CRIS - Property - Ch. 11 - Other Policies: Commercial Crime and Equipment Breakdown

Section 11. 3 - Commercial Crime Insurance
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- Most organizations need crime insurance to cover employee theft losses, since property policies universally exclude employee dishonesty as a cause of loss.

- Any organization that handles a significant amount of money and securities needs crime insurance, since money and securities do not qualify as covered property under a property policy.

- Any organization purchasing named perils property coverage, whose inventory, equipment, or other property is susceptible to theft, needs crime coverage even if little or no money is exposed to loss, since named perils property policies do not cover theft as a cause of loss.
- Employee dishonesty coverage pays for employee theft of money, securities, and property other than money and securities.

- Coverage applies to property owned or leased by the insured and to property held by the insured for others and property for which the insured is legally liable.

- Some forms exclude property inside the premises of a client, but coverage can be added back by endorsement.
Depending on the particular form used, coverage may apply to loss by "employee dishonesty" or "employee theft."

Some forms that use the term "employee dishonesty" specify that dishonest acts must be committed "with the manifest intent" to cause the insured a loss and to obtain a financial benefit, other than employee benefits earned in the normal course of employment, for either the employee or another person or organization that the employee intended to receive the benefit.

- This requirement is included to preclude coverage for loss resulting from an employee's poor business judgment or violation of the insured's rules and procedures (perhaps committed with the sincere belief that the employer's interest would be furthered rather than harmed).

