1

EMPLOYEE THEFT

WHO IS AN EMPLOYEE?

Robin Federici, CPCU, AAI, ARM, AINS, AIS, CPIW

PO BOX 781

NORTH KINGSTOWN, RI 02852

Robin’s Cell-401-529-9617 Fred’s Cell-401-524-4567

E-mail: ROBINF@IETA.BIZ EFEDERICI@IETA.BIZ

Web site: WWW.IETA.BIZ

2

WHY THE NEED FOR CRIME INSURANCE?

Most businesses need some type of crime coverage

Commercial Property forms include only limited coverage for the theft

exposure

Only the Special Cause of Loss form, in the Commercial Property

program, includes theft coverage of property other than money and

securities

Thefts caused by employees are excluded

OVERVIEW

Formerly, ISO and SAA shared responsibility for crime insurance.

However, in 1999 SAA promulgated its own crime forms and ISO followed

suit in 2000.

Currently, there are four different commercial crime programs in

use:

The ISO commercial crime program, developed by Insurance

Services Office, Inc. (ISO)

The SAA crime protection policy, developed by the Surety

Association of America (SAA)

The American Association of Insurance Services (AAIS) commercial

crime program

The ISO/SAA commercial crime program. This joint program has

been replaced by separate ISO and SAA programs, but its forms,

which have edition dates ranging from 1990 to 1997, are still used by some insurers.

Insurers may elect to use the forms in any of these programs, or they

may develop their own versions of them.

3

ISO EMPLOYEE THEFT

FOR

COMMERCIAL ENTITITES

EMPLOYEE THEFT COVERAGE (Commercial Entities)

Employee Theft - We will pay for loss of or damage to "money",

"securities" and "other property" resulting directly from "theft"

committed by an "employee", whether identified or not, acting alone or in

collusion with other persons. For the purposes of this Insuring

Agreement, "theft" shall also include forgery.

1. Property covered

2. Peril

3. Who is the perpetrator of a theft loss

Comparing “theft” with “dishonesty”:

The previous crime form covered "employee dishonesty" as opposed to

"theft."

Employee Dishonesty coverage covered all dishonest acts committed by

an employee with the manifest intent to cause harm to the named

insured.

Dishonest acts had to have a dual intention: (1) to cause harm to the

employer and (2) to result in financial gain for the dishonest employee.

Under the current “Employee Theft”, the act must only result in loss to

the "deprivation of the Insured."

4

ISO EMPLOYEE THEFT

FOR

COMMERCIAL ENTITITES

COVERAGE OVERVIEW

ISO offers coverage on a blanket basis for theft by an individual that

meets the definition of “employee”

The names or positions covered are not listed

The limit applies to each loss, regardless of how many employees were

involved

There is no requirement that the specific employee(s) is identified

Since this insuring agreement provides coverage for loss from theft by an

employee, an understanding of who qualifies as an "employee" is crucial

to an understanding of the coverage provided.

The definition of the term "employee" is located in the definitions section

at the end of each of the forms

Position or Name Schedule:

ISO offers endorsement options to limit this protection to either (1)

specific individuals, or (2) specific positions. This endorsement

Employee Theft – name or position schedule (CR 04 08) amends the

policy to provide coverage by providing the limit of insurance per

employee (for those names/positions shown) for each identified employee

involved in a loss

If the policy has been endorsed to provide scheduled (rather than blanket)

employee theft coverage (using the employee theft—name or position

schedule endorsement, CR 04 08) the definition of "employee" in the

endorsement replaces the definition in the coverage form

Other Employee Endorsements:

ISO offers several other endorsements that can be used to amend the

definition of employee under the Employee Theft coverage

5

EMPLOYEE DEFINED

ISO’s definition includes 8 categories that fit the “employee” definition:

"Employee"

a. "Employee" means:

(1) Any natural person:

