Deck 27: Crime Insurance and Surety Bonds

Question 1

Patrick is the owner of a liquor store that is insured under an ISO commercial crime coverage form (loss-sustained form) with the following insuring agreements:
• Employee Theft
• Inside the Premises-Theft of Money and Securities
• Inside the Premises-Robbery or Safe Burglary of Other Property
• Outside the Premises
For each of the following losses, indicate whether any of the above insuring agreements would cover the loss. Explain your answer.
a. Patrick withdrew money from a bank on a Friday afternoon to cash the payroll checks of customers over the weekend. He drove back to the liquor store and parked his car in the store's parking lot. As he was walking toward the liquor store, he was robbed of the cash at gunpoint.
b. A video surveillance tape revealed that a newly-hired employee was stealing money from the cash register.
c. Patrick suspected that one employee was taking liquor from the stock of inventory without paying. A physical inventory revealed a shortage of five cases of Canadian whiskey.
d. A burglar forced open a locked safe and money inside the safe was taken. Also, the interior of the store was badly damaged in the burglary.
e. Because of the burglary, the business was closed for two days. Patrick's sales receipts for the week were substantially reduced.
f. A robber threatened a cashier with a knife and demanded the cash receipts. The cashier resisted giving the robber the money. The robber stabbed her and fled from the store with a substantial amount of cash.
g. A customer paid for merchandise by giving the cashier a $50 money order drawn on a commercial bank. When the money order was presented to the bank for payment, the bank refused to pay because the money order had been stolen.

Answer 1

The insuring agreements for various losses are mentioned below:
a)The loss occurred due to the theft or disappearance of money and securities outside the premises which are generally in the custody of messenger or armored-car Company is covered under outside premises coverage. Thus, this loss will be covered under this provision.
b)The loss occurred to the employer due to the theft of money, securities or any other tangible property that has intrinsic value by the employee is covered under the employee theft. The theft can be done solely by the employee or in the collusion of any other person. The loss is covered even if guilty employee is not identified. Thus, this loss will be covered under the 'employee theft'.
c)The losses occurred due to dishonest act of employees are covered under employee theft but there is exclusion to that. If the proof of loss depends upon the calculation of inventory or on profit/loss computation , then this is not covered under 'employee theft'. This provision is added to exclude inventory losses due to the error rather than employee's dishonesty. Thus, this loss will not be covered.d)The loss occurred due to the actual or attempted robbery of other property inside the premises by the person present in the premises is covered under 'inside the premises - Robbery or safe burglary of other property coverage'. Hence, this loss will be covered.e)
An indirect loss occurred due to theft or burglary is not covered. Hence, if the business is closed due to burglary, then this loss will not be covered.f)
The loss occurred due to the theft or disappearance of money and securities inside the premises, specifically banking premises, by the person present in the premises is covered under 'inside the premises - theft of money and securities coverage'.
The coverage also includes the damage to the property due to actual or attempted theft. Thus, the loss of cash will be covered, but the medical expense of cashier will not be covered.
g)
The loss occurred to the insured due to falsification or alteration of checks, drafts, promissory notes or similar types of assets drawn by the insured or insured's agent is covered under the 'forgery or alteratio n'. However, this policy is not taken by insured and hence, this loss will not be covered.

Question 2

Define robbery, burglary, safe burglary, and theft.

Answer 2

The explanation of definitions is mentioned below:
Robbery
The illegal act of taking possession of the property from the custody of the person by someone, who has caused the following events:
• Has caused some bodily harm or threaten to cause bodily harms to the person.
• Has caused some illegal act in the presence of that person.
Burglary
The illegal act of taking possession of the property from inside the premises by a person who enters or leaves the premises and leave some evidences of forcible entry.
Safe burglary
The illegal act of taking possession of the property from inside the safe by someone, who enters the safe by leaving some evidences of forcibly entry or exit, is known as safe burglary.
Theft
The illegal act of taking the property without the permission of the insured is known as theft. It is a broader term as it includes robbery, burglary, shoplifting, and forgery and employee theft.

Question 3

Kathy owns a large retail electrical store that sells light fixtures, lamps, and electrical equipment. The firm is not insured for employee theft. A risk management consultant recommended adding an ISO commercial crime coverage form to the firm's package policy, including coverage for employee theft. The crime form was issued on a discovery basis on July 1, 2014, without a retroactive date endorsement. The coverage amount for employee theft is $25,000. A routine audit in December 2014 by an accounting firm revealed that one of the bookkeepers had embezzled $20,000 over a 3-month period in 2012.
a. What dollar amount, if any, will the insurer pay for the loss?
b. Would your answer to part (a) be the same or different if the crime coverage form were issued on a loss-sustained basis? Explain.

Answer 3

Employee theft and forgery policy protect against the losses resulting from any misconduct of employees. Employee theft policy covers the loss from the theft by employee and the forgery provides the losses against any mischievous act of employees.
a.The account has been embezzled by $20,000 and the amount of employee theft coverage is $25,000 under the complete package. There is no separate employee theft coverage policy taken by K. The loss due to embezzlement should be provided without employee theft coverage. But K has a complete insurance policy and it included the theft coverage under $25,000.
In this case, the embezzlement occurred in 2012 and the account revealed the theft in 2014. The amount of theft should have been discovered during the policy period to avail the insurance. The expiration date of policy is not mentioned. It has been assumed that the policy is valid. Hence, the dollar amount of loss paid by the insurer will be $20,000
b.Loss sustained form covers the losses if it has been revealed during the current policy period or one year after the expiration of policy. The renewal date of policy or expiration of policy is not mentioned. Hence, the answer will remain same as in part (a) and the amount of dollar loss made by the insurance company will be $20,000.

Question 4

Briefly describe the following insuring agreements in the commercial crime coverage form (loss-sustained form):
a. Employee Theft
b. Forgery or Alteration
c. Inside the Premises-Theft of Money and Securities
d. Inside the Premises-Robbery or Safe Burglary of Other Property
e. Outside the Premises

Question 5

Samuel owns several retail stores. The employees are insured for employee theft under a commercial crime coverage form (loss-sustained form) with an insurance limit of $10,000. Samuel discovered that Vera, a longtime accountant, had embezzled $5,000 during the current policy period to pay the gambling debts of her son, who had been threatened with bodily harm. What is the liability of the insurer, if any, for the preceding loss? Explain your answer.

Question 6

Explain the difference between the discovery form and the loss-sustained form.
b. What is the purpose of the retroactive date endorsement that may be attached to a policy written on a discovery basis?

Question 7

Vasquez Construction has been awarded a contract by a local school board to build a new public school and must provide a performance bond.
a. With respect to the performance bond, identify the principal, surety, and obligee.
b. If Vasquez Construction fails to complete the building according to the terms of the contract, what would be the surety's obligation?
c. Does the surety have any recourse against Vasquez Construction in this example? Explain your answer.

Question 8

Identify the major exclusions in the commercial crime coverage form (loss-sustained form).

Question 9

An important policy provision is called termination as to any employee. Explain the meaning of this provision.

Question 10

When commercial crime insurance is written on a loss-sustained basis, the policy contains a provision called loss sustained during prior insurance not issued by us or any affiliate. Explain the meaning of this provision.

Question 11

Briefly describe the following insuring agreements that appear in a financial institutions bond.
a. Fidelity coverage
b. On premises coverage
c. In transit coverage
d. Forgery or alteration

Question 12

Identify the three parties to a surety bond.

Question 13

How do surety bonds differ from insurance contracts?

Question 14

Identify three types of surety bonds and give an example where each can be used.