Despite the present tense wording of this policy, the New
by Travelers contain language broader in scope than the
York court enforced this provision and denied coverage
present tense language Travelers wrote into its policy.
to the bank, even though the bank president had learned of the employee’s dishonesty before the inception of the
In cases where the policy language clearly excluded or
policy. Contrary to the Wisconsin court in Waupaca, the
terminated coverage for dishonest employees whose
New York court in Capital Bank held that dishonest acts
past dishonesty was known to the company, coverage
committed by the employee, of which the bank was aware
was denied and the denial was upheld in court. But
before the policy began, terminated coverage as to that
where the policy language spoke in the present tense
employee immediately upon the policy’s inception.
and did not clearly say that knowledge of prior dishonest
PAST TENSE: How Insurance Companies Try to Use Past Events to Defeat Coverage of New Claims
acts that predated the policy would exclude coverage, While it may be hard to reconcile these two cases, the
the insurance company could not deny coverage for
New York court was not asked to consider the present
subsequent dishonest acts. Since insurance companies
tense of the policy language or what effect this had
write their own policies, they are free to write them
on its interpretation, because the bank did not make
in a manner that leaves no doubt about what they
this argument. Instead, the bank argued only that the
cover and do not cover. As the Wisconsin court ruled
employee’s act in 2001 did not rise to the level of a
in Waupaca, they must use language that makes their
“dishonest or fraudulent act” because the insured had
intent to terminate coverage upon pre-policy discovery
Liability insurance policies tend to fall into one of two
suffered no loss. The court held that sustaining a loss was
of employee dishonesty clear to the policyholder, or risk
categories based on the trigger of coverage: occurrence
not a required part of the termination provision – it applied
rejection of this coverage defense.
and claims-made policies. Generally speaking, under an
By John L. Corbett
occurrence policy, coverage is triggered if the underlying
upon prior discovery of dishonesty, regardless of whether The unfortunate reality exposed by this situation, and
accident (i.e., the “occurrence”) for which a party seeks to
the uncertainty it creates about whether your company
hold the policyholder liable takes place while the policy
The New York court was also swayed by the policy’s prior
has crime coverage for its $1.35 million loss in the above
is in effect, regardless of when the subsequent claim is
knowledge exclusion, which eliminated coverage for a
example, is that showing compassion for a dishonest
made. In contrast, under a claims-made policy, coverage
loss arising out of or in connection with any circumstances
employee – no matter how justified or consistent with your
is triggered if a claim (usually defined as a written demand
or occurrences known to the bank prior to the inception
corporate culture – puts your company at considerable
for relief) against the policyholder is first made and
of the policy. In this provision, there is a clear reference
risk. Long experience with crime claims teaches that
reported to the insurance company during the policy
to acts which occur before the inception of the policy.
dishonest employees, when discovered and forgiven,
period, regardless of when the underlying “wrongful acts”
Thus, the court was not required to address any present
often strike again. Crime insurers know this too; hence the
that gave rise to the claim took place.
tense confusion created by the termination provision – the
automatic termination provision cutting off coverage for a
insured’s prior knowledge of the employee’s dishonesty
dishonest employee once any bad act is discovered, no
Armed with this generalized understanding of how claims-
was enough to rule out coverage.
matter how long ago.
made policies operate, a policyholder may be lulled into
the dishonesty led to a loss.
The two cases Travelers cited in Waupaca in its effort to persuade the Wisconsin court to uphold its automatic termination provision were about policies with key differences in language. In Cooper Sportswear, supra, the Hartford policy excluded coverage for employees who committed a prior dishonest act “whether such act be committed before or after the date of employment by the Insured.” Likewise, in Douglas Wilson & Co., supra,
The only way to eliminate this risk is to fire any employee discovered to have committed any dishonest act, even one resulting in only a small loss, or even no loss at all. If a company does not do this, the risk of a subsequent embezzlement by the same employee, and the likelihood of a fight with its crime carrier over coverage for the new loss, rise exponentially.
thinking that, once a claim has been made and properly reported to the insurance company during the policy period, the timing of events before the policy period will have little if any impact on coverage. This could be a dangerous assumption. Insurance companies frequently reserve the right to deny – or deny outright – coverage of claims made during the policy period on the basis of provisions in their policies that
another Hartford policy excluded coverage for dishonest
pertain in one way or another to events predating the
acts by employees who had committed a prior dishonest
policy period. Understanding some of the more common
act “in the service of the Insured or otherwise.” Both cases
ways insurance companies try to do this can forewarn
involve policy language that focused not just on acts of
and forearm corporate policyholders in their efforts to
which the company becomes aware in the future, but on
overcome these arguments.
acts committed prior to the inception of the policy as well. As such, the policy provisions at issue in the cases cited
14 | btlaw.com
2019 Corporate Policyholder | 15
