Crime insurance

What Is Crime Insurance?

Crime insurance is a specialized form of commercial insurance that protects businesses from financial losses resulting from criminal acts. These acts can be committed by employees, often referred to as internal crime or occupational fraud, or by external parties. It is a crucial component of a comprehensive risk management strategy, designed to safeguard a company's assets against various types of theft, deception, and destruction. While general property insurance might cover certain aspects of theft, crime insurance specifically addresses the risks associated with dishonesty, forgery, embezzlement, and other illicit activities that can lead to significant financial loss for an organization. A crime insurance insurance policy typically covers losses of money, securities, and other property.

History and Origin

The roots of modern crime insurance, particularly its component covering employee dishonesty, can be traced back to the development of fidelity bonds. Historically, individuals would personally vouch for the honesty of another, but as commerce grew more complex, this personal guarantee evolved. The concept of corporate surety, where a business entity provided the guarantee, emerged to meet this need. In North America, the first Canadian bonding company chartered to offer dishonesty bonds was The Guaranty Company of North America in 1872, followed by the first successful U.S. surety, which later became the Fidelity and Casualty Company, in 1875.¹⁷ These early instruments were primarily concerned with ensuring the honesty of employees handling money or valuables. The first Bankers' Blanket Bond, a more comprehensive form of coverage, was introduced in 1916, offering protection against employee dishonesty, on-premises and in-transit losses due to robbery or theft, and other risks. Over time, these specialized coverages expanded to form the broader crime insurance policies available today.¹⁶

Key Takeaways

Crime insurance protects businesses from financial losses due to criminal acts by employees or third parties.
Covered perils often include employee dishonesty, forgery, theft of money and securities, and computer fraud.
It is distinct from general liability or property insurance, focusing specifically on crime-related losses.
Policy limits, deductibles, and specific coverage terms vary widely based on the insurer and the insured's needs.
The Association of Certified Fraud Examiners (ACFE) estimates significant global losses due to occupational fraud.

Interpreting Crime Insurance

Crime insurance is interpreted as a vital safeguard for businesses against financial repercussions stemming from criminal activities. It is not merely about recovering stolen physical assets but also about protecting against sophisticated schemes that can deplete a company's financial reserves. When considering a crime insurance policy, businesses assess their exposure to various internal and external threats, such as employee theft, forgery, or cyber-related financial crimes. The coverage limits and deductible amounts are crucial aspects, directly influencing the amount of risk retained by the business versus transferred to the insurer. The effectiveness of crime insurance is realized when a valid claim is filed, providing financial relief from losses that could otherwise severely impact a company's solvency.

Hypothetical Example

Imagine "SecureTech Solutions," a medium-sized IT consulting firm. SecureTech has a crime insurance policy with a $500,000 limit for employee dishonesty and a $100,000 limit for computer fraud.

One day, Sarah, a trusted accountant at SecureTech, colludes with an external vendor to create false invoices, diverting $150,000 from company accounts over several months through embezzlement. Separately, the company's network is breached, and an external hacker executes an unauthorized transfer of $75,000 from SecureTech's operational bank account to an offshore account via a sophisticated phishing scam targeting a junior employee.

Upon discovering these incidents, SecureTech immediately notifies its insurer and files two separate claims under its crime insurance policy. The first claim for employee dishonesty due to Sarah's actions would likely be covered, recovering the $150,000 (well within the $500,000 limit). The second claim, for the $75,000 lost to the external hacker, would fall under the computer fraud coverage, also likely covered (within the $100,000 limit). Without this crime insurance, SecureTech would have absorbed the entire $225,000 loss, potentially impacting its ability to operate or requiring severe budget cuts.

Practical Applications

Crime insurance is widely applied across various industries and organizational sizes as a fundamental aspect of asset protection. It is particularly relevant for businesses that handle significant amounts of cash, securities, or sensitive financial data.

Financial Institutions: Banks, credit unions, and brokerage firms rely heavily on crime insurance to protect against large-scale fraud, employee collusion, and cyber-related theft.
Retail Businesses: Retailers often face risks like employee theft, register manipulation, and external robbery. Crime insurance provides a safety net for such losses.
Manufacturing and Distribution: Companies with valuable inventory or goods in transit use crime insurance to mitigate losses from internal theft or external cargo theft.
Service Providers: Businesses providing payroll, accounting, or data management services can face significant liability from errors or intentional acts by employees that result in financial harm to clients.
Non-Profit Organizations: Even non-profits require protection against misappropriation of funds or fraudulent activities by staff or volunteers.

According to the Association of Certified Fraud Examiners (ACFE), occupational fraud, a primary concern addressed by crime insurance, results in substantial losses globally. Their "Report to the Nations" analyzes thousands of real fraud cases, providing crucial insights into how fraud is committed and detected, and emphasizing the importance of measures like crime insurance.¹⁵,¹⁴,¹³,¹² These reports highlight that organizations lose a percentage of their revenue to fraud each year, underscoring the pervasive nature of the threat. The Federal Bureau of Investigation (FBI) also actively investigates white-collar crime, which encompasses many of the perils covered by crime insurance, including corporate fraud, embezzlement, and financial institution fraud.¹¹

Limitations and Criticisms

While crime insurance offers crucial protection, it has specific limitations and is subject to criticisms. Understanding these aspects is essential for businesses when acquiring or relying on a policy.

