Compassion Sometimes Backfires:
Your company is aghast that by not firing Mrs. A 20
arose after the policy became effective.
loss caused by her at any time since then. According to the insurer, once your company learned of her prior dishonesty, crime coverage applicable to her subsequent conduct terminated automatically even though her prior misconduct was committed long ago. Is the insurer right
in accounting back to a position of responsibility. Her assistant begins training to replace her when she retires at the end of the year. As the assistant learns Mrs. A’s job, Your company prides itself on being a good place to
she notices a recurring payment to a vendor she does not
work, taking care of its employees and being a good
recognize: $7,500 a month for services the nature of which
corporate citizen. It provides generous employee
is unclear. The assistant calls the person listed as president
benefits. It has a wellness program. It matches 401k
of the company on its monthly invoice and speaks with a
contributions. It values its employees and lets them know
person who says that his company provides data security.
this in these and other ways.
The assistant goes to the IT department, which knows nothing about this vendor. Internal auditors get involved
So, when 10-year employee Mrs. A in accounting goes
and discover that the vendor is a shell that provides no
to human resources, says she is an alcoholic and needs
services to your company, and that the president is Mrs. A’s
help, and confesses to having stolen $5,000 from a
husband. When confronted, Mrs. A admits to having paid
dormant bank account to pay for her sick husband’s
the straw man vendor $7,500 per month over a 15-year
medical bills, your company responds with compassion.
period, thereby embezzling a total of $1.35 million.
Mrs. A is told that she must get treatment for her
She is immediately fired and the authorities are notified.
alcoholism and make restitution of the stolen money in
Mrs. A and her husband go to prison. None of the money
installment payments deducted from her paycheck. She
is recovered.
is removed from her supervisor position, her security clearance is taken away, and she is assigned to input
For many years, your company has purchased
data with no access to the general ledger. Mrs. A submits
commercial crime insurance covering losses resulting
a written apology, which is placed in her employee file.
from embezzlement by an employee. Your risk manager
She is told that any future violation of company rules will
submits a claim for the $1.35 million loss less the $10,000
result in termination.
deductible. The carrier denies the claim on the ground that coverage automatically terminated as to Mrs. A 20
Fast forward to 20 years later. Mrs. A is a model employee,
years ago when her $5,000 theft was discovered, citing
much loved by her colleagues. She has been promoted
the following provision of the policy:
12 | btlaw.com
used wording that clearly eliminates coverage for known
years ago, it appears to have lost its insurance for any
Automatic Termination of Commercial Crime Coverage Upon Discovery of an Employee’s Prior Dishonesty
By Bob Devetski
This insurance terminates as to any Employee as soon as the Insured’s Chief Executive Officer, Chief Financial Officer, Treasurer, Controller, Risk Manager, General Counsel or any person serving in a functionally equivalent position not in collusion with a perpetrator of a loss becomes aware of any criminal or dishonest act by such Employee while employed by or in the service of the Insured.
dishonest employees. The court pointed to a different case involving a Hartford policy that precluded coverage if the company “has knowledge” that the dishonest employee committed any dishonest act, “whether such act be committed before or after the date of the employment” by the company. The court stated that such policy language would clarify that the termination or exclusion of coverage relates back to any known employee who previously engaged in dishonest conduct, not just to conduct that
Travelers cited the many other cases decided in favor of the insurance company on similar facts and similar policy language, all based on the premise that as between the employer and the insurance company, the employer should bear the risk of employing a person with a known
about this?
prior record of dishonesty. Cooper Sportswear Mfg. Co.
As is always the case with insurance questions, the answer
Douglas Wilson & Co. v. Insurance Co. of N. America,
depends on the specific wording in the insurance policy.
v. Hartford Cas. Ins. Co., 818 F. Supp. 721 (D.N.J. 1993); Philadelphia, Pa., 590 F.2d 1275 (4th Cir. 1979). For
The policy language quoted above is the same as in a
example, in a more recent New York case, Capital Bank &
Wisconsin case with nearly identical facts. In Waupaca Northwoods LLC v. Travelers Casualty & Surety Co. of
a bank loan officer forged the name of the bank president
America, 2011 BL 109466 (E.D. Wisc. Apr. 25, 2011), the court held that Travelers owed coverage to its policyholder for a dishonest employee’s theft, even though the company had known of a prior act of dishonesty by that employee
Trust Co. v. Gulf Ins. Co., 91 A.D.3d 1251 (N.Y. App. Div. 2012), on loan documents in 2004 that led to the loss of $1.7 million. The bank timely submitted a claim to its insurer, Gulf, which denied the claim because the bank president had knowledge of prior forgeries by the same employee
before the Travelers policy was purchased.
three years before the bank reported the 2004 forgery.
The court pointed out that Travelers’ policy language
claim to its insurance company because he was the top-
focused on the present tense, rather than looking back to any time before the policy was issued. The policy says
The bank had not fired the loan officer or submitted a performing officer and the forgeries did not cause any loss to the bank.1 Gulf, however, denied the bank’s claim
the insurance “terminates” “as soon as” the company
based on its policy provision stating that:
“becomes aware of any dishonest” act. The court reasoned
Coverage terminates as to any employee as soon as the bank, or any director or officer not in collusion with such employee learns of any dishonest or fraudulent act committed by any such employee while employed by the bank.
that this use of present tense language suggests an awareness that is future-looking from the time of the policy’s purchase – and that if the company became aware of a dishonest act before the policy was issued, this termination clause would not be triggered. The court also said that because the policy speaks of coverage that
(Emphasis added.)
“terminates” rather than “excludes,” the policy must only be forward-looking since a policy could not “terminate” upon its very inception. Finally, the court held that had Travelers wanted to
1 The forgeries involved underperforming loans, which were eventually collected.
exclude coverage for this situation, it could have easily
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