(a) While in your service and for 30 days immediately after

termination of service, unless such termination is due to “theft” or

any dishonest act committed by the “employee”; and (b) Who

you compensate directly by salary, wages or commissions; and

(c) Who you have the right to direct and control while

performing services for you

(2) Any natural person who is furnished temporarily to you:

(a) To substitute for a permanent "employee"

(b) To meet seasonal or short-term work load conditions;

while that person is subject to your direction and control and

performing services for you, or

(3) Any natural person who is leased to you under a written

agreement between you and a labor leasing firm, to perform

duties related to the conduct of your business, but does not

mean a temporary employee as defined in Paragraph a.(2);

(4) Any natural person who is:

(a) A trustee, officer, employee, administrator or manager,

except an administrator or manager who is an independent

contractor, of any "employee benefit plan(s)" insured under

this policy; and

(b) Your director or trustee while that person is handling

"funds" or "other property of any "employee benefit plan(s)" insured under this policy.

(5) Any natural person who is a former "employee", partner,

"member", "manager", director or trustee retained as a

consultant while performing services for you;

(6) Any natural person who is a guest student or intern pursuing

studies or duties;

6

(7) Any "employee" of an entity merged or consolidated with you

prior to the effective date of this insurance; or

(8) Any of your "managers", directors or trustees while:

(a) Performing acts within the scope of the usual duties of an

"employee"; or

(b) Acting as a member of any committee duly elected or appointed

by resolution of your board of directors or board of trustees to

perform specific, as distinguished from general, directorial acts on

your behalf.

b. "Employee" does not mean any agent, broker, factor, commission

merchant, consignee, independent contractor or representative of the

same general character not specified in Paragraph 5.a.

UNIQUE CRIME CONDITIONS

Termination as to any Employee

This insuring agreement terminates as to any “employee”:

(1) As soon as: (a) You; or (b) Any of your partners, "members",

"managers", officers, directors or trustees not in collusion with the

"employee"; learn of "theft" or any other dishonest act committed

by the "employee" whether before or after becoming employed by

you.

(2) On the date specified in a notice mailed to you. That date will

be at least 30 days after the date of mailing.

We will mail or deliver our notice to the first Named Insured's last

mailing address known to us. If the notice is mailed, proof of mailing

will be sufficient proof of notice.

7

ISO CRIME FORM “EMPLOYEE” EXCLUSIONS

The ISO Crime Forms (loss sustained or discovery basis) is also subject to

the following EMPLOYEE exclusions which apply to all insuring

agreements.

Acts committed by the insured, partners, or limited liability company

members

Acts committed by employees, limited liability company managers,

directors, trustees, or representatives, except when covered under the

employee theft insuring agreement

Acts of employees whose prior dishonesty was known to the insured

EXCLUSIONS APPLICABLE TO THE ENTIRE POLICY

Acts committed by You, Your Partners, or Your Members -

Acts Committed by Your Employee Learned of by You Prior to

the Policy

Acts committed by Your Employees, managers, directors,

trustees, or representatives

Confidential or Personal information -

Data Security Breach

Government Action

Indirect loss

Legal fees, Costs and Expenses – except under Forgery and Alteration

coverage

Nuclear Hazard

Pollution

War and Military Action

8

EMPLOYEE BENEFIT PLANS

The Employee Retirement Income Security Act of 1974 (ERISA) is a

federal law that sets minimum standards for most voluntarily

established pension and health plans in private industry to provide

protection for individuals in these plans

ERISA covers retirement, health and other welfare benefit plans

(e.g., life, disability and apprenticeship plans).

Every person, including a fiduciary, who handles plan funds or other

plan property generally must be covered by a fidelity bond.

A fidelity bond is a type of insurance that protects the plan against

loss by reason of acts of fraud or dishonesty on the part of persons

covered by the bond.

The Employee Retirement Income Security Act (ERISA) requires

bonding of those handling funds of an employee welfare or benefit plan

Plans that are subject to this requirement are not limited to only 401(K),

profit sharing, and pension plans, but also medical, dental, vision, life,

and disability insurance plans

ERISA requirements are that the limit of insurance is 10% of the funds

handled, subject to a minimum of $1,000 and a maximum of $500,000.

