By Donald S. Malecki, CPCU
The commercial crime program of the Insurance Services Office (ISO) has been restructured with a number of improvements. Those who are used to referring to the fidelity coverage section of crime forms as "employee dishonesty" insurance will have to change their reference to "employee theft coverage."
Given that the defined term "theft" means "the unlawful taking of 'money,' 'securities,' and 'other property' to the deprivation of the insured," coverage may be narrower than the forms being replaced that include reference to "employee dishonesty," a term in the standard crime form defined to mean "dishonest acts committed by an employee ... with the manifest intent to: (1) Cause you to sustain a loss ..." Dishonesty therefore may include or be exclusive of employee theft.
Whether it is the old form's reference to "employee dishonesty" or the new form's reference to "employee theft," both crime form editions are still likely to be referred to as fidelity insurance or coverage. Traditionally, fidelity coverage has focused on losses of employers suffered at the hands of employees; that is still the purpose for fidelity coverage.
The meaning of "employee"
To determine whose "theft" loss is covered under the appropriate form, one needs to look not only to the definition of "employee," but also to the exclusions. For example, acts committed by the named insured are specifically excluded and so are the acts of partners of partnerships and members of limited liability companies. The latter two categories, however, can be added by endorsement, if the underwriter is willing.
In many situations, an executive officer also is an employee of the corporation. Thus, a person could in some cases be acting in his/her role as an executive officer and at other times perform work in the capacity of an employee. These types of circumstances can complicate matters regarding not only fidelity coverage but also liability coverage.
One situation where coverage should not be expected is where fidelity coverage is written for a closed corporation where the president is the sole shareholder. What fosters the argument is that the president also maintains that he/she is an employee and therefore covered.
One such actual case is Conestoga Title Insurance Co. v. Premier Title Agency, Inc., et al., 746 A.2d 462 (Sup.CT. N.J. 2000). This was an action under fidelity bond in the amount of $385,470.59, where a title insurance company authorized a title agency to issue policies on its behalf. The agency also was required to obtain fidelity coverage. The title insurance company made good the loss and then sought recovery as an assignee of the title agency.
The loss occurred when the sole director, president and shareholder of the title agency stole money held in trust to satisfy existing mortgages on purchased properties. The bond defined "employee" as "any natural person ... in your service ... [w]hom you compensate directly by salary ... ; and [w]hom you have the right to direct and control while performing services for you." The bond also provided that "this insurance is for your benefit only. It provides no rights or benefits to any other person or organization."
The fundamental question to be resolved was whether the sole owner was an employee, as defined above. The court determined that the thief was the "alter ego" of the title agency, therefore precluding recovery sought by the title company as assignee, since its rights are limited to the rights of the assignor (title agency).
Coverage was argued to apply, because of the title agency's theoretical right to control the sole owner. However, the court rejected this argument which, it said, finds strong support in the following opinion expressed in the case of World Hospitality Ltd., 983 F.2d 650 (5th Cir. 1993):
A corporation can act only through its officers and directors. When one person owns a controlling interest in the corporation and dominates the corporation's actions, his acts are the corporation's acts. Allowing the corporation to recover for the owner's fraudulent or dishonest conduct would essentially allow the corporation to recover for its own fraudulent or dishonest acts. The [fidelity] bonds, however, were clearly designed to insure the corporations against their employee's dishonest acts and not their own dishonest acts.
Persons or organizations not covered
It is also not unusual for businesses to suffer loss of money, securities and other property at the hands of other persons who have close business ties with the employer. Included in this category are agents, brokers, factors, commission merchants, consignees, and other independent contractors or representatives. Persons in this category are not considered employees and, in fact, are specifically precluded under the "employee" definition of the forms being replaced. The new form includes this same category of persons but adds any person leased to the named insured (you) by a labor leasing firm.