Definition of "Crime": Policies often contain strict definitions of what constitutes a covered "criminal act." Losses resulting from accounting errors, negligence, or non-criminal operational mistakes are typically not covered.¹⁰ Proving that a loss was directly caused by a criminal act, especially when no direct evidence like surveillance video is available and only financial discrepancies exist, can be a challenge.⁹
Discovery Period: Most crime insurance policies are written on a "discovery basis" or "loss sustained" basis. A discovery policy covers losses discovered during the policy period, regardless of when they occurred, while a loss sustained policy covers losses that both occurred and were discovered during the policy period or an extended discovery period. Disputes can arise regarding when a loss was "discovered" and if it falls within the policy's specified timeframe.
Known Acts Exclusion: If an employee has a known history of theft or dishonesty and continues to work for the company, subsequent acts by that employee might be excluded from coverage. Policies generally cover the first act of theft, but continued employment after discovery of an initial act can jeopardize future coverage for that employee.⁸
Collusion with Business Partners: Losses arising from collusion between an employee and a business partner might also be excluded, focusing the policy's protection on internal employee dishonesty or external third-party crime, but not a combination.⁷
Cybercrime Overlap: While some crime insurance policies offer limited cybersecurity coverage, they are not a substitute for a comprehensive cyber liability policy. They typically do not cover losses related to data breaches, loss of intellectual property, or extensive cyber-attacks.⁶
Underinsurance: Businesses may underestimate their potential exposure to internal or external crime, leading to insufficient coverage limits. When a significant financial loss occurs that exceeds the policy's limits, the business must absorb the remainder.
Claim Submission Complexity: Making a claim under a crime insurance policy can be complex, often requiring detailed proof of loss, forensic investigation, and adherence to strict reporting deadlines. Insurers may scrutinize claims rigorously, requiring clear evidence that a criminal act directly caused the claimed loss.⁵ Challenges can arise in resolving such claims, as discussed in legal analyses of insurance disputes.⁴,³

Crime Insurance vs. Fidelity Bond

While often used interchangeably or as closely related terms, crime insurance and a fidelity bond have distinct focuses within the broader category of financial protection.

A fidelity bond primarily protects an employer from financial losses caused by the dishonest acts of its employees. It specifically covers acts such as theft, forgery, or embezzlement committed by employees with the intent to cause loss to the employer and gain improper financial benefit. Essentially, a fidelity bond is a specialized type of insurance against employee dishonesty.,²

Crime insurance, on the other hand, is a broader policy. While it typically includes coverage for employee dishonesty (acting as a "first-party fidelity bond" within the policy), it also extends protection against a wider array of criminal acts committed by external parties. These can include burglary, robbery, forgery committed by outsiders, computer fraud, funds transfer fraud, and loss of money and securities on and off premises. Thus, a crime insurance policy encompasses the employee dishonesty coverage of a fidelity bond but adds various other crime perils that can affect a business. In essence, a fidelity bond addresses internal threats from employees, while a crime insurance policy addresses both internal and external criminal threats. Another related term is a surety bond, which is a three-party agreement where the surety guarantees the principal's performance to an obligee, often differing significantly from a two-party insurance contract.

FAQs

What types of criminal acts does crime insurance cover?

Crime insurance typically covers losses resulting from various criminal acts, including employee dishonesty, forgery or alteration, theft of money and securities (both inside and outside the premises), robbery, safe burglary, computer fraud, and funds transfer fraud. The specific coverages depend on the policy's terms and conditions.

Is crime insurance the same as general property insurance?

No, they are distinct. While general property insurance might cover physical damage or loss of property due to certain perils, it often excludes or provides very limited coverage for losses specifically caused by employee dishonesty, forgery, or other forms of financial crime. Crime insurance fills these gaps, focusing on deliberate criminal acts that result in financial or property loss.

Do all businesses need crime insurance?

Businesses that handle money, securities, or valuable inventory, or that conduct electronic financial transactions, are particularly susceptible to financial losses from criminal acts. The Association of Certified Fraud Examiners (ACFE) regularly publishes data on the prevalence and cost of occupational fraud, suggesting that virtually any organization can be a target. Businesses with employees or significant assets can benefit from assessing their risk management needs for this coverage.

What is the difference between a first-party and third-party fidelity bond?

A first-party fidelity bond (or blanket coverage) protects the business itself from wrongful acts by its own employees. A third-party fidelity bond protects a business against wrongful acts committed by people working for them on a contract basis, such as consultants or independent contractors.¹ The latter is often required when a business's contractors have access to client funds or sensitive data.

How are crime insurance premiums determined?

Underwriting for crime insurance premiums considers several factors, including the type and size of the business, the nature of its operations, the amount of money and securities handled, internal controls and security measures in place, the claims history of the business, and the desired coverage limits and deductibles. Businesses with robust internal controls, such as regular audits and segregation of duties, may qualify for lower premiums.