However, if the plan includes employee securities, other than as part of a

broadly diversified fund such as a mutual or index fund, the maximum

required amount of insurance is $1 million.

ISO underwriting guidelines allow these ERISA requirements to be met

by simply including the plans as named insureds. There is no need to

attach any endorsements since the definition of “employee” has been

amended to accommodate this option.

The term "employee benefit plan(s)" is as "any welfare or pension benefit

plan shown in the declarations that is subject to the Employee Retirement

Income Security Act of 1974 (ERISA)."

9

EMPLOYEE BENEFIT PLANS

o ISO allows coverage for the plan by just adding the name of the plan as a

named insured

o Employee Benefit Plan is defined as “any welfare or pension benefit shown

& subject to ERISA”

o The definition of the term “employee” includes officers, trustees, etc.

o Reminder: There is no coverage for plan administrators and managers who are

independent contractors

o Many, if not most, insureds use outside firms to manage and administer one

or more of their welfare and benefit plans.

For example, many insureds use an investment firm to manage and

administer their 401K plans.

Since these firms must be bonded to handle funds under ERISA, most

insureds would have a means of recovery if an employee of such a firm

were to steal funds from the insured's plan.

ISO endorsement option: Coverage can also be provided

under the insured's crime insurance policy, by attaching CR 25

02 (include designated agents as employees).

10

REMINDER – WHO IS AN EMPLOYEE UNDER

CRIME FORMS

1. Employed – compensated & directed/controlled

2. Temps – directed & controlled

3. Leased workers under contract

4. Trustees, officer, directors, employees,

administrators & managers of an employee benefit

plan

5. Former employees, partners, managers, directors

or trustees retained as consultant

6. Guest students & interns

7. Employees of newly merged/consolidated entities –

if prior to the effective date

8. Managers/directors/trustees performing duties of

an employee OR a committee member (elected or

appointed)

11

ISO ENDORSEMENT OPTIONS

COMMERCIAL ENTITIES

Employee Theft – name or position schedule (CR 04 08):

Amends the definition of employee to include:

o any person named in the schedule, if coverage applies on a

name schedule basis; or

o Any person who performs the duties of a position shown in

the schedule if coverage applies on a position schedule basis.

Exclude Designated Persons or Classes of Persons as Employees

(CR 25 01)

This endorsement eliminates employee theft coverage for acts of the

specific individuals or classes of persons identified in the endorsement

schedule.

Include Designated Agents as Employees (CR 25 02)

This endorsement adds coverage for theft by agents appointed by the

insured in writing and designated in the endorsement schedule. For

example, this endorsement can be used to add the independent

contractors the insured uses to administer their employee benefit plans(s)

The designated agents may be individuals, partnerships, or corporations

Each agent and the partners, officers, and employees of that agent

collectively are considered to be a single employee

The limit listed on the endorsement schedule is not an additional amount,

rather it is part of the employee theft limit shown in the declarations

12

ISO ENDORSEMENT OPTIONS

Include Partners as Employees (CR 25 03)

This endorsement amends the definition of employee and the "Acts

Committed by You, Your Partners, or Your Members" to add coverage

for theft by the partners identified in the schedule

Coverage applies only to loss in excess of the value of that partner's

interest in the partnership, any amounts owed to that partner, and

the deductible

Note: this endorsement does not prevent the other partners from suffering

a loss. In fact, the loss of the dishonest partner's share of the business

could well force the innocent partners to dissolve it.

