Employee Theft Coverage

Employee Theft Insurance Covers A Variety of Dishonest Acts

A cashier at the checkout in a retail store stealing money.

While few employers expect their workers to steal, some employees do steal. Fortunately, businesses can protect themselves by purchasing employee theft insurance. Employee theft (also called employee dishonesty) coverage is a type of crime insurance. It compensates a business for financial losses caused by property thefts committed by employees. This coverage may be purchased alone or in combination with other crime coverages like Computer Fraud and Robbery and Safe Burglary.

Many insurers provide crime coverages on standard ISO commercial crime forms. Some have drafted their own proprietary forms but these are often similar to the ISO crime forms. Crime coverages can be written by themselves or added to a commercial package policy.

Loss Sustained Versus Discovery

There are two types of ISO crime forms: loss sustained and discovery. A loss sustained form resembles an occurrence general liability form. It covers loss resulting from an occurrence that takes place during the policy period. A discovery policy is similar to a claims-made liability policy. It covers loss resulting from an occurrence that takes place at any time if the loss is discovered during the policy period.

Except for their coverage triggers, the two types of forms are virtually identical. Business owners can obtain adequate coverage under either type of form.

An alternative to employee theft coverage is a fidelity bond. Bonds can be purchased from a surety company.

What's Covered?

Employee theft insurance covers loss or damage to money, securities or other property that results from theft committed by an employee. Coverage applies whether or not the perpetrator is identified and whether the employee committed the theft alone or colluded with others. Employee theft coverage is quite broad as it includes loss by forgery or alteration, computer fraud, and funds transfer fraud (as long as these acts are committed by employees).

The ISO crime form defines theft as "the unlawful taking of property to the deprivation of the insured." With regard to employee dishonesty coverage, theft also includes forgery. The term other property means any tangible property besides money or securities but does not include electronic data or computer programs.

Here are some examples of losses that would likely be covered under employee dishonesty insurance:

  • A construction company employee pilfers tools and construction materials from a job site and then sells them online.
  • An employee disguises himself and then robs a fellow employee who is walking to a bank to deposit cash into the employer's account.
  • An employee of a property management company pockets some of the rent money he collects from tenants who pay in cash.
  • A bookkeeper writes checks to a fake vendor, forges her boss's signature, and then deposits the funds into an account she's created.

What Isn't Covered?

Employee theft coverage excludes certain types of losses. First, it excludes thefts committed by you or your partners, directors or representatives (other than an employee). Acts committed by company principals are excluded because such individuals aren't employees. Secondly, the form excludes loss caused by any employee who had committed theft or another dishonest act prior to the policy inception date if you or another company principal was aware of the act before the policy began. The insurer won't pay for a theft committed by a known thief.

Also excluded are trading losses (from poor investment decisions), inventory shortages, and income you lose that you otherwise could have earned (had the theft not occurred) by investing money that was stolen. A loss of inventory is excluded if the only proof of a loss is an inventory shortage or a profit and loss statement. An inventory loss may be covered if you can provide separate evidence (such a video of an employee stealing) to substantiate the loss.

Here are some other exclusions that typically apply to employee theft coverage:

  • Legal Costs. Fees or expenses related to any legal action, such as a lawsuit
  • Pollution, Nuclear Hazard, War and Military Action
  • Virtual Currency. Any loss involving a virtual currency like Bitcoin
  • Confidential or Personal Information. Excludes loss caused by the disclosure of another person’s or organization’s confidential information or your personal or confidential information
  • Data Security Breach. Expenses or costs or any fines, fees or penalties incurred due to a data breach.

Other Important Provisions

Crime policies include some other important provisions policyholders should be aware of. First, they contain a condition entitled Termination As To Any Employee. This clause automatically cancels coverage for any employee once you or another company principal learn that the worker has committed a dishonest act. That is, once you discover that an employee has stolen something, you are not covered for any subsequent thefts committed by that employee.

In a crime policy, the term employee includes a natural person (a human being, not a corporation) who's in your service or who was in your service within the last 30 days.

Secondly, crime policies contain a discovery period. Discovery policies automatically include a 60-day extended period to discover loss. The policy covers losses discovered within 60 days after the policy expires if they occurred during the policy period. If the loss is incurred by an employee benefit plan that is named on the policy, the discovery period is one year.

A loss sustained policy contains a discovery period that applies if your policy is canceled. The policy covers loss you sustained before the policy was canceled, but only if you discover the loss within one year of the cancellation date. The discovery period terminates if you replace your canceled policy with a new crime policy.

Thirdly, the limit under a crime policy applies to each occurrence. With regard to employee theft coverage, this term means a single act by an employee or all acts (including a series of acts) committed by the same employee. Thus, two acts of embezzlement committed by one employee would likely constitute a single occurrence, not two separate occurrences.