Imagine this nightmare scenario: one day you wake up to discover one of your most trusted employees has been stealing from you. He’s been forging checks, embezzling thousands in company funds in the two years he was able to operate undetected. To make matters worse, it all started before you increased the crime loss coverage on your commercial insurance policy.
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The answer depends on which type of crime coverage you have. In this post, you’ll learn the differences between the two main forms of crime coverage, as well as what each means for your business when it comes to recovering losses due to fraud.
Crime insurance policies frequently offer several types of coverage. These include employee dishonesty, forgery, computer fraud, funds transfer fraud, money and securities coverage, and coverage for money orders and counterfeit money.
Blue kimono shirt kimono oversized Blue Blue oversized Ice Ice Ice shirt Crime coverage is written in one of two ways. If your policy allows claims on a discovery basis, it means you’re covered for losses discovered during the policy period (and often for some period thereafter). Under the discovery form of coverage, it doesn’t matter when the loss occurred—only that you have coverage at the time of discovery.
Ice Ice oversized shirt kimono kimono Blue Blue oversized Blue shirt Ice This form of coverage is similar to claims-made coverage, but even better. That is, if you’ve increased your limits since the crime occurred, the increased limit would apply to the loss. Even if it happened before you increased your coverage.
The other main form of crime coverage is structured on a loss sustained basis. Under loss sustained wording, claims are only allowed for those losses that were both sustained and discovered during the policy period.
The loss sustained form will typically only cover losses under a prior crime policy if all three of the following conditions are met: 1) the previous policy was in effect when the loss occurred; 2) there has been continuous crime coverage; and 3) the loss is covered by both the prior and the current policy. Sustained loss policies are often compared to occurrence type liability policies.
So what does this all mean for crime that happens at your company?
Under the sustained loss form, a loss must occur—and be discovered—during the policy period in order to be covered. Contrast this with the discovery form, which only requires the loss be discovered during the policy period, no matter when the incident occurred.
In dealing with the check forgery incident described above, your company would recover less damages under the loss sustained form than under the discovery form.
This is because loss sustained only covers losses if your company has maintained crime insurance uninterrupted. And only up to the limits on those policies when the fraud took place. Contrast this with the discovery form of crime coverage, which covers losses that happened under a different policy, or even no policy at all.
Obviously, this is a simplified example given for illustration purposes. In reality, the specific details on your policy will dictate how you’re covered against fraud. For instance, the discovery form can have a retroactive date limiting the extent of historical coverage, while the loss sustained form may cover a past crime if the policy has a “tail” that covers you after the policy is no longer in effect.
The most important thing to know is that there are huge differences in the way your company’s exposures to fraud are covered. And while it’s easy to see why the discovery form has become such a popular choice, there’s still a lot of confusion over how these forms of crime coverage work. Make sure your agent knows the difference, as well how to best protect your business against crime loss.