Include Members of a Limited Liability Company as Employees

(CR 25 04)

This endorsement is similar to the above partner endorsement

Coverage for loss caused by dishonesty of a member applies only to loss

in excess of the value of that member's membership interest in the limited

liability company, any amounts owed to that member, and the deductible

Like the partner endorsement above, this endorsement also attempts to

force the dishonest member to suffer the loss, but steps in when the

amount of the loss exceeds that member's share of the business

13

ISO ENDORSEMENT OPTIONS

Include Chairperson and Members of Specified Committees as

Employees (CR 25 06)

This endorsement is a "class of business" endorsement for nonprofit

organizations only

Coverage is amended to include the chairman and members of the

committees identified in the endorsement schedule

They are only covered when performing services for the insured as

members of the identified committee

Include Specified Non-Compensated Officers as Employees (CR 25 08)

When this endorsement is attached to the policy, the noncompensated

officers whose names or titles are shown in the endorsement schedule are

included as employees.

Include Volunteer Workers as Employees (CR 25 09)

This is a "class of business" endorsement used only if the insured is either

a nonprofit organization or governmental entity

The definition of employee will include uncompensated individuals

performing duties:

o usual to employees, or

o acting as funds solicitors during fund-raising campaigns

14

ISO ENDORSEMENT OPTIONS

Include Volunteer Workers Other Than Fund Solicitors as Employees

(CR 25 10)

This is a "class of business" endorsement used only if the insured is either

a nonprofit organization or governmental entity

The definition of employee will include uncompensated individuals

performing duties:

o usual to employees, EXCEPT

o acting as funds solicitors during fund-raising campaigns

Include the Spouse and Children of Building Manager, Superintendent

or Janitor as Employees (CR 25 11)

This is a "class of business" endorsement used only for insureds that are

real estate management companies

Employee includes the spouse and children over 18 years of age who

reside with an employee who is a building manager, superintendent,

or janitor.

Each family is considered to be a single employee

However, the coverage can be canceled on individual members of the

family

15

ISO ENDORSEMENT OPTIONS

Amend Definition of Employee To Comply with Labor-Management

Reporting and Disclosure Act of 1959 (CR 25 15)

This is a "class of business" endorsement used for a labor union.

The definition of employee is amended to include:

o Noncompensated officers

o Noncompensated dues collectors

o Shop stewards

o Shop chairman

o Directors or trustees acting as members of committees elected

or appointed by the board of directors or trustees to perform

specific functions.

Add Faithful Performance of Duty Coverage (CR 25 18)

This is a "class of business" endorsement for fraternal orders or labor

unions whose bylaws or constitution requires purchase of faithful

performance of duty coverage

This endorsement adds coverage for loss of money, securities, or other

property caused by failure of an employee to faithfully perform

duties prescribed by the insured organization's constitution and by-laws

or resolution of its governing body

Coverage is not limited to loss from theft; it also applies to loss from

failure to faithfully perform as a result of error or oversight or some

other cause. Coverage also includes loss resulting from inability to

faithfully perform duties because of a criminal act committed by

someone other than an employee.

16

ISO ENDORSEMENT OPTIONS

Clients' Property (CR 04 01)

The endorsement adds coverage for loss of or damage to money,

securities, or other property suffered by a client of the insured as a

result of theft by an identified employee of the insured

Coverage applies to property owned or leased by the client and to

property held by the client for others, regardless of whether the client

is legally liable for the loss.

2. The Ownership of Property; Interests Covered Condition is replaced

by the following:

The property covered under this Insuring Agreement is limited to property:

a. That your "client" owns or leases; or

b. That your "client" holds for others whether or not your "client" is

legally liable for the loss of such property.

However, this insurance is for your benefit only. It provides no rights or

benefits to any other person or organization, including your "client". Any

claim for loss that is covered under this Insuring Agreement must be

presented by you.

Insuring Agreement:

The following insuring agreement is added to Section A. Insuring

Agreements:

We will pay for loss of or damage to "money", "securities" and "other

property" sustained by your "client" resulting directly from "theft"

committed by an identified "employee", acting alone or in collusion with

other persons.

17

ISO ENDORSEMENT OPTIONS

Clients' Property (CR 04 01) (continued)

Definitions:

o The term "client" is defined as an entity for whom the

insured performs services under a written contract

o The definition of "theft" is replaced and amended as the

unlawful taking of property to the deprivation of your "client"