Forms that use the term "employee theft" rather than "employee dishonesty" (including those in the ISO commercial crime program) typically do not include this "manifest intent" language.
Employee Dishonesty Coverage: Who are considered covered employees?an employee is defined as an individual in the insured's service who the insured has the right to direct and control while he or she is performing services for the insured and who is compensated directly by the insured with salaries, wages, or commissions. Such individuals are also considered employees for 30 days after their service terminates. (Sometimes the policy can be extended to provide coverage for loss caused by terminated employees within 60 or 90 days after the termination.)Employee Dishonesty Coverage: Are temporary workers considered covered employees?In most forms, temporary workers also are considered employees. However, the status of leased workers varies. The definition of employee in current ISO commercial crime forms includes leased employees. However, some commercial crime policies must be endorsed to cover leased workers as employees.Employee Dishonesty Coverage: Are Directors and trustees of the insured's business considered covered employees?They are not considered employees except while they are performing duties that come within the scope of an employee's usual duties. Independent contractors, agents, brokers, etc.—persons who are paid by the named insured to perform a service but who are not under the direction and control of the insured in the performance of that service—are not considered employees.Employee Dishonesty Coverage: Coverage for non-employees?It also is sometimes possible to amend the definition of "employee" to extend coverage to apply to theft by certain nonemployees. Examples of nonemployees for whom coverage may be available by endorsement include: - partners - limited liability company managers - directors and trustees - agents - data processing service providers. A number of standard endorsements are available for this purpose.Employee Dishonesty Coverage: Other Important Provisions: What provision is known as the "prior dishonesty clause" and what is it?"Cancellation as to Any Employee" It establishes that coverage is canceled with respect to an individual employee immediately upon discovery by the insured or a partner, officer, director, or trustee of the insured (or, if the insured is a limited liability company, a member, or manager) of any dishonest act committed by that employee.The "Cancellation as to Any Employee" provision applies not only to employee theft, but also to ....?any other instance of employee dishonesty, including acts committed before being hired by the insured.Why is it important for the insured and its management to be aware that knowingly hiring a person with a record of dishonesty, or overlooking minor dishonest acts of an employee (perhaps because the employee is considered too valuable to fire)?The Cancellation as to Any Employee provision will eliminate coverage for losses caused by that employee's dishonest acts. f such a situation exists, it should be discussed with the insurer. Some insurers will agree to waive the provision on a case-by-case basis.Employee Dishonesty Coverage: Other Important Provisions: "Employee Canceled under Prior Insurance" exclusion. What is this?this exclusion eliminates coverage for loss caused by an employee of the insured (or of a predecessor in interest of the insured) for whom similar insurance was canceled and not reinstated.Employee Benefit Plans: The Employee Retirement Income Security Act (ERISA) requires that those handling funds of an employee welfare or benefit plan subject to its provisions be bonded. Plans that are subject to this requirement include...?not only 401(k), profit sharing, and pension plans, but also medical, dental, vision, life, and disability insurance plans. The required amount of insurance is 10% of the funds handled, subject to a minimum of $1,000 and a maximum of $500,000.Employee Benefit Plans: The ________________________ policy can be used to satisfy these ERISA requirements by including each of the plans as a named insured.employee dishonesty - Depending on the particular coverage form used, it may be necessary to attach an ERISA compliance endorsement, or these provisions may be built in.Blanket versus Scheduled Coverage: Employee dishonesty coverage can be written on a blanket or a scheduled basis. (T/F)?trueBlanket versus Scheduled Coverage: What is the major difference between the two?The major difference is the way the policy limit applies. - When coverage is written on a blanket basis, the limit of insurance shown in the declarations applies to each loss, regardless of how many employees were involved in causing the loss—and regardless of whether the employee(s) causing the loss can be identified. - Under the scheduled coverage approach, there is a schedule of either named individuals or named positions, and the "each employee" limit of insurance shown in the declarations applies per employee for each employee whose name or position is scheduled who was involved in causing the loss. Coverage applies only with respect to each employee that is actually identified as having caused the loss.Loss Sustained versus Discovery Coverage: Employee dishonesty coverage (and some other types of commercial crime coverage as well) can be written on either a "loss sustained" or a "discovery" basis. (T/F)?trueLoss sustained versus discovery crime coverage is roughly analogous to ______________ versus _______________ liability coverage.occurrence vs. claims-madeLoss Sustained versus Discovery Coverage: How does Loss sustained coverage apply?- applies to loss that occurs during the policy period and is discovered within 1 year after the policy period ends. - applies to loss that would have been covered by a prior policy except for the expiration of that previous policy's discovery period.Loss Sustained versus Discovery Coverage: How does Discovery-based coverage apply?applies to loss that is discovered during the policy period or within 60 days after the policy period ends (within 1 year for employee benefit plans), regardless of whether the loss occurs during the policy period.Crime coverage traditionally has been written on a loss sustained basis. Discovery-based coverage is a relatively new approach. It first became available in the standard commercial crime programs in the late 1990s. (T/F)?trueForgery or Alteration Coverage: Forgery or alteration coverage pays for loss as a result of....?the forgery or alteration of checks, bank drafts, promissory notes, and similar financial instruments drawn on the insured's bank account.Forgery or Alteration Coverage: Coverage also applies to ....?legal expenses incurred in defending a suit that results from the insured's refusal