By Donald S. Malecki

One of the more delicate jobs a producer has is to discuss fidelity insurance limits with a corporate controller, treasurer, or person holding a similar position in other forms of entities.

Very delicately, and without a hint of finger pointing, the producer has to inform this person, who has control over the entity's money, securities, or other valuable property, and who very likely is the person who may embezzle funds, that dishonesty losses are common and difficult to detect.

Having laid that groundwork, the next words that should come from the producer's mouth are that determining limits is virtually impossible, but nonetheless important because of the usual policy limitation of prolonged undetected losses spanning several policy periods.

Controllers and treasurers also commonly make decisions about the insurance to buy and the limits to purchase. Some live by the rule of obtaining the most coverage possible for the least amount of cost (a euphemism for being somewhat "tight" with the dollar).

So once the ice has been broken with the comment that dishonesty losses are common and difficult to detect, the first question likely to be raised by the person who is being told about the importance of this coverage is: "How much insurance do I need?"

As seasoned insurance producers know, there have been (and still are) various selling aids for fidelity insurance which also suggest the limit levels to purchase. But they are guides only and not hard-and-fast rules. So, for purposes of risk management, the producer needs to avoid suggesting a limit and instead transfer that task to the person who must make the decision to purchase the coverage.

It is no different from liability insurance. It is not unusual for clients to ask producers and consultants how much their liability limits should be. The usual response of this writer, as a consultant, and most assuredly from among producers, is to ask the question: "How high is the sky?" This question is then followed with the statement: "You should purchase all of the limits you can afford."

Of course, there may be extenuating circumstances where certain minimum limits may be required such as when an entity is subject to the Employee Retirement Income Security Act of 1974 and subsequent amendments. In these cases, ERISA requires each fiduciary and each person who handles qualifying employee benefit plan assets to be bonded subject to a certain minimum amount.

Apart from that federal requirement, the matter of selecting limits is purely discretionary and will likely be selected on the basis of price. However, at the time of loss, the purchaser of this insurance will not ask how much the coverage costs but instead whether he or she has coverage.

To provide the purchaser of fidelity coverage with peace of mind, the producer also needs to explain how the crime policy usually applies when embezzlements span a period of several years and the total loss--once finally determined--far exceeds the policy limits. Explaining this in writing or with brochures on this subject produced by insurers has to be an additional aid in helping clients determine their limits.

It does not have to be a long, detailed explanation. After all, there are reams of paper and chapters in textbooks written on the application of fidelity coverage limits. What is required is a simple explanation or warning, if you will, that says: When dishonesty goes undetected over more than one policy period, you, the employer, may not receive the benefit of two or more policy limits. Therefore, make sure your limits are high enough to encompass the worst-case scenario. Or another way is to restate the so-called "Non-Cumulation of Limit of Insurance" clause which is found in the standard ISO Crime General Provisions Form CR 10 00.

Some producers are reluctant to provide warnings, since it could mean the loss of a sale. And it takes time, which producers admittedly have little of, particularly those working solely on commission. Besides, many prospective clients of insurance do not want to hear what may not be covered. Yet, some producers who have remained silent with respect to these kinds of matters have regretted it. Ask those who have been defendants in E&O cases whether the time and expense of having to go to court is worth it.

Nonetheless, it is not until after a loss happens that clients are told how the policy actually works. Some people in this category get angry and prefer to take their issue to court. One such recent case among many is Landico, Inc. v. American Family Mutual Insurance Co., 559 N.W.2d 438 (Ct.App.MN 1997).

In this case the entity purchased employee dishonesty coverage for the one-year period 1993 to 1994 with limits of $100,000 per occurrence at a cost of $659. When this policy expired, it was continued for another annual period with a renewal certificate for the same premium amount. An employee of this entity repeatedly embezzled through 1993 and 1994. The entity filed claims with its insurer for embezzlement losses of $47,424.48 in 1993 and $102,697.88 in 1994.

When the insurer paid the entity its policy limit of $100,000, suit followed because the entity thought it was owed the difference between the amount paid and its loss, given the fact that the entity had purchased two separate policies and limits. The insurer, however, pointed to its policy's non-cumulation of limits clause and its definition of "occurrence," and essentially said, "what has been paid is all you are going to get."

The non-cumulation of limits clause read:

Regardless of the number of years this insurance remains in force or the number of premiums paid, no Limit of Insurance cumulates from year to year or period to period.

The definition of "occurrence" read:

All loss caused by, or involving, one or more "employees" whether the result of a single act or a series of acts.

The entity argued that both of the above provisions were ambiguous. The court disagreed. The only reasonable interpretation of the non-cumulation clause, the court said, is that if no claim is filed in a given one-year period, the employer cannot accumulate liability limits and claim $200,000 coverage in the next year.

In contrast, the occurrence definition, the court explained, limits recovery across multiple years of coverage. Thus, it said, "the occurrence definition and the non-cumulation clause work in conjunction with each other to restrict the employer's recovery. The non-cumulation clause limits recovery vertically, within each year of coverage, while the occurrence definition limits recovery horizontally, across multiple years of coverage."

It should be mentioned that, while the court agreed with the insurer that its $100,000 limit was the maximum payable, there was a dissenting opinion which is interesting reading. It also substantiates what was mentioned earlier about providing warnings. The dissenting justice in this case said: "...Insureds pay premiums with the expectation that losses in the applicable policy period will be covered up to $100,000. If that coverage is denied them on a technical reading of the policy, the insured does not get what has been paid for."

The above commentary reminds this reader of the non-cumulation of limits provision found in some primary and excess liability policies--a subject for a possible future article. Suffice it to say that the non-cumulation clause of crime insurance provisions has been accepted and in use for a long time. However, these provisions in liability policies still are an enigma.

In any event, in the past several years, a growing number of court cases has dealt with employee dishonesty. Why there has been such a large number of disputes is uncertain. But one thing for sure is that employers need to be better prepared to handle the surprises that crime among employees often creates.*