There are a number of other persons or organizations, also falling outside the definition of "employee" in these crime coverage forms, whose acts of theft can be covered by endorsement--if the underwriter is willing, of course. Among the endorsements available for use with the new commercial crime forms to protect the employer are:
* Include Designated Agents As Employees, CR 25 02. This endorsement contains a schedule where the capacity of the agent is to be listed, along with the limit of insurance. The capacity could show, for example, an attorney or law firm, an auditor or the auditor's firm, so long as the appointment of such person, partnership, or corporation is in writing and shows that it is an agent of the named insured. The employer's coverage under this endorsement is limited to "theft," even though the crime form, as a whole, provides other coverages.
* Include As Employees The Spouse and Children of Building Manager, Superintendent or Janitor, CR 25 11. This is also referred to as a real estate management endorsement and applies when a person or entity is hired to service the building or premises owner. The term "employee" also includes the spouse and children (over 18 years of age) who reside with the employee. Each family is considered to be, collectively, one employee for purposes of this endorsement.
* Include Leased Workers as Employees, CR 25 05. Considering that employment leasing is so common today, it is important not to overlook this exposure. When this endorsement is added, an "employee" is defined to mean "any natural person leased to you by a labor leasing firm shown in the Schedule, under a written agreement between you and the labor leasing firm, to perform duties related to the conduct of your business ..." However, not included within this defined term is any person furnished to substitute for a permanent employee on leave or to meet seasonal or short-term workload conditions. The reason for this exception is that these employees are automatically included in the crime forms under the defined term "employee." This latter exception is unlike commercial general liability forms, which specifically preclude coverage against the acts or omissions of temporary workers.
* Include Members of A Limited Liability Company As Employees, CR 25 04. This endorsement is similar in content to the endorsement Include Partners as Employees, CR 25 03. (The limited liability company concept was first introduced in the United States in 1977, but was used in other parts of the world as early as the 1930s. The limited liability company is intended as an alternative to privately held companies. It provides its members with limited liability despite hands-on management, unlike partners of a partnership who are confronted with the assumption of unlimited personal liability.)
This endorsement redefines the term "employee" to include any natural person who is a "member" of a limited liability company that is an insured and shown in the schedule. It also amends the "acts committed by you, your partners or your members" exclusion. When issued, the insurer will not pay for loss caused by a "member" included as an "employee" by this endorsement, unless the amount of that loss exceeds the following:
a. Any amounts you owe that "member";
b. The value of the "member's" membership interest in the limited liability company insured under this insurance as determined by the closing of that limited liability company's books on the date of discovery of the loss by that limited liability company or any of its "members" not in collusion with the "member" causing the loss; and
c. Any applicable Deductible Amount.
We will then pay the amount of loss excess of that sum, up to the limit of insurance applicable to the Employee Theft Insuring Agreement.
One result of using this endorsement is to force the member who is involved in the theft to suffer the monetary loss he/she causes, while allowing the insurer to pay for that loss to the extent it exceeds the share of the partner who caused it.
Other endorsements available to add others as "employees" for the protection of the employer are:
* Include Chairperson and Members of Specified Committees As Employees, CR 25 06
* Include Specified Director or Trustees On Committees As Employees, CR 25 07
* Include Specified Non-Compensated Officers As Employees, CR 25 08
* Include Volunteer Workers As Employees, CR 25 09
* Include Volunteer Workers Other Than Fund Solicitors As Employees, CR 25 10
* Include Treasurers or Tax Collectors As Employees, CR 25 12
* Include Employee Officers and Employees Of Federal Reserve Bank Acting As Efts [Electronic Fund Transfer System] Agents, CR 25 14
A point to remember about adding others as employees to an employer's crime policy is that it decreases the chances that the employer's loss will go uncompensated. If the appropriate endorsement is not added and the employer sustains a loss at the hands of one or more of these persons or organizations that could have been added, the employer will have to retain those losses.
An endorsement also is available to exclude designated persons or classes or persons as employees. This endorsement is likely to be more of an underwriting tool and issued when the insurer wants to exclude certain persons such as those who have had prior histories of employer thefts, but who are otherwise productive and efficient employees. *