Section I.A. Coverage, Subsection 5. Additional Coverages:“Coverage for Employee Dishonesty is provided as described in Section I.G. Optional Coverages, Subsection 3. Employee Dishonesty of form BP 0003. The most we will pay under this coverage is the limit of insurance shown for Employee Dishonesty on Page 1 of this endorsement. The requirements of ERISA are provided by this coverage. The limit provided under this endorsement is an additional limit to limits provided under similar coverage if provided elsewhere in this policy. The deductible applicable to business personal property applies to losses under this coverage.”

There is no limit listed on the Declarations. The coverage extender refers to Form SEQ 1525 which does have spaces to enter the limit and applicable deductible. However, the spaces were blank.

The appellate court concluded that with the ambiguous language combined with a reference to “optional coverage,” one could easily interpret the coverage to be in addition to the business personal property limits. The part of the judgment that failed to provide Black Silver the balance of the claim was reversed. The issue was then remanded to the trial court to determine, based on this ruling, how much of Black Silver’s unreimbursed claim should be paid.

Black Silver Enterprises, Inc. v. Sequoia Ins. Co., No. D059682, 2013 WL 704925 (Cal. Ct. App. Feb. 27, 2013)

Employee dishonesty as an option

The ISO businessowners policy provides coverage for employee dishonesty as an optional coverage. The available limits are $5,000, $10,000, $25,000, $50,000 or $100,000. Some insureds insist that a minimal limit is acceptable but consider how one employee in a two-year time period was able to take $65,000. If a loss covers multiple years, all thefts during that time period could be covered, but only if there had been no lapse in employee dishonesty coverage and if the current limit of insurance is sufficient.

Read the PF&M analysis of the Employee Dishonesty Optional coverage provided in the ISO BP 00 03-Businessowners policy


Optional Coverages do not apply unless there is a limit for them on the declarations. They are subject to the property coverage terms and conditions, except for and/or as stated below.

  1. Employee Dishonesty (07 13 change)
  2. The insurance company pays for direct loss of business personal property and money and securities due to dishonest acts its employees commit, whether they act alone or collude with others to do so. However, it does not include actions by the named insured or a partner. In order for coverage to apply, the act must intend to cause the named insured to sustain a loss and also to benefit the employee, other persons, or other organizations.

Note: The term employee as used in this optional coverage is broad. It is not defined within the Definition section but is defined later in this optional coverage.

  1. There is no coverage for loss or damage:
  • Due to dishonest acts by the named insured, its partners, or members, whether they act alone or collude to do so
  • For dishonest acts by managers or directors who act alone or who collude with others. Such acts are excluded while they are providing a service for the named insured or are performing a service for others.
  • For dishonest acts of employees, except as a. above provides, while in collusion, acting alone, or while they are performing for the named insured or performing services for others.
  • If the only proof that a loss occurred is an inventory or a profit and loss calculation
  • (07 13 addition) Losses an employee causes if both of the following apply:

o    The employee committed a dishonest act or theft prior to the inception date of this policy

o    Any of the named insured’s partners, members, managers, officers, directors, or trustees knew about that employee’s prior dishonest act or theft. This item does not apply if the individual who knew about the incident was in collusion with the employee.

  1. The most paid in a single occurrence is the Employee Dishonesty Limit of Insurance on the declarations.
  2. Loss or damage caused by one or more persons or that involves a single act or a series of acts is considered a single occurrence.
  3. If the current policy and a previously terminated or cancelled policy that the same or an affiliated insurance company issued to the named insured both cover a loss, the amount paid is limited to the largest amount that any policy provided, regardless of the number of years it was in effect. Limits are not cumulative from year to year.

Note: This provision eliminates stacking limits from two or more policies due to a series of acts.

Example: Floyd’s Meat Market has the best steaks in town. Ernie is the head butcher and takes steaks home with him at least once a week for over ten years but never tells Floyd. Ernie finally recognizes the error of his ways and confesses to Floyd. Floyd suddenly realizes that Ernie has stolen $6,000 worth of steaks in each of the past ten years. His claim is for $60,000 since he has been with the same company the whole time. The loss is capped at $10,000 because the Employee Dishonesty Limit of Insurance is $10,000.

 This coverage is cancelled with respect to a specific employee as soon as the named insured or one or more of its partners, members, managers, officers, or directors who are not in collusion with the employee become aware of dishonest acts the employee committed before or after he or she was hired.

Example: Floyd at Floyd’s Meat Market really likes Ernie and wants to keep him as an employee. The policy permits this but coverage does not apply to Ernie if he commits any other dishonest acts. Even if Floyd did not report Ernie’s actions, Ernie is not covered in the future because Floyd knew about the situation.
  1. Loss must be sustained during the policy period and discovered not later than one year after the end of the policy period.
  2. If the named insured had a covered loss in a previous policy period but did not discover it until after its discovery period expired, the current policy covers the loss as long as there was no break in coverage from the previous policy and the current policy would have covered the loss or damage if it was in effect at the time of loss.
Example: The policy for John’s Pizza and Deli has been in force continuously since the business started ten years ago. The policy dates are 01/01 to 01/01 of each year and it has always included employee dishonesty coverage. John hired Joanne as a cook two years ago. During the time she was employed, from 01/14/14 to 07/13/14, John noticed a strange pattern in the inventory. He couldn’t prove anything but suspected that Joanne was taking inventory. She ended her employment and was arrested in connection with theft at another pizza place in June 2015. She was a first-time offender and confessed to all previous crimes, including her thefts at John’s. John reported the crime as a claim to the company that provided coverage for the 01/01/14 to 01/01/15 policy period. The company denied the claim. He then forwarded the claim to the current carrier and its coverage paid the claim submitted.

 iThe insurance in paragraph h. above is limited to the lesser of the limits on the current policy or the limits on the policy in effect when the loss occurred.