to pay a covered instrument believed to be forged or altered. The insured must have the written consent of the insurer to contest the suit. Amounts paid under this extension are in addition to the forgery or alteration limit of insurance.Forgery or Alteration Coverage: Why do some contractors view this coverage to be unnecessary and why should they have it?In light of the fact that banks are held liable for accepting forged or altered checks. However, there are circumstances in which a bank will not be held liable for forgery losses, such as when the depositor's negligence plays a substantial role in allowing the loss to happen. Another reason for carrying forgery or alteration coverage is that it makes a confrontation between the insured and its bank unnecessary. - A contractor that enjoys a good relationship with its bank might prefer to avoid jeopardizing that relationship in a dispute over responsibility for a forgery loss.Computer Fraud and Funds Transfer Fraud Coverage: All of the standard commercial crime forms except the employee dishonesty form, contain exclusions that typically would eliminate coverage for theft accomplished via computer. (T/F)?trueComputer Fraud and Funds Transfer Fraud Coverage: The most important such exclusion is of loss from _________________.unauthorized property transfer. - This exclusion eliminates coverage for loss to property that has been transferred outside the insured's premises (or a banking premises) on the basis of unauthorized instructions.What two separate crime coverages that address this loss exposure (theft accomplished via computer)?1) Computer fraud coverage - pays for loss of money, securities, and other tangible property caused by the use of a computer to fraudulently transfer covered property from inside the insured's premises (or a banking premises) to a person or place outside those premises. 2) Funds transfer fraud coverage - pays for loss of money and securities resulting from fraudulent use of a bank's funds transfer system, in which a thief purporting to be the insured instructs the bank to transfer funds from its account using the agreed-upon methods, codes, and passwords.Beginning with the 2015 editions of the commercial and government crime forms, the computer and funds transfer fraud insuring agreement does not cover loss resulting from....?the transfer of money or securities by an employee who is tricked by someone impersonating another employee. NOTE: The fraudulent impersonation endorsement, introduced in 2015, can be used to add coverage for this loss exposure. It adds fraudulent impersonation to the policy as a separate insuring agreement.Kidnap, Ransom, and Extortion Coverage: Kidnap/ransom and extortion coverage can be added to a commercial crime policy but is frequently written under a separate policy. (T/F)?trueKidnap, ransom, and extortion policies generally offer coverage for some or all of the following "perils.":- Kidnapping an insured person - Bodily injury extortion (consisting of a threat to kidnap, injure, or kill an insured person) - Property damage extortion (consisting of a threat to damage or pollute property, tamper with the insured's product, or reveal a trade secret or other proprietary information of the insured) - Wrongful detention (consisting of involuntary confinement of an insured person by someone acting as agent of or with the tacit approval of a government entity or while acting on behalf of any insurgent party, organization, or group) - Hijacking (consisting of holding an insured person against their wishes while in transit via air, water, or land)Most policies impose separate limits for each of the following categories of loss. Usually there is an annual aggregate limit as well; this places a maximum on the amount that will be paid in any one year. What are the categories of loss?- Ransom money payments - Wrongful detention costs (for costs of attempting to locate and secure the release of the victim) - In transit/delivery expenses (for confiscation, disappearance, or destruction of ransom money during delivery) - Other expenses (such as reward payments to informants, interest on loans of ransom money, fees for security consultants and other experts, etc.) - Judgments, settlements, and defense costs (for lawsuits by a victim or victim's family alleging negligence on the part of the employer) - Death or dismemberment payments (for a victim or insured person involved in handling the incident)Coverage for other related or similar costs may be available by endorsement. Examples of coverage that may be available by endorsement include:- evacuation - war risk accidental death and dismemberment - business interruption - product recall or destruction.Kidnap, ransom, and extortion policies include a provision requiring the insured to make all reasonable efforts not to disclose the existence of the policy. Why?The reason for this provision is that revealing the existence of a high-limit kidnap, ransom, and extortion policy may make the organization a more likely target.Section 11. 4 - Equipment Breakdown Insurance...Equipment breakdown policies are designed to cover ____________________________________; they generally are not used to insure the mobile equipment that contractors use in construction operations.fixed equipment at specific locationsHow does equipment breakdown insurance close gaps in the commercial property policy covering the contractor's own facilities?Standard commercial property policies contain exclusions that eliminate coverage for explosion of boilers owned or operated by the insured and for mechanical and electrical breakdown. These exclusions also eliminate coverage for resulting loss of income and extra expenses.If equipment breakdown coverage is needed in connection with a building being constructed by the contractor, it is usually arranged as part of the builders risk policy rather than using a separate equipment breakdown policy. (T/F)?trueContractors that own buildings with steam heating equipment on the premises usually recognize their need for equipment breakdown coverage. What are two reasons coverage may be purchased for these contractors?1) for the coverage itself 2) for inspection purposes - Most states and many local governmental entities require regular inspection of boiler equipment. While a few require the inspections to be performed by state inspectors, most will accept inspections performed by insurance company boiler inspectors.Contractors that do not own or operate steam heating equipment still have at least some exposure to loss due to equipment breakdown, with respect to their.....?HVAC systems, office equipment, and any other fixed equipment. - For some contractors, this loss exposure may be significant enough to warrant the purchase of equipment breakdown coverage, particularly if the breakdown of the equipment