During the past few years, the Surety Association of America (SAA), has been developing alternative approaches to the claims handling of crime losses. This has resulted in the filing of discovery-based forms in addition to the existing loss sustained forms.
Because the SAA fidelity forms are the basis for the Employee Dishonesty and Forgery coverages found in the current ISO Commercial Crime Program, ISO had to work out revisions to the Commercial Crime Program in order to be compatible.
As a result, ISO's Commercial Crime Program now offers options for the treatment of loss on both a discovery basis or a loss sustained basis in its Commercial Crime Program.
These changes show an April 1997 edition date on the Crime forms; but state approvals have only recently been received, with the first group of states approving with a May 1, 1998, date.
Discovery basis
By way of explanation, the discovery basis approach provides for payment of losses that have been discovered during the policy period but that were not necessarily sustained during that particular policy period (an approach similar to claims-made liability).
A retroactive date is necessary to avoid overlap with previous loss sustained coverage. Working the same as its general liability counterpart, the retroactive date is the cut-off date for discovery basis losses. No losses that actually occurred prior to the retroactive date are covered by the existing policy, regardless of when they are reported. If no retroactive date has been shown in the Declarations, the policy effective date becomes the retroactive date by default.
The discovery version of the Crime General Provisions form contains the following important clause:
"Discovery of Loss:Discovery of loss occurs when you first become aware of facts which would cause a reasonable person to assume that a loss covered by this insurance has been or will be incurred, even though the exact amount or details of loss may not then be known."
What this means is that if any circumstance arises or information comes to light that may eventually result in a claim, the insured must contact the insurer with as much information as has been discovered. Even if that information is not complete, whether or not an actual claim has been filed, the insured must notify the insurer of the potential loss.
The insured has up to 60 days from the end of the policy period or termination of coverage to discover a loss that was sustained during the coverage period. If coverage is replaced by similar insurance any time during the extension period, the 60-day extension ends.
Loss sustained basis
The loss sustained policy basis simply covers only those losses that were both sustained and discovered within the policy period or that are sustained during the policy period and are discovered within one year of the end of that policy period. It works in a manner very similar to the occurrence-based general liability form and is the coverage basis that has previously been provided by ISO Commercial Crime forms up to this point.
Example 1
Policy Inception 1-1-1998
Policy Expiration 1-1-1999
Claim Filed 9-1-1999
Date of Loss 8-1-1998
The claim filed on 9-1-1999 for the injury that occurred on 8-1-1998, is covered by a loss sustained policy effective 1-1-1998 to 1-1-1999.
The date of loss must be within the policy period, and the claim must be filed within one year of policy expiration to be covered. Had the claim been filed on 9-1-2000 (over a year from policy expiration), there would have been no coverage.
Example 2
Retroactive Date 1-1-1997
Policy Inception 1-1-1998
Policy Expiration 1-1-1999
Claim Filed 9-1-1999
Date of Loss 8-1-1998
However, in the same example, there is no coverage in the discovery basis policy as the claim must be after the retroactive date, and the claim must be filed during the policy period or within 60 days after expiration.
Example 3
Retroactive Date 1-1-1997
Policy Inception 1-1-1998
Policy Expiration 1-1-1999
Claim Filed 2-1-1999
Date of Loss 8-1-1998
Coverage would apply in this case under a discovery basis policy. The loss occurred after the retroactive date, and the claim was filed within 60 days of the covered policy period.
New and changed forms
Let's take a quick look at the changes in forms in the program revisions.
The title of existing Form CR 10 00--Crime General Provisions has been changed to Crime General Provisions (Loss Sustained Form). There have been other changes in the loss sustained form, such as the time given for automatic coverage on newly acquired entities obtained through consolidation or merger. This has been increased to 60 days. However, the insured must notify the insurer in writing within 60 days, as well as pay additional premium for the cover to extend to the new entity past 60 days.
In another change, the provision for the Discovery Period for Loss has been renamed to Extended Period to Discover Loss. Finally, the definition of employee in the general Definitions section of the policy has been revised to include employees used as short-term substitutes for other employees on leave to meet seasonal or short-term workload condition; but leased employees are not included.
A new form has been developed, CR 11 00--Crime General Provisions (Discovery Form), to provide the discovery basis coverage and include all of the above mentioned revisions.
Similarly, the title of existing Form CR 50 01--Policy Change has been changed to Policy Change (Loss Sustained Form). A new form has been developed, CR 50 09--Policy Change (Discovery Form).
In another change, a new endorsement has been developed (CR 50 10--Include Leased Workers As Employees) to treat leased workers as covered employees. It is designed for those employees insured by labor leasing firms other than persons hired only to meet seasonal or short-term workload conditions.
Other new endorsements that have been developed include:
CR 50 05--Policy Bridge; Discovery Replacing Loss Sustained, a new endorsement designed to bridge the coverage gap that may occur when a loss sustained policy is replaced by a discovery policy.
CR 50 06--Include Retroactive Date For Named Insured allows for a different retroactive date to be set for the named insured only.
CR 50 07--Include Retroactive Date For Specified Joint Insured allows for a different retroactive date to be set for a specified joint insured.
CR 50 08--Include Retroactive Date For An Entity Acquired through Consolidation Or Merger allows for a different retroactive date to be set for an acquired entity. *
The author
Diana Kowatch, CPCU, AU, AAM, CPIW, with over 20 years' experience in the insurance industry, is editor in chief of Rough Notes' Technical & Educational Products.
©COPYRIGHT: The Rough Notes Magazine, 1998