  1. This Optional Coverage defines employee. When used in employee dishonesty, an employee is any natural person:
  • In the named insured’s service or for up to 30 days following termination) that the named insured compensates and controls
  • Who acts as a temporary substitute for a regular employee or one hired for certain short-term situations
  • Leased under a written agreement with a labor leasing business to perform certain duties. This does not include temporary employees.
  • Who is a former employee, director, partner, representative, trustee, member, or manager who the named insured retains as a consultant to perform services for the named insured
  • Who is a guest student or intern while working on the premises but not while working away from them

Independent contractors are not employees. Managers, directors, or trustees also are not employees unless they are carrying out the duties of employees.

Note: ISO uses the term “natural person” in the definition above. A natural person means a living, breathing individual. Unnatural persons are entities, such as corporations, that have rights and obligations as defined by law.

Note: This definition of employee matches the same definition in the ISO crime coverage forms.

Related Article: ISO Commercial Crime Coverage Forms And Policies Analysis

A very important and underpurchased coverage

Employee dishonesty is an underpurchased coverage because many clients are convinced that they are excellent readers of human character in their hiring practices or that they have adequate safeguards in place to prevent any losses. Unfortunately, some employees will steal and those great safeguards can’t stop everyone.

Here are two emarketing articles you may want to use in order to alert them about this important coverage.

Employee Theft – Part One

When a business uses insurance and/or loss control to protect itself from losses, the focus is usually upon outside forces. In other words, the assumption is that some event or some party not directly connected with the business will be the source of a loss. While this assumption is legitimate in many instances, it is a very limited and dangerous assumption.

Losses may occur from inside a business just as easily as from outside. A major source of loss for many businesses is their employees. The more trust an employer places in a given employee, the more vulnerable that employer is to employee-related loss if that employee is dishonest. To protect itself from crooked employees, a business may need to purchase crime coverage.

A company’s exposure to theft from employees lies with workers who are responsible for handling money (and similar property) and those who have significant access to company inventory. Therefore, a company that wants to evaluate its possible expense for purchasing crime insurance as well as to determine what control measures it should create to minimize theft losses, must properly classify its employees.

Types of Employees

Employees in positions of greater trust (such as supervisors, managers and executives) usually have greater access to company assets. These workers are more expensive to insure because they can, potentially, create greater theft losses. These employees are often in a position, not only to handle money and securities; they usually handle company records concerning monetary transactions. They are also, often, in charge of benefit plans or have other fiduciary responsibilities.

Other employees, with non-managerial duties, can also cause problems. Consider persons, such as those in sales, product transportation and/or warehousing and supplies who have constant access to valuable company property. Because dishonest employees at this level deal with tangible items rather than money and securities, they represent a less dangerous source of loss. However, depending upon the property involved, they may also create substantial losses. Still, such employees are less expensive to insure. A business that is evaluating its need for insurance coverage and for anti-theft controls MUST make thorough consideration of their type of business.

Employee Theft – Part Two

Employee Theft Controls

Controls refer to techniques and processes that discourage employee theft. While controls can’t fully eliminate theft; they can certainly help minimize the danger. Further, they may also assist in quicker discovery of losses and aid in capturing dishonest employees. The most effective controls are those that limit theft opportunities and the use of auditing.

One important control is to thoroughly check new employees. The hiring process must include adequate references that are verified, as well as running pre-employment background checks. Hiring workers with criminal backgrounds is a near guarantee that losses will soon occur. Such losses may not be covered since insurance companies usually exclude losses involving employees with a documented criminal history.

Another control is to assign distinct job duties among different employees. Responsibilities for making deposits should not be assigned to the same employees responsible for making account payments. The worker who orders inventory should be different from a worker responsible for receiving property. These workers should be different from the worker who pays for shipments. In small businesses, with few employees, such tasks can be rotated among different workers. This reduces the chance for a dishonest employee to create theft opportunities. Employees will act as checks and balances against crooked activity. There is still the chance that workers will cooperate with each other to steal property, but collusion is significantly less common than individual acts.

Other important controls involve having proper procedures for handling company check disbursements (such as use of countersignatures, stamping incoming checks “for deposit only), monitoring electronic payment processes and inventory controls that include accurate record keeping (either manual or computerized) to track inventory levels. It also helps to closely monitor ordering procedures, acceptance of credit and separate approval of suppliers. Another way to exert control over possible thefts is to use qualified, independent auditors regularly. Outside auditing can quickly and accurately identify problems Implementing auditing recommendations is also a smart idea.

Regardless the type of business, it is important to recognize that, unfortunately, employees can be a major contributor to business losses. An insurance professional is a good source of expertise for identifying ways to protect against internal losses.

Congratulations – you need more coverage

Your successful clients need more coverage because as they expand, their exposures expand with them. This is particularly true with employee dishonesty. As stock increases, sales increase, the number of employees increase and/or the number of locations increase, the limit of employee dishonesty coverage should also increase.

Below is a business building letter you could use to encourage your clients to increase their limits before a loss occurs and the limit is inadequate to coverage the loss.

Dear [Name]:

Congratulations for having increased your sales, inventories and receivables over the years. The growth in these operating and balance sheet items creates an insurance consideration. Business growth may increase your vulnerability to large losses caused by, we’re sad to say, employee dishonesty.

It’s probably time to see whether the amount that is subject to employee theft exceeds your present dishonesty insurance protection, and we’d like to help.

I’ll call in a few days to set up an appointment convenient for you. Trust me when I say that our meeting can indeed save your growing, prospering business!

Thanks for your time.


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