in question could cause the contractor to incur significant extra expenses in order to continue its office operations.What Is Covered: Equipment breakdown insurance pays for....?the cost to repair or replace covered equipment that suffers a covered breakdown or accident. - If the breakdown or accident damages other property belonging to the insured (and, in most policies, property of others that is in the insured's care, custody, and control), the cost to repair or replace that other property is covered as well.Equipment Breakdown policies & Extra Expense coverage- nearly all EB policies provide extra expense - Some EB policy forms include business income and extra expense coverage automatically - Others contain business income and extra expense coverage options that the insured may elect to purchase - Business income and extra expense coverage may be subject to separate limits of insurance, a single limit that applies to both, or the overall policy limitExtra Expense coverage generally defined as...?expenses that are incurred to speed up the repair or replacement of damaged property, plus the cost of temporary repairs. Express shipping charges and overtime wages are examples of expediting expenses. Most policies place a maximum (such as $25,000) on the amount of coverage that is available to cover expediting expenses.Most equipment breakdown policies provide only limited coverage for the following types of damages that may result from an accident or breakdown:- Hazardous substances - Ammonia contamination - Water damage These types of damages usually are subject to a maximum, referred to as a sublimit. This sublimit is part of, rather than in addition to, the direct damage coverage limit. The current standard equipment breakdown coverage form specifies a $25,000 limit for each.Covered Equipment: Traditional boiler and machinery policies can be written to cover the breakdown of....?individually described pieces of equipment (referred to in traditional boiler and machinery policies as "objects") or specific categories of equipment.Covered Equipment: Most equipment breakdown policies use a very broad definition of covered equipment so that nearly all equipment owned, leased, or operated by the insured is covered automatically. (T/F)?trueCovered Equipment: What are some exclusions?Most equipment breakdown policies exclude vessels, piping, and other equipment that is buried below the ground. Also, many policies exclude medical diagnostic equipment. The number and nature of items that are not considered covered equipment varies from one insurer's form to another's.Covered Equipment: For coverage to apply, the equipment must be located where?at premises that are designated in the policy as covered locations. Most policies also grant temporary automatic coverage for equipment at newly acquired locations for a specified number of days (typically 90 days) after the date of acquisition.Covered Equipment: How are computers covered?Most equipment breakdown policies include computers used to operate other covered equipment as covered equipment. However, computers that are not used to operate other equipment may or may not be included as covered equipment. It is important to realize that equipment breakdown policies that provide full coverage on computer equipment may not provide coverage for equipment breakdown due to a computer virus and may not provide coverage for loss to computer data.What is the best way to confirm an insured is properly covering their computers?By purchasing an electronic data processing (EDP) policy.Covered Accidents or Breakdowns: A) traditional boiler and machinery policy accident definition? B) equipment breakdown policy definition of a covered breakdown or accident?A) an accident is a sudden and accidental breakdown of the covered equipment B) most equipment breakdown policies define a covered breakdown or accident by specifically granting coverage for each of the commercial property policy exclusionsCovered Accidents or Breakdowns: There are always some exclusions to policy's breakdown or accident definition—some events or conditions that do not qualify as a covered accident or breakdown. The exclusions to the breakdown definition vary somewhat from one policy form to another. What is the primary purpose of these exclusions?to clearly eliminate coverage for portions of the equipment that are normally subject to periodic replacement and for the expenses of routine maintenance. - Equipment breakdown insurance is intended to pay for unexpected breakdowns of equipment. It is not a promise to pay for any and all expenses that might be necessary to keep the equipment running well.Suspension Clause: Equipment breakdown policies normally contain a suspension clause that permits the insurer to....?immediately suspend coverage on any item of covered equipment if an inspection reveals that it is in a dangerous condition.Suspension Clause: Although written notice to the insured is required, immediate suspension can be accomplished by...?means of a handwritten notice delivered to the firm's management at the time of the inspection. Once the problem has been corrected, coverage can be reinstated by endorsement.Suspension Clause: If a "________________________" (an item of equipment that must be regularly inspected to comply with state or local law) is found to be in a dangerous condition, the insurer's inspector, as a representative of the governmental entity requiring inspection, has the authority to immediately prohibit its continued operation.jurisdictional objectJoint Loss Agreement: A joint loss or loss adjustment agreement is a provision or endorsement designed to....?prevent an insured from suffering because its equipment breakdown insurer and its commercial property insurer disagree as to which policy should respond to a particular loss and in what amounts.Example of why you need to have a joint loss agreement endorsement added to the commercial property and EB policy?a steam boiler explosion and ensuing fire at the contractor's premises would probably trigger coverage under both the commercial property policy and its equipment breakdown policy. While the two insurers determine the proper apportionment of the loss, the insured contractor could be seriously inconvenienced by a delayed settlement. When both the commercial property policy and the equipment breakdown policy are properly endorsed with a joint loss agreement, each insurer pays one-half of the disputed amount to the insured, pending resolution of the issue.Property/Equipment Breakdown Package Policies- becoming more common for a single insurer to provide both coverages on a single policy - One advantage of this approach is that it makes a joint loss agreement unnecessary. - These policies are often referred to as integrated or blended property/equipment breakdown policies.